Economists and market strategists are weighing in on the U.S. executive order that will impose steep tariffs on Canadian goods and energy and initiate a historic trade war with its northern neighbour.
Some, including BMO Capital Markets, have already significantly changed their economic forecasts. BMO now thinks the economy could fall into a recession later this year, prompting the Bank of Canada to slash its key policy rate of 3 per cent in half by October - if not sooner.
Starting Tuesday, the U.S. will impose 25-per-cent tariffs on Canadian goods and 10-per-cent levies on Canadian energy. In response, Canada plans to impose 25-per-cent tariffs on $155-billion worth of American imports.
The dramatic developments this weekend occurred while global markets were essentially closed. Many futures markets, including for U.S. stocks and commodities, began trading Sunday evening at 6pm ET. TSX 60 futures ahead of Monday’s market open are down about 1.4 per cent. The Canadian dollar (CADUSD) has slipped to below 68 cents US, touching its weakest since 2003, and down roughly a cent from where it closed at on Friday.
U.S. and Canadian stocks were already starting to sell off into the close on Friday as the White House reiterated that the tariffs were coming. The S&P/TSX Composite Index ended the day down 1.07% and the Dow down 0.75%.
Here’s how economists are market strategists are so far reacting in written commentaries:
David Rosenberg, founder of Rosenberg Research
In sum, we are talking about the prospect of $3.3 trillion of production from the rest of the world to the U.S. being massively hit (over 3% of world GDP). Global recession, not just Canada and Mexico (is Trump really prepared to destroy the North American motor vehicle industry?). ....
Trump has over-reached, in my opinion. He has made a huge misstep. We won’t need historians in the future to be telling us what is obvious today. In the next few months and quarters, American households will no longer be blaming Joe Biden for an inflation breakout, especially for goods that are essentials. They will be blaming the current President. And as his polls continue to slide, what ends up getting jeopardized is his ambitious and costly fiscal agenda as the GOP hawks in the House very likely grow more emboldened and less intimidated. This is why this tariff gamble is more likely to end up being bullish as opposed to bearish for the bond market — because of what this is going to imply for other key parts of the President’s agenda, particularly fiscal policy, which I suspect will be moving into gridlock, and this is not priced into Treasury prices at the current time. ...
China, Mexico, and Canada account for roughly 40% of U.S. imports, worth more than $1.3 trillion. The hit to Canada is obviously going to be very severe: the average impact on real GDP growth in year one (as per the various BoC scenarios outlined last week) is -2.5% from the baseline of no trade war. That means we can expect a recession that looks a lot like the early 1980s and early 1990s. Not exactly a walk through the park. The effects on inflation are far more complex, but the average increase in the rate is close to +0.2% on an average annual basis (the impact here on prices takes longer to take effect and peaks at +0.8% by year three). Basically, the negative impact on the real economy in Canada is about three times that on inflation (versus a nearly two-to-one ratio in the U.S.) and the reality is that most measures of underlying inflation, appropriately measured, are running far below the mid-point of the 2.0% target range (which is 1.0% to 3.0%). Ergo, the BoC will be cutting rates and cutting them hard from here, and the Canadian dollar will be destined to reach or breach the January 2002 all-time now of C$1.6120. Just to bring the Canadian economy out of its current excess supply (output gap) alone would mean a move weaker to C$1.55 in any event. All roads lead to a weaker loonie, which will be needed in any event to blunt the hit to the domestic resource and industrial sector. And there is no doubt that Canada is going to need at least a $70 billion fiscal stimulus package to offset the tariff-induced economic shock, which would still pale next to the $360 billion that was spent to offset the economic damage from COVID-19 ($90 billion of which was pure waste). That would mean a lot of budgetary red ink but would still leave the deficit-to-GDP ratio running between 4% and 5%, at least temporarily, and keeping in mind that the comparable number south of the border is set to top 6% for the third year in a row.
