FCC Links Tariff Escalation and Higher Bond Yields to Weaker Canadian Growth Outlook

Farm Credit Canada’s latest economic and financial-market update argues that the August escalation in the U.S. trade conflict has weakened Canada’s outlook for the second half of 2026 and for 2027. FCC estimates that about one-fifth of Canadian exports are now subject to U.S. tariffs ranging from 10% to 50%, and it projects Canadian GDP growth of roughly 1% in 2026. The report identifies non-energy exporters as particularly exposed because they are contending both with the effects of earlier tariffs and the more recent escalation. [1]

The FCC analysis also says the U.S. decision not to renew CUSMA has created an annual-review process that will continue until the agreement’s scheduled 2036 expiry. In its view, the combination of continuing tariff exposure and uncertainty surrounding the agreement will restrain export-oriented activity even after Canada’s second-quarter economic rebound. The Bank of Canada similarly said on September 2 that recently announced U.S. tariffs and threats of further action pose risks to the durability of Canada’s recovery. [1][2]

A central conclusion of the report is that supportive monetary policy may not be sufficient to reduce long-term financing costs. FCC says Government of Canada bond yields have climbed since last November even though the overnight rate has not changed, because Canadian yields are strongly influenced by U.S. Treasury markets. The Bank of Canada confirmed that long-term yields have risen globally, including in Canada, while holding its overnight-rate target at 2.25% amid greater uncertainty over trade and inflation. [1][2]

FCC attributes the rise in U.S. Treasury yields to several factors, rather than tariffs alone. It cites persistent U.S. inflation, investor concern about U.S. fiscal conditions, a higher term premium, and a growing supply of corporate bonds connected to large technology companies’ artificial-intelligence investment. The report argues that tariffs have contributed to U.S. inflation and that tariff revenue has not met expectations for offsetting the fiscal effects of tax reductions, adding to concerns about debt and deficits. [1]

The U.S. Treasury announced on August 19 that it would at least double the maximum size of liquidity-support buyback operations for longer-dated nominal coupon securities, raising the per-operation maximum from US$2 billion to at least US$4 billion. The larger operations take effect September 9 and run through the remainder of the refunding quarter ending November 4. FCC considers the announced buybacks small relative to the Treasury market and does not expect them, by themselves, to reverse the broader pressures it identifies. [1][3]

For Canadian households and businesses, FCC’s assessment implies that fixed mortgage rates and long-term borrowing costs could remain elevated even if the Bank of Canada keeps short-term rates low. It expects weak growth and excess supply to ease inflation later in 2026, but notes that Canadian counter-tariffs could add some price pressure. The Bank of Canada likewise said new U.S. tariffs and Canadian counter-measures could raise business costs and eventually affect consumer prices, although core inflation was close to 2% in July. [1][2]