A recent Bank of Canada Market Participants Survey has flagged geopolitical and trade tensions as the biggest risks facing the Canadian economy. Leading the downside are geopolitical risks led by the Middle East war, with 82% of respondents identifying it as the biggest risk, while 79% and 57% of respondents picked growing trade tensions and tightening global financial conditions, respectively. The shift from trade tensions dominating headline risks to Canada’s economy amid Trump tariffs is largely attributed to the Iran war, which has disrupted global supply chains and impacted the shipping of oil, gas, and fertilizer through the Strait of Hormuz.
Governor Tiff Macklem has warned that persistent high energy prices resulting from these conflicts could necessitate interest rate hikes to maintain the 2% inflation target. However, like many oil producers, Canada is also experiencing an "oil paradox" with high oil prices driving up domestic fuel costs and inflation while simultaneously generating significant government revenue windfalls.
Canada posted its first trade surplus in six months, with the country’s merchandise trade balance swinging to a $1.78 billion surplus in March against expectations of a shortfall of $2.88 billion, while total exports rose 8.5% to $72.8 billion, the second-highest level on record. Energy exports surged 15.6% to $17.1 billion, the highest level since September 2022, helped by a 18.9 % jump in crude oil exports thanks to a 33.1% spike in prices.
Exports of metal products increased 24.0% to a record $15.3 billion, led by a $3 billion rise in gold exports thanks to a surge in safe-haven demand. Meanwhile, total imports fell 1.6% to $71.0 billion, driven by lower volumes of consumer goods, pharmaceuticals, and aircraft.
That said, trade tensions between Canada and the United States remain a major headwind, with 82% of respondents saying easing of the tensions is the leading upside risk to Canada’s economy. That’s significantly higher than 57% of respondents who identified a larger-than-expected fiscal stimulus as the top upside or 43% who listed decreasing geopolitical risks and higher commodity prices.
Currently, there’s plenty of uncertainty surrounding the review of CUSMA (USMCA). CUSMA is a trade agreement between Canada, the United States and Mexico that came into effect on July 1, 2020 during Trump’s first term, replacing the 26-year-old NAFTA. The agreement requires, among other things, that 75% of automobile components to be manufactured in North America to qualify for zero tariffs, aiming to boost regional production.
The Trump administration is required to outline its new position by July 1; however, negotiations are likely to drag into the fall, influenced by U.S. midterm election politics. While a 16-year extension is the base case, there is a risk of a severely fragmented scenario where the U.S. imposes up to 35% tariffs on all Canadian exports, potentially inducing a Canadian recession. Further, there are reports that the White House is considering splitting the agreement into separate bilateral deals rather than maintaining it as a single trilateral agreement.
Canada is already doing much less business with its northern neighbor, with the U.S. accounting for just 66.7% of total exports in March, the lowest level ever, in large part due to Trump’s tariffs. Canada’s trade surplus with the United States widened to $7.1 billion in March, its highest level since September 2025, largely driven by a 8.3% increase in shipments of passenger cars and light trucks to $48.51 billion. In contrast, imports from the U.S. dropped by 1.2% to $41.44 billion.
The Trump administration has imposed significant tariffs on Canadian goods, including a 50% tariff imposed on Canadian steel and aluminum; 35.2% combined anti-dumping and countervailing duties on soft lumber, 25% tariffs on auto exports and 50% tariffs on copper and copper products, among other levies. Canada initially announced reciprocal, dollar-for-dollar tariffs on $30 billion worth of U.S. goods but removed many of them in September 2025 after some U.S. exemptions. However, it still maintains retaliatory tariffs on specific U.S. steel, aluminum and auto products.
The results of the survey came just two weeks after Canada’s federal Finance Minister François-Philippe Champagne tabled the spring economic update, which revealed that Canada’s GDP growth is projected to slow down to 1.1% in 2026, down from 1.7% in 2025. However, the economy is expected to perk up again, growing 1.9% in 2027. Canada's deficit for FY 25/26 was reduced by $11.5 billion to $66.9 billion (2.1% of GDP), thanks in large part to higher oil revenues.
Last month, Canada unveiled the Canada Strong Fund, its first ever sovereign wealth fund. The federal government has pledged to seed the fund with $25 billion over three years on a cash basis. CSF will focus on achieving market-rate commercial returns by investing alongside private capital in strategic sectors. The investments will target nation-building projects in both clean energy and fossil fuels, transportation infrastructure, telecommunications, advanced manufacturing and critical minerals. However, the sovereign wealth fund’s unique feature is a planned retail investment product that will allow individual Canadians to directly invest their own money into the fund and share in the financial returns.
By Alex Kimani for Oilprice.com
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