A new report from the Canadian Federation of Independent Business (CFIB) warns that Canada could see a significant economic contraction in the second quarter of this year if the tariff war between Canada and the United States drags on.

Its latest Main Street Quarterly report for the first quarter of the year estimates that the economy grew by a modest 0.8% in the first three months of the year. It predicts, however, that the economy will contract at an annualized rate of 5.6% in the second quarter.

The report, which is based on the CFIB’s most recent monthly business barometer data, says the drop comes from a historically low long-term business sentiment in the context of the trade war with the United States.

Indeed, after seeing good recovery at the end of 2024, private investment is estimated to see a major drop of 13.9% in Q1, with the Q2 forecasted even lower at -19.1%.

A special analysis highlights that SMEs are under growing pressure from weak demand and rising input costs. Exporters are the least able to pass on tariff-related costs, while importers have more flexibility to adjust prices.

The quarterly sectoral section highlights how different industries are coping with these pressures. It finds that manufacturing and wholesale firms are the hardest hit by low demand due to their trade exposure. Meanwhile, agriculture, hospitality, and arts, recreation and information businesses are less able to pass on costs and more likely to absorb them fully.

One-third of wholesale firms have already increased their prices. Moreover, two-thirds of firms in hospitality and construction plan to increase their prices once supplier costs stabilize.

“Given how the long-term business confidence is at historically low levels, it’s not surprising that small businesses are pausing their capital expenditures,” said CFIB’s chief economist and vice-president of research, Simon Gaudreault. “It’s nearly impossible for owners to plan expansions or investments when they’re not sure if their business will even be open in six months. Governments at all levels urgently need to balance the economic environment, so SMEs have the capacity to withstand the impacts of the trade war.”