Tariffs hit Canada’s GDP growth – can trade diversify fast enough?

Impacts of protectionist U.S. trade policies have shown up in Canada’s economic growth and unemployment data.

August’s Gross Domestic Product (GDP) report registered a 1.6% decline as Canadian economic output slowed in response to tariffs. And the country’s unemployment rate rose 0.2 points to 7.1%. Largely in response to those two key economic indicators, the Bank of Canada eased target overnight lending rate by 25 basis points to 2.5% at its meeting this week.

News around economic output is particularly bad for manufacturing dependent Ontario. The province’s Financial Accountability Office issued a report projecting fallout from tariffs will do long-term harm to Ontario’s economy. It calls for Ontario’s real GDP growth to slow to 0.9% in 2025 and 1% in 2026 as demand cools for Ontario exports.

“Over the 2027 to 2029 period, real GDP growth is projected to return to its long-term average trend of 1.9 per cent, as Ontario’s economy adjusts to the impact of U.S. tariffs,” the report says. “However, this implies that the level of Ontario’s real GDP would be 1.7 per cent lower than in a no tariff scenario in 2029.”

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To counter tariff impacts, Canada continues to seek new trading partners and strengthen relations with already friendly markets.

To that end Prime Minister Mark Carney is in Mexico this week to work with that country’s president, Claudia Sheinbaum, to both salvage North American free trade in the face of U.S. protectionism, and craft a bilateral trading relationship between the two countries.

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Carney is also touting several ‘nation-building projects’ aimed at spurring the domestic economy and creating new export markets for Canadian goods. Among these is expansion of liquified natural gas (LNG) production, pipelines and export facilities. A Sept. 17 report from Morningstar DBRS notes that project, if followed through, could attract private capital for further expansions.

“The shorter shipping distance to Asia from coastal British Columbia gives Canada a structural cost advantage over competing LNG sources, specifically the U.S. Gulf Coast,” the ratings agency says, adding shipments could reach Tokyo in 10 days as opposed to 20 from the U.S. Gulf Coast.

Brokerage buyout changes?

The size of mergers and acquisitions (M&A) deals being made by North American property and casualty (P&C) insurance brokerages has risen sharply over the past two years, says a Sept. 12 report from ratings agency Fitch. The report does not isolate data for Canada.

While the trend could raise credit risks for rated insurers prioritizing debt-financed M&A, Fitch notes “the sector’s recession-resistant nature and strong [free cash flow] partly offset these risks, allowing well-managed insurance brokers to withstand higher leverage than other corporate sectors.”

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Going forward, the ratings agency calls for “positive but slower organic P&C growth” over the near term. While Fitch notes post-pandemic inflation trends did drive M&A, some growth trends may start to reverse.

“Property pricing turned into a headwind in 2025. Elevated but moderating interest rates could pressure property values through 2026, reducing the chances of near-term pricing reacceleration,” the report says. “Weakness also exists in certain other lines of coverage including cybersecurity and financial/professional lines while casualty trends remain healthy still and are supportive of continued positive organic growth.”

Takeoffs and landings

Rhetoric from the U.S. notwithstanding, passenger traffic through Canada’s three largest airports during the first half of 2025 isn’t all bad news, notes a Sept. 10 report from Morningstar DBRS. While fewer passengers are transiting to or from the U.S., the ratings agency says travel to other worldwide destinations appears to be picking up some of the slack.

Related: Why tariff deals, travel plans and income gaps matter for P&C pros

Vancouver led the pack with overall passenger traffic up 2.1% (despite a 6.2% decrease in flights between Canada and the U.S.) during fist-half 2025. International travel grew 9% and flights within Canada climbed 2.7%. Toronto also held its ground, ticking up 0.1% in 2025 H1, but Montreal saw a 0.6% slip in overall passenger traffic in the same period.

“This shift may be persistent rather than cyclical, with many travellers reallocating their travel to domestic or international non-U.S. destinations,” Morningstar DBRS writes in its report.

Phil Porado

Phil, an award-winning journalist with over 30 years of experience in financial topics, has been managing editor of Canadian Underwriter for more than three years.