Scotiabank trims 2027 GDP forecast to 2.0% as tariff fallout clouds the Bank of Canada's next move
The collapse of Canada-US trade negotiations has left the Bank of Canada (BoC) navigating one of its most difficult policy crossroads in years. Scotiabank Economics warned that new American tariffs and expected Canadian retaliation will clip growth and complicate the central bank's options heading into 2027.
"It's clearly disappointing that all signs were pointing to a deal being consummated as late as well into Friday evening only to fall apart minutes before the midnight deadline when additional US tariffs kicked in," wrote Derek Holt, vice-president and head of capital markets economics at Scotiabank in Toronto.
"There are no winners in trade wars, only losers, including the United States and its consumers and businesses."
Before negotiations fell apart, Scotiabank's team had been preparing to revise its 2026 and 2027 growth forecasts upward by 0.2%, citing stronger-than-expected output, labour market resilience, and elevated commodity prices. That upgrade has been set aside.
Upon factoring in the effects of new US tariffs, anticipated Canadian counter-measures, fiscal supports, and other financial assistance programs, Scotiabank now leans toward trimming Canada's growth rate to 2.0% in 2027.
Holt's overall assessment offers some reassurance. "We do not estimate a material impact upon the national unemployment rate and only modest effects on CPI and core CPI over 2026–27," he wrote, noting that the Canadian dollar and the rates curve are expected to absorb some of the shock, with federal and provincial fiscal measures offering further cushion once details are announced.
Read more: What the US-Canada trade war means for the housing market
A micro shock, not a macro one — for now
The new US tariffs pushed Canada's effective tariff rate on total goods exports to 6.5%, and to 8.6% on exports destined solely for the United States, while the composite goods-and-services rate rose to 4.6%.
"The effects will likely be harsh on individual sectors subject to the additional US tariffs, but we judge that to be more of a micro shock than a large macroeconomic shock to the economy based on information to date," Holt wrote.
Automotive production faces the most acute near-term pressure, with the last-minute US decision to extend punitive tariffs to heavy and light trucks widely seen as the proximate cause of Canada's withdrawal from negotiations on Friday night.
Canada could lose 102,000 jobs and $271 billion in GDP by 2035 if CUSMA collapses, according to new Oxford Economics analysis commissioned by the Canadian American Business Council.https://t.co/jGKSbavOX0
— Canadian Mortgage Professional Magazine (@CMPmagazine) August 14, 2026
What the Bank of Canada does next
The central question for Canada's mortgage market is how the BoC will respond. "What the BoC does is unclear and dependent upon retaliation — a point Governor Macklem repeatedly emphasised at earlier stages of the trade wars started by the US," Holt wrote.
The concern is that counter-tariffs combined with fiscal stimulus could push inflation higher and restrict the central bank's room to ease, even as growth softens. Holt is explicit about the uncertainty involved.
"These highly tentative views are accompanied by a massive caution," he wrote.
"That caution is that what happens depends very critically upon next steps."
Read more: Trump tariff chaos: are BoC rate moves ahead?
Prime Minister Mark Carney has deferred the release of Canada's retaliatory tariff list by roughly two weeks, a delay Holt views as strategically deliberate, making it harder for Washington to respond quickly to any counter-measures.
He also pushes back against the notion that Canada lacks negotiating power.
"It's a fallacy to argue that Canada has no leverage as that underestimates the breadth of the measures that can be drawn upon," he wrote.
With US midterm elections approaching and Canadian counter-tariffs expected to hit GOP-connected sectors with direct implications for the mortgage rate outlook, Holt's bottom line is pointed: "It is in neither country's interest to escalate and both countries have every incentive in the world to strike an agreement."
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