Trump has targeted Mexico with hefty import tariffs–but this also spells bad news for Canada.
Two big banks have cut Canada’s growth forecasts amid rising trade tensions between the US and Mexico.
Economists at Bank of America Merrill Lynch revised Canada’s growth forecast from 1.5% to 1.3% for this year, and made an even bigger cut to their growth estimate for next year from 1.8% to 1.3%.
US President Donald Trump reaffirmed in London Tuesday that he would order new tariffs on Mexican exports beginning next Monday because of a high number of Mexican and Central American migrants entering the US.
It is also widely suspected that the new trade deal between the US, Canada, and Mexico, which is set to replace the North American Free Trade Agreement (NAFTA) won’t be approved this year, because of the new tariffs.
Along with weaker than expected growth in the first quarter, news of the burgeoning trade war has prompted National Bank of Canada to cut their growth forecast for this year to 1.4% from 1.6%.
“Such a large exposure to one trade partner (i.e. the US) makes Canadian exporters more vulnerable to U.S. economic cycles,” Krishen Rangasamy of National Bank told CBC. “The resulting hit to commodity prices and negative spillovers on the US economy, won’t be good for Canada.”
Canada’s economy grew at an annualized pace of 0.4% in the first three months of this year—falling below expectations, and just slightly above the 0.3% growth in the previous quarter. They were the country’s weakest back-to-back quarters of growth since 2015.
Export volumes dropped one percent—marking for their first quarterly decrease since 2017.
The global picture
Meanwhile, other Canadian banks are also keeping a close eye on developments on the global trade front as they review their forecasts.
Royce Mendes, senior economist at CIBC Capital Markets, said the bank was reviewing its North American forecasts as broader global risks like the US-China trade war and Brexit moved closer to materializing in May.
“For a small open economy like Canada, these situations could be significant either via direct trading links, or indirectly through financial markets and confidence,” Mendes told CBC. “The increased uncertainty regarding these global risks likely more than offsets any positives from the removal of U.S. steel and aluminum tariffs.”
However, he added that the latest economic data doesn’t look “particularly weak” with growth likely to rebound in the second quarter from the weak start to the year.
“At this point, central bankers are satisfied staying on the sidelines. However, should the data deteriorate more than they expect, don’t be surprised if they jump into the game and pull the trigger on rate cuts,” Mendes said.