Canada’s economy caught between oil windfalls and trade wars

A recent survey of market participants from the Bank of Canada has pointed to geopolitical and trade tensions as the biggest risks facing the Canadian economy. Leading the downside are geopolitical risks led by the Middle East war: 82% of respondents identified it as the biggest risk, while 79% and 57% of respondents chose rising trade tensions and tighter global financial conditions, respectively. The shift in trade tensions dominating the top risks to Canada’s economy amid Trump’s tariffs is largely attributed to the Iran war, which has disrupted global supply chains and impacted the shipping of oil, gas and fertilizers through the Strait of Hormuz.

Governor Tiff Macklem has warned that persistently high energy prices resulting from these conflicts could require interest rate increases to maintain the 2% inflation target. However, like many oil producers, Canada is also experiencing an “oil paradox,” as high oil prices drive up domestic fuel costs and inflation, while generating significant windfalls in government revenue.

Canada posted its first trade surplus in six months, with the country’s merchandise trade balance hitting a surplus of $1.78 billion in March, versus expectations for a deficit of $2.88 billion, while total exports rose 8.5% to $72.8 billion, the second highest level on record. Energy exports rose 15.6% to $17.1 billion, the highest level since September 2022, helped by an 18.9% rise in crude oil exports thanks to a 33.1% rise in prices. Exports of metal products rose 24.0% to a record $15.3 billion, driven by a $3 billion increase in gold exports thanks to a surge in safe haven demand. Meanwhile, total imports fell 1.6% to $71 billion, driven by lower volumes of consumer goods, pharmaceuticals and aircraft.

Related: US Crude Inventories Fall, But Gasoline Stocks See Surprise Rise

That said, trade tensions between Canada and the United States remain a major headwind, with 82% of respondents saying easing tensions is the main upside risk to Canada’s economy. This is significantly higher than the 57% of respondents who identified larger-than-expected fiscal stimulus as the main benefit or the 43% who cited declining geopolitical risks and higher commodity prices.

Currently, there is a lot of uncertainty surrounding the revision of the CUSMA (T-MEC). CUSMA is a trade agreement between Canada, the United States and Mexico that went into effect on July 1, 2020 during Trump’s first term, replacing the 26-year-old NAFTA. The deal requires, among other things, that 75% of auto components made in North America qualify for zero tariffs, with the goal of boosting regional production. The Trump administration is required to outline its new position by July 1; However, negotiations are likely to extend into the fall, influenced by midterm electoral politics in the United States. While the base case is a 16-year extension, there is a risk of a severely fragmented scenario in which the United States imposes tariffs of up to 35% on all Canadian exports, which could induce a Canadian recession. Additionally, there are reports that the White House is considering splitting the agreement into separate bilateral agreements rather than keeping it as a single trilateral agreement.

Canada is already doing far less business with its northern neighbor: The United States accounted for just 66.7% of total exports in March, the lowest level ever recorded, largely due to Trump’s tariffs. Canada’s trade surplus with the United States widened to $7.1 billion in March, its highest level since September 2025, driven largely by an 8.3% increase in passenger car and light truck shipments to $48.51 billion. On the contrary, imports from the US fell 1.2%, to $41.44 billion.

The Trump administration has imposed significant tariffs on Canadian products, including a 50% tariff imposed on Canadian steel and aluminum; 35.2% combined antidumping and countervailing duties on softwood lumber, 25% tariffs on automobile exports, and 50% tariffs on copper and its products, among other levies. Canada initially announced reciprocal, dollar-for-dollar tariffs on $30 billion worth of U.S. goods, but eliminated many of them in September 2025 after some U.S. waivers. However, it still maintains retaliatory tariffs on specific American steel, aluminum and auto products.

The survey results came just two weeks after Canada’s federal Finance Minister François-Philippe Champagne presented the spring economic update, which revealed that Canada’s GDP growth is projected to slow to 1.1% in 2026, down from 1.7% in 2025. However, the economy is expected to rebound again, growing 1.9% in 2027. Canada’s deficit for fiscal year 25/26 was reduced by between $11.5 and $66.9 billion (2.1% of GDP), thanks largely to higher oil revenues.

Last month, Canada launched the Canada Strong Fund, its first sovereign wealth fund. The federal government has committed to contributing $25 billion over three years in cash to the fund. CSF will focus on achieving business returns at market prices by investing alongside private capital in strategic sectors. Investments will focus on nation-building projects in both clean energy and fossil fuels, transportation infrastructure, telecommunications, advanced manufacturing and critical minerals. However, the unique feature of the sovereign fund is a planned retail investment product that will allow individual Canadians to directly invest their own money into the fund and share in the financial returns.

By Alex Kimani for Oilprice.com

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