Trade war could cost $1 trillion

The Bank of Canada is predicting the trade battles being waged will leave lasting scars on the global economy, including the permanent loss of more than $1 trillion in output by 2021.

Bank of Canada governor Stephen Poloz said Thursday that certain policies that have been put in place “will have permanent effects.”

“We think by the end of next year we will have lost over a trillion dollars globally in output,” Poloz said during a fireside chat at an Ontario Securities Commission conference in Toronto. “And that’s gone forever.”

Even if economic growth picked up, it could not make up for the loss, Poloz said, “because you’ve thrown so much sand into the wheels of global commerce.”

The comments from Poloz came after the Bank of Canada’s senior deputy governor, Carolyn Wilkins said Tuesday that the trade war between the United States and China is “top of mind for all of us,” according to a transcript of her speech.

Wilkins added that uncertainty around trade policy remained elevated, causing a global slowdown and sparking concerns of a global recession, although the Bank of Canada’s baseline forecast was not calling for one. “Even if the trade war doesn’t get any worse, by 2021 it could cost around US$1 trillion in lost economic output around the world,” she added.

Poloz, however, said Thursday that they thought they had gotten monetary conditions “about right” given the situation, which came as a bit of a jolt to some observers.

Since the governor last spoke on Oct. 30, domestic data “has generally been soft and, at a minimum, traction toward addressing global trade frictions has stalled while inflation remains on target in backward looking fashion,” wrote Derek Holt, vice-president and head of capital markets economics at the Bank of Nova Scotia, in a report published prior to the governor’s remarks.

A TD Securities note said Poloz had “surprised markets with a relatively hawkish tone” on Thursday, as the governor described the economy as being “in a good place and described monetary policy as ‘about right.’”

Poloz said that over the past year trade tensions have been turning into real economic consequences.