Charles St-Arnaud, chief economist with Alberta Central
We expect the Bank of Canada to cut its policy rate at the March meeting. However, the size of the cut is uncertain. Given the magnitude of the shock on the economy, the BoC could decide to reduce its policy rate by more than 25bp. Similarly, given that its next policy meeting is scheduled for six weeks, we see a possibility that the central bank could decide to act before the March meeting with an inter-meeting emergency cut.
Warren Lovely and Taylor Schleich, economists with National Bank Financial
[Our] contemplated ‘tariff scenario’ is similar in direction but less extreme in magnitude than what was recently modeled by the Bank of Canada. Assuming broad application of 10-25% tariffs on Canadian exports to the U.S., combined with Canada’s announced retaliation plan, we would envision a roughly 1%-pt hit to Canadian real GDP growth for 2025 (old baseline 1.4% to new baseline of 0.4%). This in turn would add roughly 0.4%-pts to the full-year average unemployment rate (now estimated at 7.4%). Leveraging the BoC’s analysis, our assumed tariff war would increase Canadian all items CPI inflation but a relatively modest 0.1%-pts in year one.
Given our revised baseline economic forecast for Canada (incorporating U.S. tariffs plus retaliation), we believe it would be appropriate for the Bank of Canada to reduce the target policy rate aggressively/quickly. At this juncture, cumulative easing has totaled 200 bps (5% peak to 3% current). As it stands, the policy rate is still in the upper half of the assumed neutral range (2.25% to 3.25%). Given the potential for meaningful economic damage in a lasting trade fight (taking the form of GDP destruction, job loss, reduced real consumption), it may be appropriate to look through the anticipated inflationary impacts of tariffs.
To lessen the fallout on Canada’s real economy and to simultaneously buttress financial conditions, we believe there would be a strong argument for an emergency or inter-meeting interest rate cut by the BoC. Note that an emergency action would argue for a larger-than-normal cut of at least 50 bps. Beyond a near-term inter-meeting action, additional relief at the scheduled March and April meetings (an additional 50 bps) would quickly lower the policy target rate to 2% by spring. This would leave the BoC policy rate in stimulative territory and could provide, at the margin, borrowing rate relief for the spring mortgage season. This would aid housing affordability as job/income losses accumulate (assuming tariffs remain in place).
Beyond spring, the BoC would be in a position to better assess the economic fallout and net impact on inflation. A further degree of monetary easing could be provided (lowering the target rate to 1.5% by late summer/fall) if the anticipated labour market weakness arrives and likewise assuming the imported inflation effect is relatively contained.
As for considerations… It should be clear that the extent of the economic fallout and the required policy response hinges on the duration of a tariff fight. The reaction of the U.S. Administration to Canadian retaliation needs to be monitored. Meantime, the U.S. is taking action against Mexico and China as well, where potential countermeasures could influence the broader economic outlook.
We fully assume that federal-provincial fiscal stimulus will be rushed to affected consumers, workers, companies/industries. Political leaders have pledged this repeatedly. The scale and speed of these relief measures would impact the economic outlook. It is our assessment that regardless of fiscal stimulus efforts, the threat to the Canadian economy would be sufficiently large to warrant loose(r) monetary policy under almost all reasonable scenarios.
Shaun Osborne, managing director, chief currency strategist. Scotiabank
Markets had priced in the risk of some tariff action over the past few weeks but not, I believe, the full extent of the plans announced by President Trump thus far. Given the 10% oil/energy carve out, the average tariff on Canadian exports to the US is around the 20% mark. My guess is that the CAD could weaken up to another 5-6% (at least) in the next few weeks to help adjust to the tariff regime and reflect negative domestic risks, driving USDCAD into the 1.50-1.55 range (66.6-64.50 cents US.)
TD Economics
TD Economics expects a sharp negative reaction in the Loonie and North American equity markets come Monday, and would not be surprised to see the currency flirt with at least 65 U.S. cents in relatively short [order]. Likewise, both countries will experience a rise in inflation. Vehicle costs are particularly susceptible due to the interconnectivity on the supply chain.
Their calculations show if these tariffs are sustained for 5 to 6 months, it would officially tip the domestic economy into recession, albeit a relatively shallow one at that point. Further duration would naturally deepen the contraction. Likewise, the unemployment rate would cross the 7% threshold within that six-month period, instead of their baseline scenario from mid-December that saw it fall to 6.4%.
