Canada Trade Surplus Seen Widening as Tariff Front-Loading Lifts Exports

Solid 3.2% annualized GDP growth in the second quarter and on-target core inflation prints since April have strengthened the case for patience. Heightened growth risks from new U.S. tariffs and inflation risks from high oil prices have created discomfort at the Bank of Canada but not enough to push it off the sidelines, BMO economists wrote.

On the jobs front, consecutive large gains over the summer pushed the unemployment rate down to 6.4% in July. BMO expects August employment to post a smaller 5,000 increase, with the unemployment rate holding steady. Job postings from Indeed.com were little changed that month, and broader growth indicators have improved substantially since activity stalled over the winter.

Recent trade uncertainty poses risks to economic growth, but BMO remains cautiously optimistic that per-worker labour markets will continue to improve gradually, with the unemployment rate edging lower into 2027.

Current U.S. tariffs and Canadian counter-tariffs are not yet large enough to derail the economy's recovery. Further escalation is a real threat that could delay Bank of Canada rate hikes previously expected in 2027 or push the central bank to cut rates, BMO said.

"We're not there yet," the economists wrote.