The spectre of recession has been hanging over Canada since U.S. President Donald Trump launched his tariff war early in 2025, but there could be worse dangers in store for the economy than that.

Jimmy Jean, chief economist of the Desjardins Group, said many Canadian businesses adopted a wait-and-see approach to the turmoil of the first year of Trump’s term, but by early 2026 the mood shifted and companies began to find their footing again despite the uncertainty.

However, August brought another blow in the breakdown in trade talks, followed by a new tariff on about $27.6 billion in goods that did not include a carveout for products under the Canada-United-States-Mexico-Agreement. The Canadian counter tariffs that followed added more pressure.

Jean said though Trump’s new tariffs only affect 5 per cent of Canadian exports, their significance extends beyond the targeted goods.

“If businesses increasingly view the deterioration in Canada–U.S. trade relations as lasting rather than temporary, some may finally make decisions they had previously been willing to postpone,” he said in a report.

When that happens — and August may have been a turning point — the economy stands to lose more than a few points off GDP.

Some will adapt to the new environment by diversifying their export markets or supplies and investing to refocus their operations, he said. Others will cut production, cancel expansion projects or close facilities.

“In other words, moving from wait-and-see to adaptation doesn’t necessarily signal better days ahead. In some cases, adapting may mean permanently scaling back operations,” said Jean.

The economist said that’s why it’s important to focus on the structural effects of the trade war, rather than obsessing about a recession. Tariffs affect a limited share of the economy and other forces such as stronger energy revenues and public spending may continue to support growth.

“But avoiding a recession doesn’t mean the economy will emerge from the trade conflict unscathed,” he said.

In a typical recession weaker demand lowers economic activity and raises unemployment, but productive capacity remains largely intact and can be revived by support from the Bank of Canada and government.

But when factories close permanently and investments are abandoned, the damage to the economy extends beyond the 18 months of a recession and recovery, he said.

And that damage can be substantial. If the growth rate of an economy was reduced from two per cent to one, in five years its output would be nearly 5 per cent below what it otherwise would have been, he said.

In January the Bank of Canada estimated the country’s GDP would be 1.5 per cent lower at the end of this year than its forecast before the trade war. About half of that shortfall was attributed to lower output rather than just weaker demand, said Jean, showing that even before the latest trade skirmish, the bank expected some structural damage.

“One thing is clear: the ultimate economic cost of the trade war won’t be measured simply by whether Canada enters a recession,” he said. “Above all, it will depend on what Canadian businesses are still capable of producing years from now.”

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Whether the Bank of Canada raises interest rates this month is a “coin toss,” said economists after inflation data Monday.

Canada’s consumer price index breached the bank’s comfort zone of three per cent in September, but the pace was less than economists had expected and core measures remained stable.

However, it was Governor Tiff Macklem’s hawkish comments over the weekend at an IMF meeting in Bangkok that really added doubt to the mix.

Macklem told reporters that given developments in the Iran war the “risk that inflation broadens and becomes more persistent has gone up.”

Robert Kavcic, senior economist for BMO Capital Markets, said in an interview that the central bank will probably raise rates 25 or 50 basis points to get things back to neutral.

“The timing is a bit of a question: Is there enough urgency there for them to go in October?,” he said.

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Today’s Posthaste was written by Pamela Heaven with additional reporting from Financial Post staff and Bloomberg.

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