CIBC slashes Canadian and US GDP forecasts on trade war pain

Canadian trade data today underscored the first-half 2025 dynamics in the Canadian economy. There will be strong front-running of tariff exports in January and February before a total reversal afterwards, assuming the tariffs remain.

CIBC is out with new forecasts that capture some of that. They continue to see Q1 GDP growth at +1.3% as a retrenching consumer offsets trade but now see Q2 at -2.4% compared to +1.2% previously. For the year, they see 1.0% growth compared to 1.8% previously.

They continue to believe the US will return to the negotiating table by the summer.

We don’t at this point have any signal from President
Trump that such a deal is imminent, although we’ve learned to expect the unexpected from the White House in recent
weeks, and we might again have to adjust our forecasts for any changes ahead. Given what we’ve seen from this
President on other files, the countries now under the tariff hammer may have to come with some peace offerings that give
the Trump administration a win or two on other matters to achieve a new truce, although even then, we’ll still be operating
under a cloud until an extension of the USMCA deal is in place.

In short, write these forecasts down in pencil, not pen.

For the US, the pain comes more in this quarter as imports surge. They now see Q1 GDP growing at 0.7% compared to 2.1% previously. Notably, that’s still far ahead of the Atlanta Fed number of -2.8%. For 2025, they see the economy growing at 1.7% compared to 2.3% previously.

The picture for the US is better than Canada, but not great by any stretch. The once indefatigable American consumer will
look more fatigued, wary and cautious after seeing steep price hikes on imported Mexican fruits and vegetables and
Chinese-made consumer durables. The policy uncertainty and supply chain disruptions will grind business investment
growth lower.

A pickup later this year will depend on the trade war improving. As for monetary policy, they see the Federal Reserve cutting in the second half of the year and they ‘lean’ towards another BOC cut in March with a trough coming at 2.25% (from 3.00% currently) premised on an end to the US-Canada trade war in the summer.

What about USD/CAD?

If, as we expect, no immediate ceasefire is
forthcoming, we would expect to see some further Canadian dollar depreciation in the weeks ahead. Should the tariffs last
beyond a couple of quarters, the dent to Canada’s trade flows, and additional Bank of Canada rate cuts, could put further
pressure on the Canadian dollar, if markets started to believe that the tariffs were permanent. But in the current
environment, we don’t see a jump to the 1.50 range, given that tariff sensitivity has waned due to doubts about their
longevity, and increasing concerns about the implications of a trade war for US asset prices and economic growth. In our
base case, we would instead anticipate a move back into the low 1.40s if calmer waters are restored