The U.S-China trade war continues to reverberate across the globe, with the latest signal coming in the form of tepid third-quarter GDP growth in Canada.

Real gross domestic product grew at an annualized rate of 1.3%, Statistics Canada said on Friday, as a rise in business investment and household spending were offset by a decline in exports and flat imports.

Canada’s trade balance, which is less positive than previously thought, is one of many signs that the shaky relationship between the U.S. and China is taking its toll on the country’s economy, said Scotiabank’s chief economist Jean-Francois Perrault.

“We have a whole series of indicators that suggests that the impact of the trade war is being felt,” he said.

“The numbers show reasonably decent growth. It’s not anywhere near recession. There is a kind of underlying momentum that is keeping things stronger than would otherwise be the case. But we are going through a bit of a slowdown now. That’s a reflection, to a large degree, of the trade uncertainty that we see.”

The country’s real GDP growth for the quarter ended Sept. 30 was in line with Scotiabank Economics’ forecast of 1.2% That’s lower than the 2.1% growth seen in the U.S. during the same period, and a step down from the Canadian economy’s performance during the second quarter at 3.5%.

Canada’s third-quarter GDP release on Friday follows recent comments by Bank of Canada governor Stephen Poloz that the ongoing trade war between the U.S. and China will cost the global economy more than $1-trillion in lost economic output by the end of 2021.

Scotiabank economists have also quantified the fallout from trade-related on both sides of the border. In the U.S., the level of economic activity is expected to be about 0.75 of a percentage point lower by mid-2020 relative to a scenario with historical levels of uncertainty. In Canada, that impact is estimated to be about 0.5 of a percentage point of GDP.

“These are very significant impacts,” said Perrault. “Thankfully, underlying fundamentals have been generally strong in North America, such that growth is reasonably strong despite this drag. What’s important to keep in mind though, is that our economies would be significantly stronger if trade uncertainty were lower.”

Canadian retail sales slipped 0.1% to $51.6 billion in September, Statistics Canada said recently, marking the first decrease in three months. The decline stemmed from lower sales at motor vehicle and parts dealers and gasoline stations, the Ottawa-based agency said.

As well, Canada’s merchandise trade deficit with the world in September narrowed from $1.2 billion to $978 million, less than economists expected.

Meanwhile, it has been a roller coaster ride for world markets this week. Signs mounted earlier in the week that a first-stage trade deal between the U.S. and China was close, sending stocks higher, but investor optimism was dampened again after U.S. President Donald Trump signed legislation in support of Hong Kong protesters. 

“The lingering tension between China and the United States, the two largest economies, has reverberated throughout the world,” said Myles Zyblock, chief investment strategist at Dynamic Funds in a recent analysis.

“It has rattled corporate confidence, handcuffed capital spending, interfered with normal supply chain functioning, and is now starting to manifest as weakening labour demand. A tangible resolution would go some way to help reversing the headwinds to growth that have been building for the better part of the past 18 months.”

He notes that Wall Street’s economic projections for global GDP growth “continue to drift lower” and now stand at 3.1% for both 2019 and 2020.

“This is a significant downshift from the near 4% aggregate growth rate that was achieved in 2017. The forecasts, if they prove accurate, would represent the weakest back-to-back annual growth rates recorded since the great financial crisis. It’s been a synchronous slowdown, with almost all of the world’s major economies now expected to deliver even less growth as the calendar rolls forward.”

A trade deal, however, could dramatically reshape the risks to the outlook by removing the “dominant downside risk to the health of the global economy,” said Perrault.

“If this happens, uncertainty should return to normal levels, and the drag we have observed so far might be reversed.”

Read Scotiabank Economics' latest report on Canadian GDP figures here.