As inflation ticked higher last month, one economist says Canada could be facing higher prices and a technical recession.
Statistics Canada released its latest consumer price index for the month of February on Tuesday, noting that the annual inflation rate rose to 2.6 per cent from 1.9 per cent a month earlier. The increase came alongside an end to the federal government’s temporary tax breaks, where Canadians saw GST and HST taken off certain items.
James Orlando, director of economics at TD Economics, said in an interview with BNN Bloomberg on Tuesday that “everyone knew inflation was going to rise” due mainly to the end of the GST/HST holiday. Following a fairly stable period of comparatively low inflation, he notes prices appear to be moving higher, independent of the ongoing tariff situation.
“The issue for us is how much is this going to continue? Not just into March, but into April and May? We have a situation where it’s not just the tax impact, the tax holiday that’s pushing up inflation right now,” Orlando said.
“When you look at inflation excluding indirect taxes, which is what this is here, we’re looking at inflation moving potentially above three per cent by next month.”
Canada’s economy is also facing a trade war, with U.S. President Donald Trump saying he will impose both broad reciprocal tariffs and additional sector-specific tariffs on April 2.
In a quarterly economic forecast, released Tuesday, TD Economics said Canada has “born the brunt” of Trump’s tariff plan despite having “one of the most equal trade relationships.”
As a result, the forecast predicts tariffs can not be avoided and are expected to be in place for six months before a gradual reduction through negotiations.
“However, even with this, we doubt Canada’s trade and tariff relationship will return to the pre-Trump state,” the forecast says.
Despite a wave of sentiment from Canadian consumers to buy domestic products, the forecast said it won’t offset the negative impacts from U.S. tariffs. As a result, TD Economics predicts Canada’s economy to “tip into a shallow recession this year, mitigated in part by government support.”
“If we took tariffs out of the equation, Canada was actually regaining its strength. You look at the Canadian consumer, Canadian businesses, you look at inflation, they were all starting to come back in a way such that the Bank of Canada was likely going to have to pause rate cuts,” Orlando said.
However given the uncertainty around tariffs, he said it’s a “scenario-based world we live in,” where the scope and duration of tariffs remains unclear. Assuming a six month period of “potentially on again, potentially off again” tariffs, Orlando said a technical recession could occur.
“What we calculate is we are going to hit what is a technical recession in Canada, so two straight quarters of negative growth. Now these aren’t big negative numbers, but they are negative. So, I think this reflects Canadian consumers and businesses with their confidence being hit based on these tariffs,” he said.
With files from the Canadian Press.
