Canada's economy is expected to post a strong second quarter, with exports surging on the energy rally and other goods, including autos, beginning to recover from earlier trade uncertainty, according to BMO Capital Markets in a note on Thursday.
The improvement pushed the current-account surplus to its largest share of the economy since 2008 and is a key reason the bank expects real gross domestic product growth of nearly 4% annualized later Friday.
The outlook became more challenging heading into Q3 as the trade war with the US escalated, wrote BMO Senior Economist Shelly Kaushik. July's flash GDP estimate, also to be released later Friday, will provide an early read on how the economy is responding to renewed US tariff threats.
Preliminary indicators, including manufacturing, retail and wholesale trade, were negative, though hours worked remained firm, added the economist. Trade may also have received a temporary boost from tariff front-running, but that support is likely to fade by August.
"Given the various tariffs, countertariffs, and government support programs announced this week, we estimate roughly half a percentage point hit to economic growth if nothing changes for a year -- which is a big if," said Kaushik.
For the Bank of Canada, weaker growth and higher inflation from countertariffs create a difficult trade-off.
On balance, the risks lean dovish, though near-term action is unlikely, according to BMO. Policymakers and markets will focus on incoming data for signs of the trade escalation's impact.