However, these estimations do not account for the high likelihood that governments will buffer the economic impact via financial supports to households and businesses. Canadians this time have an ability to substitute on demand preferences to non-American products.
Frances Donald, senior vice president and chief economist, Royal Bank of Canada
A persistent tariff of this magnitude is recessionary for Canada. If sustained, our initial analysis suggests that tariffs of this size (based on many assumptions) could wipe out Canadian growth for up to three years, with the largest impacts in the first and second years. Our estimates align to the Bank of Canada’s findings which simulate that a 25% increase in tariffs across the board (U.S. and global) would reduce Canadian GDP ranging from -3.4 to -4.2 percentage points, compared to the baseline forecast. Similarly, an earlier model from the Bank of Canada estimated that GDP could drop by as much as 6 percentage points. By our calculations, such reductions could push Canadian unemployment rates up by between 2 to 3 percentage points. While the precise impact depend on a variety of assumptions – including monetary and fiscal policy responses – this is a significant negative shock to Canadian growth and poses a serious risks of unemployment rate increases.
Canadian retaliatory measures (25% on $155bn CAD, phased in) appear designed to asymmetrically challenge the U.S economy more than the Canadian economy. However, they will still function like tariffs do for any imposing country – by lowering growth and raising inflation on targeted goods. ....
Tariffs are hitting the Canadian economy at a moment during which it is already struggling. Canada is still recovering from a major interest rate shock, and even as the Bank of Canada has cut interest rates by 200bps, the unemployment rate continues to rise, with the country is still operating with excess supply and below full capacity. GDP per capita has declined for eight of the past nine quarters, and business investment has been stagnant. Both cyclically and structurally, Canada’s economy is not well positioned to absorb a shock of this scale. ...
Tariffs removed within a matter of weeks are likely to create a temporary stall for Canada. However, if they extend over a matter months (e.g. 3-6 months), Canada’s recessionary risks increase rapidly. The duration of the tariff isn’t just about the immediate shock (or recession) – the longer the tariffs last, the greater the structural damage (i.e. permanent) on the economy. For example, Canada’s manufacturing sector (the most trade sensitive) accounts for more than 10% of total Canadian business investment, and almost a quarter of total Canadian machinery and equipment investment. A prolonged slowdown in investment in this sector will further reduce Canadian economic potential in the longer-run and require an even larger long-term adjustment. ...
Our base case expectation has been that the BoC was already on its way to cutting interest rates to about 2% by year-end 2025 and we suspect a tariff shock that produces a recession (even if it has inflationary elements) would put the BoC on an even more dovish track. All central banks are challenged by tariff shocks because they tend to raise prices but also lower growth. Further, the monetary policy response will need to be calibrated with the fiscal response ahead (more fiscal implies less need for monetary and vice versa). Our expectation is that, based on what we know now, the risks of additional easing over the baseline expectations for 2025 is growing.
Douglas Porter, chief economist, BMO Capital Markets
Tariffs on Canada and other countries could be around for a while. Given this backdrop, we are adjusting our forecasts ....
Trump’s tariff hammer will come down hard on Canada’s economy. If the announced tariffs remain in place for one year, the economy would face the risk of a modest recession. A couple quarters of contraction are well within the realm of possibility. With little confidence given the lack of historical precedent, we estimate that the tariffs will reduce real GDP growth by about 2 ppts to roughly zero in 2025. This reflects reduced demand for Canadian exports to the U.S. (which account for about a fifth of GDP), disrupted supply chains impeding business activity and consumption, and heightened uncertainty that reduces business investment. It also reflects a reduction in domestic demand due to higher prices stemming from retaliatory tariffs and a weaker Canadian dollar. ...
CPI inflation is expected to rise less than one ppt this year from the current 1.8% rate in December. But given growing slack in the economy and a likely more-than-one ppt increase in the unemployment rate to around 8%, inflation pressures should remain subdued, allowing for some moderation in 2026. Partly limiting the economic pain will be a weaker currency, lower interest rates, and an expected government relief program for jobless workers and affected businesses. These supports, along with the assumed revoking of tariffs after one year, should lead to a modest recovery in real GDP growth to about 1% in 2026. ...
