Canada quarterly economic outlook

In our previous quarterly outlook, we predicted an interesting year ahead for Canadian investors. In hindsight (and in keeping with the character of the 2020s), perhaps we should have said, “Let the chaos begin.” 

Through a multitude of executive actions, the second Trump Administration has been breaking (or at least threatening to break) radically with the global trade and military order of the past 60-to-80 years while also articulating territorial ambitions reminiscent of the late nineteenth and early twentieth centuries. Heading into the “Liberation Day” announcement on April 2, we hadn’t seen any large economic or market dislocations, but economists and other observers understandably were concerned about potential impacts on the Canadian and global economies as well as financial markets. In this paper, we’ll recap the current state of the trade war, discuss potential impacts, and try to identify some under-the-radar risks.

A sigh of relief, but hold your breath

We think “chaos” is a fair characterization of Trump’s executive orders, as even their ardent supporters acknowledge they aim to massively reshape longstanding global trade patterns. In his executive order signed April 2, Trump announced the imposition of broad 10% tariffs against over 130 countries as well as higher reciprocal rates on countries that Trump views as being the worst offenders in terms of trade imbalances.¹ Surprisingly, both Canada and Mexico were left off the list entirely. 

While that’s certainly a positive, corks should be left in the champagne bottles. Canada’s exports to the U.S. are still subject to higher trade barriers, including 25% tariffs on aluminum, steel, and goods that are not compliant with 2020’s United States-Mexico-Canada Agreement (USMCA), as well as 10% on energy goods. Canada is fortunate to have escaped additional Liberation Day tariffs, but these existing measures still pose significant risk. As multiple observers have now noted, the United States’ cumulative in-force and announced tariffs are now at levels last seen in the 1930s.²

Furthermore, Trump has promised to pursue additional tariffs on strategic sectors such as lumber, pharmaceuticals, and semiconductors (the first two are especially relevant in terms of potential impact to Canadian industries).

Finally, in addition to these impending and potential headwinds, Canada’s economy is quite exposed to any global or U.S. economic slowdown precipitated by Trump’s trade war and any subsequent retaliation from other countries.

In short, the intermediate-term outlook is now quite concerning. Sentiment measures have been worsening in Canada and the U.S., and while the domestic labour market was still in reasonable shape as of the latest report (Exhibit 1), it’s quite possible we’ll begin to see some more meaningful deterioration in hard economic data in the months ahead.

¹ The “reciprocal tariffs” were derived using an unusual and controversial approach based on each country’s trade surplus with the U.S. divided by its total exports. While China was the highlight, this approach also threatens severe harm to some smaller countries. 

² Investors are likely to hear frequent references to the Smoot-Hawley Tariff Act of 1930 and its proximity to the onset of the Great Depression. While relevant to the current situation, we would caution investors not to consider those tariffs as the sole and proximate cause of the Great Depression. Monetary policy likely played a much more important role in the severe global downturn of the early 1930s. See, for example, Douglas Irwin’s 2010 paper, “Did France Cause the Great Depression?” Available at: https://www.nber.org/system/files/working_papers/w16350/w16350.pdf.

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