On Feb. 1, the Trump administration announced a 25% tariff on Canadian goods and a 10% tariff on Canadian oil and gas goods. The Canadian government announced retaliatory tariffs later that day, starting with 25% tariffs on CAD 30 billion of US products like beverages, cosmetics, and paper products (effective Feb. 4), and on an additional CAD 125 billion of US goods, including cars and trucks (effective in three weeks).
This is the most significant trade shock in Canada since the Great Depression, greatly surpassing the 2018 tariffs. In a bear case wherein the tariffs last a prolonged time, the Canadian economy could enter a recession for up to three years, and Canadian consumers will face higher inflationary prices and a higher unemployment rate. A weaker Canadian dollar could be a partial buffer for the price shock to the US consumer. The Canadian dollar has already weakened by more than 7% from a year ago, but it is very unlikely to depreciate to the point of fully offsetting the tariffs.
Across our banking coverage, Canadian Imperial Bank of Commerce CM has the largest exposure to uninsured mortgages. Should the housing market see a severe downturn from a recession, we think that bank is at more risk. Bank of Nova Scotia BNS had Mexico earnings exposure of around 13.5% in fiscal 2024, so it also faces higher risk should the Mexico tariff become effective after a delay of one month.
We are increasing our Morningstar Uncertainty Ratings for Toronto-Dominion Bank TD, Bank of Montreal BMO, and Bank of Nova Scotia to Medium from Low to reflect the increased uncertainty in the Canadian economy due to tariffs. We had already raised our Uncertainty Ratings for Royal Bank of Canada RY, CBIC, and National Bank of Canada NA to Medium from Low on Jan. 30.
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar's editorial policies.
