Geopolitical Tensions Overtake Trade Concerns as Top Risk to Canada’s Economy

For the first time in recent quarters, geopolitical instability has surpassed trade conflict as the primary threat to Canada’s economic productivity. New data from the Bank of Canada reveals a significant shift in sentiment among the nation’s financial and business leaders, who now view global conflict as the most pressing downside risk to growth.

The Shift in Economic Risk Perception

According to the Bank of Canada’s Market Participants Survey for the first quarter of 2026, geopolitical tensions have moved to the forefront of economic anxiety. The survey, conducted between March 25 and April 1, 2026, polled approximately 27 leaders from sectors including banking, insurance, asset management, pension funds, and research firms.

When asked to identify up to three downside risks to Canada’s economic growth, the responses highlighted a clear hierarchy of concern:

• Increasing geopolitical tensions: Selected by 82% of respondents.
• Worsening trade tensions: Selected by 79% of respondents.
• Tightening global financial conditions: Selected by 57% of respondents.

This represents a dramatic reversal from the final quarter of 2025. In that period, trade tensions were the dominant concern, cited by 93% of participants, while geopolitical risks did not even rank among the top three threats. Other risks in late 2025 included tighter global financial conditions (43%) and weaker consumer spending (37%).

The Impact of Conflict in the Middle East

The sudden rise in geopolitical anxiety is closely tied to the ongoing war in Iran, which has persisted for over two months. The situation has been further complicated by U.S. President Donald Trump’s rejection of Iran’s most recent ceasefire proposal, leaving the long-term outlook uncertain.

The economic fallout is primarily felt through critical supply chain disruptions. The Strait of Hormuz—a narrow shipping channel essential for global trade—is essentially closed to most container ship traffic. This blockade has strained the supply of essential materials, including:

• Crude oil and natural gas
• Fertilizer
• Various raw materials

As these supplies dwindle, prices for gasoline and food are rising globally. The severity of the situation is underscored by a warning from a UN agency last month, which suggested that if the war continues unabated, it could trigger a food “catastrophe” later this year.

Monetary Policy and the Inflation Fight

The Bank of Canada is closely monitoring these developments, as energy price spikes threaten to undo progress on inflation. On April 29, shortly after maintaining the benchmark interest rate at 2.25%, Governor Tiff Macklem warned that the central bank may be forced to act if energy costs continue to climb.

Speaking to reporters in Ottawa, Macklem stated, “If energy prices go higher, and particularly if they stay higher for longer, there could well be a need to increase the policy rate to get inflation back to two per cent.”

The instability is compounded by Iran’s targeting of energy infrastructure in Kuwait and the United Arab Emirates, as part of broader strikes against countries it perceives as aligned with U.S. Interests.

Key Takeaways: Canada’s Economic Outlook

Looking Ahead

Canada’s economic stability currently hinges on external factors beyond its domestic control. While trade tensions with partners like the U.S. Remain a significant concern, the immediate volatility of the Middle East has created a more urgent set of challenges. If diplomatic efforts fail to secure a ceasefire and shipping lanes remain blocked, Canadian consumers and policymakers should prepare for sustained inflationary pressure and potential interest rate hikes.