While the oil industry has very high exposure, we assume the 10% tariff will have little dampening effect on U.S. demand given a combination of a weaker loonie, Canadian producer price cuts, and U.S. refinery cost absorption. The housing market recovery in Canada, as gradual as we expected it to be in the absence of tariffs, could be dampened this year by the confidence-sapping trade war, before resuming in 2026 on lower mortgage rates.
It is somewhat encouraging that the U.S. executive order keeps the door open for revoking the tariffs if the said national emergency “crisis is alleviated”. In the event the tariffs prove short-lived, we would unwind the downward revisions to growth. However, the order also warns that the President could increase tariffs further in response to retaliatory actions, which would raise the risk of a deeper economic downturn. The potential long-term damage to Canada’s economy cannot be dismissed, either. Many businesses will increase production on the other side of the border to avoid tariffs. The uncertainty alone about further protectionism could put a chill on business investment for years, which is why the government’s response should also be directed at encouraging productivity-enhancing investment. ...
The Bank of Canada’s rate cut last week was partly portrayed as a risk management move compelled by the rising risk of U.S. tariffs. With that risk now being realized, we reckon the Bank will lean against the expected significant economic slowdown and steeply escalating risk of recession along with associated disinflationary pressures. However, there will be a measure of caution in the policy easing, with inflationary pressures simultaneously prodded by retaliatory tariffs and Canadian dollar depreciation. Previously, we projected the Bank would cut the policy rate two more times this cycle, by 25 bps in April and July (ending at 2.50%). We now look for the quarter-point pace to continue each meeting until October, thus ending at 1.50%. The net risk is that we get to the endpoint sooner.
With the Fed forecast to continue its current pause until June and then resume a quarterly 25-bp rate cut clip, this means Canada-U.S. overnight rate spreads are going to push past -225 bps, testing the all-time extreme of -250 bps during the spring of 1997. With medium- and long-term Canada-U.S. bond yield spreads recently smashing through record negative levels, the market has been sensing extreme overnight spreads too. This will no doubt add to the Canadian dollar’s woes along with appreciation in the greenback as America’s tariffs go global. We see the loonie averaging around C$1.49 by this autumn and can’t rule out a run at the C$1.50 (66.6 cents US) level, with the net risk this could occur quicker. ...
Incorporating the U.S. tariff increases and retaliation from Canada and Mexico announced so far, and assuming these higher tariffs remain in place a full year, we are marking down our baseline U.S. GDP growth forecast for full-year 2025 by 0.3 ppts to 2.1% and the 2026 call by 0.2 ppts to 1.8%, while lifting our core PCE inflation estimates by 0.3 ppts in each year to 2.8% and 2.4%. On a Q4/Q4 basis for 2025, we see growth at 1.7%, down from 2.2% previously, and core PCE inflation at a higher 3.0% instead of 2.4%.
Avery Shenfeld, Andrew Grantham, and Ali Jaffery, economists with CIBC Capital Markets
This is a shock, but there’s nothing to be in awe about here. It will entail a significant economic hit to what we’ve always thought was America’s close ally to its north, and will serve to raise prices and slow growth in the US itself. But the announcement has by no means cleared up the uncertainty over what comes next if Canada addresses Trump’s concerns over migrants and drug flows across the border. Moreover, a negotiated end to this 25% levy would still leave Canada at risk of being included in a subsequent tariff on all US imports, or to targeted tariffs designed to address any grievances the US unveils over Canada-US trade in a review scheduled for completion on April 1st. We also can’t completely rule out a court challenge in the US, since we understand that the act the President has used to invoke these measures has been used for sanctions rather than tariffs in the past. ...
