Trump tariffs threaten to derail Canada’s economic recovery

Bank notes issued by the Bank of Canada are seen in a display case at the Bank of Canada Museum in Ottawa, on Wednesday, Sept. 4, 2024. THE CANADIAN PRESS/Justin Tang (Justin Tang/The Canadian Press)

OTTAWA — U.S. tariffs that took effect on Tuesday are threatening to derail Canada’s fledgling economic recovery and will fuel a rise in consumer prices and unemployment, potentially triggering a recession.

Canada relies on the United States for 75 per cent of its exports and a third of all imports. Its dependency on trade for economic growth leaves Canada vulnerable to a protracted trade war.

The Canadian economy had started showing signs of improvement after several anemic quarters thanks to six consecutive interest rate cuts from the Bank of Canada.

Canada’s fourth quarter annualized economic growth was 2.6 per cent, surpassing expectations and the unemployment rate dipped thanks to robust job additions in January. Its labor productivity turned positive in 2024 for the first time since the COVID-19 pandemic, data showed on Wednesday.

The growth spurt may be short-lived, however, depending how long tariffs are in place.

“If the tariffs are sustained indefinitely, it would almost wipe out two years' worth of economic growth,” said Craig Alexander, president of Alexander Economic Views, an independent economic research organization.

The economy could at least see a mild recession, he said, but cautioned that this estimate does not take into account the impact of any further tariffs. Economists have also said the impact of tariffs on the U.S. economy will be broad, deep and time-consuming.

U.S. President Donald Trump slapped a 25 per cent tariff on all imports from Canada except energy products, which are taxed at 10 per cent from Tuesday.

After Canada announced immediate retaliatory measures on C$30 billion of goods, Trump threatened even more tariffs.

Trump and Canada’s outgoing Prime Minister Justin Trudeau are expected to speak on Wednesday, said a source with knowledge of the matter.

“We are at an inflection point,” said Randall Bartlett, Deputy Chief Economist with Desjardins. All the good news of the past in terms of GDP, jobs and inflation is likely to reverse, he said.

Canada is likely to slip into a recession, probably starting in the second quarter of this year, he said, adding that unemployment could go up to 8 per cent. The unemployment rate is currently at 6.6 per cent.

The Trump administration will make an announcement later on Wednesday regarding tariffs as Trump weighs potential relief for some sectors such as automobiles, the U.S. Commerce Department chief said.

In Windsor, Ontario, just across the border from Detroit, the impacts on the auto industry could be felt in a matter of days, said Mayor Drew Dilkens. Layoffs for manufacturers could start in a week, he said.

“And that’ll cascade down in the supply chain. So some will be able to survive a little longer than others, but 25 per cent across the board is in the realm of being catastrophic for the auto industry as a whole,” he said.

The central bank has said Canada’s growth will be permanently stunted by the tariffs, while inflation will see a spike that could persist if tariffs continue.

The BoC will announce its monetary policy decision on March 12 and currency swap markets see at least a 90 per cent chance of a rate cut, almost double the chance expected on Monday. 0#BOCWATCH

Exports to the U.S. account for roughly 18 per cent of Canada’s GDP and more than 2.4 million jobs in Canada are dependent on business with the U.S.

“I won’t sugar coat it. This is going to be tough,” Prime Minister Justin Trudeau told a press conference on Tuesday.

Economists said that if tariffs continue and keep stacking up, they will ripple through a multitude of sections of the economy.

Households will be pushed deeper into debt, company profits will be hit, government revenues will be dented, there will be sweeping layoffs, consumer and corporate defaults will jump, and Canadian provinces could lose credit ratings, they said.

“It will disproportionately affect the less fortunate economically,” said Dave McKay, CEO of Royal Bank of Canada, the country’s biggest lender.

(Reporting by Promit MukherjeeAdditional reporting by David Ljjungren, Nivedita Balu and Anna Mehler Paperny; Editing by Caroline Stauffer and Lincoln Feast)