Credit the Bank of Canada for a realistic depiction of risks facing the global and Canadian economies in its recent quarterly report. In the central bank’s view, the world is becoming more fragmented, geopolitical risks are elevated and for Canada, the future of trade in North America is an important uncertainty. Yet, in this author’s view, key assumptions mean the risks are not reflected in the bank’s economic projection.
The Monetary Policy Report, released last week, blames a 1.5-per-cent lowering of the projected level of real GDP by the end of 2026 on current U.S. tariffs. It flags the detrimental effect on Canadian investment, productivity and potential growth from the tariffs and trade uncertainty. It recognizes that diversification away from the United States toward other markets will take time and be expensive. The bank has its eyes wide open to the possibility that trade relations with the United States could get even worse were the U.S. to withdraw from USMCA, renegotiate it with less favourable terms to Canada, or not reach any agreement, which would leave USMCA in place but prolong uncertainty.
However, owing to two key assumptions, none of these risks appear to be reflected in the bank’s economic projection:
- “The projection is based on tariffs in place or officially agreed on as of January 23, 2026.”
- “The impact of trade policy uncertainty on GDP is assumed to slowly decrease in 2026.”
The implication of these assumptions is not only is USMCA renegotiated as is, but the process is smooth. That does not seem a good bet in the environment of statements coming from the U.S. administration of disinterest in free trade and the frequency and volatility of its international trade threats.
Even without capturing the trade risks, the bank describes its economic outlook as featuring “modest growth.” Real GDP growth on a fourth-quarter-to-fourth-quarter basis is projected at 1.4 per cent for 2026 and 1.7 per cent for 2027. Inflation is expected to be around the target of 2 per cent. The bank does not provide guidance on future interest rate changes but does so implicitly by noting the policy rate is expected to remain within the “neutral range” of 2.25 per cent to 3.25 per cent. No case arises from the bank’s projection for an interest rate hike, so the assumption is tantamount to a statement that the bank assumes the rate will remain at 2.25 per cent for quite some time.
Ideally an economic projection would represent a balance between identified upside and downside risks. Yet the most important risks rightfully identified by the bank – global trade disruption and financial imbalances and threats to USMCA – are overwhelmingly to the downside.
Reflecting the initial uncertainty associated with the COVID pandemic, the Bank of Canada began presenting multiple scenarios rather than a singular projection. It returned to the use of scenarios during periods of heightened uncertainty, including the trade crisis, where, as recently as July, 2025, the Monetary Policy Report presented three scenarios based on the status quo on tariffs, lower tariffs and higher tariffs.
Without any appreciable lowering of risks to trade relationships, the bank has returned to a single projection predicated on a favourable outcome to Canada-U.S. trade relations despite the widespread and realistic concern of many Canadians of something far darker.
The Government of Canada should take a different tack and consider using scenarios for the upcoming spring economic statement. A more permanent fissure in trade relations with the United States may seem too horrible to contemplate, but the risk will not dissipate by assuming it away. In the meantime, it is incumbent on users of economic projections to recognize the downside risks to projections from the Bank of Canada and others.
Above all else, the attention of Canadians must be on securing future economic well-being with or without the United States as a dependable partner.
Don Drummond is a Fellow-in-Residence at the C.D. Howe Institute and the Stauffer-Dunning Fellow at Queen’s University in Kingston. He was previously chief economist at TD Bank.