At this point, we’re not ready to give up on the ability of Canada and its allies in the US and the business sector to reach a more favourable resolution. For our base case economic forecast, we’re assuming that the tariff on Canada, and the retaliatory tariffs on the US, are lifted at the end of Q2 through efforts at the negotiating table, lobbying by affected US businesses and states, and actions by Canada that make the case that its border is secure. A hit to business confidence and capital spending would then linger due to remaining uncertainties over further trade issues. Call that a bit of wishful thinking if you will, but it reflects the room for such a deal that was explicitly laid out in the testimony of Trump’s Commerce Department Secretary, and the on-again, off-again period of tariffs and NAFTA talks during Trump’s first term. The Q2 date would be consistent with Canada getting a favourable review in the analysis of border issues being prepared for the President for April 1st, including actions taken to address US concerns. We also hope that the review on Canada-US trade matters opens the door to negotiations rather than an immediate imposition of tariffs on selected sectors. ...
While we would favour a monetary policy easing as part of the initial response, our existing call for a 2.25% overnight rate by the end of Q2 may be all we see from the Bank of Canada if the tariffs end at that point. The Governor appeared to be concerned about feeding into inflation expectations with a more aggressive stance. Should tariffs persist beyond Q2, recession-style job losses and the reduction in spending power would put enough downward pressure on prices to cancel out the initial upside, and thereby leave the Bank of Canada an easy decision to ease rates more aggressively. It’s hard to believe that inflation expectations would shoot higher with significant slack in the economy and so much uncertainty looming over Canada’s long-run growth prospects. It would take a lot of fiscal stimulus to substitute for monetary policy, and a combination of accommodative rates and targeted fiscal support would likely be part of the response. The immediate reaction in the currency market will be to add to what we’ve already seen as markets priced in a higher risk, but not a certainty, that Canada and Mexico would be hit by US tariffs. Our initial projection in such a scenario was that dollar-Canada would approach the 1.50 mark, rather than in a no-tariff forecast, in which the end of such risks would have seen the loonie recover some of its lost ground in upcoming quarters. With tariff uncertainties likely to remain even after Q2, we could see a more limited rebound than we earlier projected.
Derek Holt, vice president and head of Capital Markets Economics, Scotiabank
As much of Asia returns from the Lunar New Year holiday, I suspect that there will be swift, concentrated market reactions into the Monday open with particular emphasis upon the dollar, CAD and MXN. ...
Overall, I have to give credit to PM Trudeau and Team Canada. They were clearly prepared for this and did their homework. He spoke eloquently and with purpose while reaching out to both Americans and Canadians versus the divisive, anti-Canadian combative approach taken by the US administration. At issue is whether the US signature carries any value on its international agreements as it withdraws on multiple fronts and violates the CUSMA/USMCA trade agreement.
More reasonable elements may still exist in the US to find a way out of this but the economic consequences will be severe for both countries if it does not happen soon. ...
Unfortunately Canada-US relations have sharply deteriorated in breathtaking fashion that I certainly haven’t seen in my life or 30-year career. You could hear it in the unfortunate booing of the American anthem at the Ottawa Senators hockey game. You could see it in border towns reportedly taking down the US flag. You can hear and see it in the responses of Canadian politicians of all stripes and levels of government who are unified around fully retaliating. Canada feels betrayed. Violated. Punched by its big brother for no damn good reason. The family still struggling to make ends meet faces fresh out-of-the-blue uncertainty. The household struggling with mortgage resets now faces a needless additional worry. Canada is under an unprovoked attack by a belligerent American President and subjected to unhelpful insults from folks on the periphery like Texas Republican Governor Abbott. Even groundhogs are afraid of popping their heads up today.
This is not who Canadians are. I once didn’t think it was who Americans are. ... It is vitally important to understand the true motives of the US administration that have nothing to do with fentanyl. ... It’s time for American businesses and consumers to join their Canadian peers to make their voices loud and clear that the path chosen by this US administration is a terribly unwise one with deep ramifications for all.
Stephen Innes, managing partner, SPI Asset Management
If fully implemented, the new tariffs on Canada, Mexico, and additional Chinese goods would dwarf the $360 billion worth of imports targeted during Trump’s first term. In 2023, this wave of tariffs could hit over $1.3 trillion in trade, amplifying its potential impact on global markets and supply chains.
