Bank predicts up to three years of economic slowdown if trade war escalates
Canada and the US averted a trade war yesterday evening, but Royal Bank of Canada (RBC) chief executive officer Dave McKay said measures to support businesses and consumers would be needed if tariffs do eventually arrive.
His recommendations included reducing trade barriers within Canada, accelerating infrastructure projects, and implementing financial relief measures to counteract the economic strain.
US president Donald Trump agreed to postpone imposition of the tariffs for 30 days after a phone call with Canadian prime minister Justin Trudeau yesterday afternoon.
In an internal memo to RBC employees on Sunday, McKay warned that the tariffs could “severely impact jobs and hurt affordability for Canadian and American workers and families.” He also cautioned that rising costs could put small and mid-sized businesses at risk as the cost of doing business increases.
His warning came as the US appeared to move ahead with a 25% tariff on nearly all Canadian exports, except energy products, which would have been taxed at 10%. Canada announced retaliatory tariffs on $155 billion worth of US goods, subsequently shelved after Trudeau’s discussion with Trump.
“There are no winners in a prolonged trade war between allies, especially two nations that each have their own deep-rooted identity, unique culture and strong sense of independence,” McKay said in the memo.
McKay was not alone in calling for action. Other banking executives have weighed in, pushing for government intervention to soften the economic blow.
Canadian Imperial Bank of Commerce (CIBC) CEO Victor Dodig suggested appointing a “border czar” to oversee trade relations, while National Bank of Canada CEO Laurent Ferreira proposed tax and regulatory reforms, including a “Buy Canada Act,” to shield businesses from the fallout.
RBC was in talks with federal officials about potential relief measures.
“I want you to know we’re already working closely with the Canadian government to develop tools to support clients, just as we did during the pandemic,” McKay said.
During COVID-19, the government lowered capital reserve requirements for banks, allowing them to lend more freely to struggling businesses and consumers. McKay hinted that a similar approach might be necessary to mitigate the impact of the trade war.
An RBC economic report said that if the tariffs arrive – and remain in place – Canada could see up to three years of stalled economic growth. Economists Frances Donald and Nathan Janzen warned that the impact will be most severe in the first two years.
Unemployment could also rise significantly, with projections indicating a two to three-percentage-point increase from the current 6.7% rate. The last comparable spike in joblessness occurred during the pandemic lockdowns in 2020.
Beyond short-term fixes, McKay believes the tariff dispute highlights the need for Canada to expand trade beyond the US.
“On a personal note, and as a Canadian business leader, I believe this is the moment to unite the country behind a long-term economic agenda,” he said. “The world wants what Canada can provide in great abundance. We can feed and fuel the growing world, and be a leader in sectors like energy, agriculture, critical minerals, advanced manufacturing and technology.”
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For years, economists have urged Canada to reduce its economic dependence on the US market, and the current crisis has renewed calls to strengthen global trade ties.
Despite the challenges, McKay reassured employees that RBC is positioned to weather the storm.
“As we navigate the weeks ahead, I’ll ask each of you to do what we have always done, and that’s stay focused on our clients and communities when they need us most,” McKay told the bank’s employees. “Our bank has the financial resilience and expertise to help our clients navigate difficult economic times.”
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