SKN | BMO Sees Strong Q2 Growth, but Tariffs Darken Canada’s Q3 Outlook

Key Takeaways:

• BMO Capital Markets expects Canadian real GDP growth of nearly 4% annualized in the second quarter, supported by stronger exports.
• BMO estimates the latest tariff and countertariff measures could reduce economic growth by roughly 0.5 percentage point if sustained for a year.
• The bank sees risks to the outlook as increasingly dovish for the Bank of Canada, although it does not expect immediate policy action.

BMO Capital Markets is taking a two-speed view of the Canadian economy: a stronger second quarter followed by materially greater uncertainty as renewed U.S.-Canada trade tensions begin to affect activity. In a recent note, BMO Senior Economist Shelly Kaushik said exports, particularly energy and other goods including autos, are supporting a significant improvement in second-quarter growth.

BMO expects real GDP growth of nearly 4% annualized in Q2, with the export improvement also pushing Canada’s current-account surplus to its largest share of the economy since 2008. For the bank, however, the strength of the second quarter does not necessarily establish a durable growth trend.

BMO Sees Trade Support Fading Into Q3

The central concern in BMO’s assessment is the transition from temporary trade support to the economic effects of escalating tariffs. The bank noted that earlier uncertainty had restrained some activity, while subsequent trade flows benefited from stronger energy exports and recovering goods shipments.

BMO cautions that some of the recent trade strength may reflect tariff front-running, as businesses accelerated activity ahead of potential trade measures. That support is unlikely to persist indefinitely. Preliminary indicators for manufacturing, retail and wholesale trade were already negative, while hours worked remained relatively firm.

For wealth holders with Canadian exposure, the distinction matters. A strong headline GDP figure can mask a weaker underlying trajectory if trade-related activity was brought forward rather than generated by sustainable domestic demand.

The 0.5-Point Growth Risk BMO Is Watching

BMO estimates that the combination of tariffs, countertariffs and government support programs announced during the week could impose approximately a 0.5 percentage point drag on economic growth if the measures remained unchanged for a year. The bank stresses that this is a conditional estimate, with policy potentially changing before such an impact fully materializes.

That qualification is important. BMO is not forecasting a fixed downturn; it is identifying the economic sensitivity of Canada’s growth outlook to an evolving trade relationship. The greater the persistence of tariff barriers, the greater the potential pressure on business activity, investment and consumer confidence.

Why BMO Sees a Difficult Path for the Bank of Canada

The bank also highlights a policy dilemma. Weaker economic growth argues for easier monetary policy, while countertariffs could simultaneously push inflation higher. That combination creates a less straightforward environment for the Bank of Canada.

BMO’s overall assessment is that risks lean dovish, although it does not expect near-term policy action. The bank instead expects policymakers and markets to focus on incoming economic data for evidence of how quickly trade escalation is affecting activity.

For sophisticated investors, BMO’s analysis makes the second-quarter strength less important than the durability of that strength. The critical signals ahead are July GDP, trade-sensitive activity and the persistence of tariff measures. For a confidential discussion regarding cross-border exposure to Canadian markets and broader wealth structures, contact our senior advisory team.