Tariff uncertainty has resurfaced with a vengeance, with expectations of a deal scuttled by unacceptable last-minute U.S. demands.

Canada is now in a trade war, with the United States imposing 50 per cent tariffs on about $28 billion in Canadian exports to the U.S., and Canada retaliating with dollar-for-dollar tariffs set to take effect Sept. 8.

The U.S. has threatened additional tariffs on vehicles and parts for Jan. 1. The unnecessary trade war is likely to cut into Canada’s economic recovery through exports and investment, with B.C. among the hardest-hit provinces alongside Ontario and Quebec. Exclusion of energy, potash and critical mineral products from U.S. tariffs limits impacts on other provinces. Businesses and consumers on both sides of the border will face weaker economic activity and higher prices in the coming months.

On the data front, retail spending in B.C. was steady in June with seasonally adjusted sales up 0.1 per cent to $10 billion following a 2.5 per cent increase in May. A month-over-month decline in retail gas prices weighed on nominal growth, with unadjusted sales up 3.7 per cent from June 2025. This lifted year-to-date growth to 1.8 per cent albeit real sales were softer. There was modest evidence of a World Cup boost to B.C. retail spending.

Year-over-year retail spending growth in June was driven mostly by gasoline stations and fuel vendors, where sales rose 17.8 per cent. This was at a slower pace from the 26.4 per cent seen in May. Health and personal care retailers also recorded strong growth, with sales increasing 12.5 per cent. Meanwhile, sales at motor vehicle and parts dealers rose 2.1 per cent to $2.5 billion, marking an improvement following declines since late 2025.

These trends have broadly driven year-to-date patterns through mid-year. However, through six months, sales continued to decline at motor vehicle and parts dealers (-5.2 per cent), building material and garden equipment and supplies dealers (-5.1 per cent), and furniture, home furnishings, electronics and appliance retailers (-0.9 per cent). Weaknesses in the latter two categories were likely linked to the downturn in the provincial housing market.

B.C. small business sentiment firmed in August to extend the recovery that began earlier this summer but remained soft heading into the fall months. The higher index came as a surprise considering renewed tariff threats by the U.S., but the collapse in negotiations will likely hammer September readings.

According to the Canadian Federation of Independent Business (CFIB) Business Barometer, the province’s 12-month outlook index edged up to 56.8, up from 52.5 in July. The gain signals that businesses are becoming more hopeful that economic conditions will improve over the coming year, but that optimism has yet to translate into a stronger near-term outlook.

While the three-month index rose to 48.3 from 45.6, it remained below the 50-point threshold that separates expansion from contraction, suggesting many firms continue to anticipate sluggish business conditions through the fall. Nationally, the comparable readings were considerably stronger, leaving B.C. among the weakest provinces in terms of short-term business sentiment.

Nearly half of survey respondents identified insufficient demand as a constraint on growth, unchanged at a highly elevated 49 per cent and notably above labour-related constraints. Skilled labour shortages remained a concern at 37 per cent, but customer demand was clearly the more pressing challenge for many firms.

Wage costs (69 per cent) and tax and regulatory costs (67 per cent) remained the dominant concerns, while fuel and insurance costs were each cited by 58 per cent of businesses.

The combination of weak demand and persistent cost pressures continue to strain profit margins despite lower interest rates over the past year.

Bryan Yu is chief economist at Central 1.