The stakes are higher than ever, and Trump’s “all-in” approach shows he’s betting big—whether it’s a calculated gamble or a high-risk bluff, the fallout could reshape trade dynamics across the continent and beyond.
We could see USD/CAD blast through 1.5000 (66.66 cents US) in a flash at the open, with USD/MXN not far behind, mirroring a similar percentage surge.
Trump isn’t just dipping his toes into trade wars—he’s diving in headfirst. Expect more tariff barrages, not fewer, as he looks to weaponize trade policy at full throttle. The dollar is primed for a resurgence, and any illusion of a measured, pragmatic approach won’t last long. Brace for impact—this is just the opening act.
Tu Nguyen, economist at RSM Canada
Trump’s tariffs, and Canada’s response to add a 25 per cent tariff on $155 billion of U.S. imports beginning Tuesday, would send Canada into a recession this year, after the country reached a soft landing in 2024.
Job losses should be expected across industries, from manufacturing to tourism to transportation. Higher prices decrease demand, which means aggregate demand for goods across the U.S. and Canada would drop — leading to fewer jobs.
For Canadian households, this means an increase in prices of multiple consumer goods, including groceries, appliances and especially vehicles.
Prices of perishable goods such as fruits and vegetables are likely to jump as early as this coming week, given that they cannot be stockpiled in advance. Although the price of goods like appliances and cars would take longer to increase, they will inevitably rise. ...
U.S. tariffs and Canada’s retaliation would lead to a contraction of -2 per cent in the Canadian economy, down from a projected growth rate of 1.8 per cent in 2025.
They would also lift inflation from the current 2 per cent to a 2.7 per cent headline number, as some of the increased costs from tariffs are passed onto Canadian consumers.
The Canadian dollar would slide further to mitigate the impact of tariffs on Canadian exports to the U.S. Tariff threats pushed the loonie from 0.72 US before the election to 0.69 US — a level not seen since the early days of the COVID-19 pandemic.
While the depreciation of the Canadian dollar would make imports more expensive for Canadians, the net effect on inflation is far from one-to-one. The economic blow from tariffs would decrease aggregate demand, keeping prices from rising too much.
The impact of tariffs extends beyond traded goods between Canada and the U.S. The unemployment rate would spike as jobs are lost, which lowers demand for all goods and services like new cars, dining out and entertainment. Restaurants, hotels and other services in border towns will be particularly hard hit.
The effect on each industry and each good of course depends on whether there are close Canadian substitutes to U.S. imports and how well supply chains can work around tariffs. For example, tariffs and retaliation would leave auto companies in Canada, the U.S. and Mexico unable to compete with businesses in Asia or Europe.
The scenario in which economic damage is minimized is one in which a trade agreement is negotiated, putting an end to tariffs. The longer tariffs and retaliation continued, the more fractured and uncompetitive the three countries’ economies became — and the more economic pains consumers would feel from higher prices, fewer goods available and fewer jobs.
Mark Malek, chief investment officer at Siebert Financial in New York (from video interview transcript via Reuters)
Now, of course, as with anything ... a lot of this rhetoric generally ends up being a strong-arm negotiating tactic. So, I’d be surprised if these tariffs stay in place for any meaningful length of time. That said, they are sizable. 25% is a very big number. And so, the fallout is not going to be trivial. And we’ve seen a lot of the market digesting this. There’s been a lot of fluctuations in the currency markets. The US Dollar has strengthened quite a bit against both the Canadian Dollar and the Mexican Peso. The most immediate effect of this would be increased costs of goods, not surprisingly. And so, the ramifications from could result in a downturn in kind of the American economy. This is when you look at the types of goods that this could impact, I mean, it’s everything from automobiles to avocados. So, it would be a meaningful potential increase in cost of goods sold. So, that’s one reason I’m inclined to think that the administration is probably using this more as a negotiating tactic and less as something that they intend to leave in place for any length of time because again, it would had the potential to slow down the US economy and increase costs concurrently, which is not something anybody wants.
More to come