US President Donald Trump said he intended to proceed with 25% tariffs on Canadian good after the monthlong pause lapses midnight tonight.
This has reignited fears of a recession in Canada.
“With no reprieve seemingly forthcoming, Canada must brace for the immediate impact of U.S. tariffs,” warns Eric Lascelles, chief economist at RBC Global Asset Management.
Retaliatory tariffs by Canada are a certainty, alongside a menu of potential non-tariff responses, which, although carefully calibrated to hurt US businesses, could further hurt Canadian consumers and by extension the domestic economy.
“Tariff damage is set to be considerable for Canada, potentially to the point of inducing an economic contraction in the coming months if the tariff rate is indeed 25%,” says Lascelles. “Whether that broadens into a proper recession will depend on how long the tariffs last.”
Morgan Stanley strategists Michael Zezas says that fully implemented tariffs would have meaningful consequences.
In the absence of a quick resolution, “the tariffs could go on as scheduled and be removed after a short period of time (limited scope/duration), or the tariffs could prove broad-based and durable, which would have the greatest impact for the economy and markets,” he says in a note to investors.
Indeed, for an economy struggling to regain strength, the steep levies will spell disastrous consequences, making the possibility of recession clear and present danger. Such an eventuality will upend any plans the Bank of Canada may have to enact a rate cut freeze, possibly necessitating further and deeper cuts to their policy rates.
Trump’s reiteration of full 25% tariffs starting tomorrow triggered a sharp selloff in the markets with the TSX retracting 1.5% and the Canadian dollar dropping to C$ 1.45 against the US dollar from a relatively stronger C$ 1.42 on Feb 25. The Canadian dollar has been sliding against its US counterpart for nearly a year, prompting analysts to issue bleak forecasts for its performance in 2025.
Investors were hoping for another last-minute reprieve, with further extension of the previous one-month suspension that ended on March 04. The markets appeared to be shaking off the last week’s swoon Monday morning when Trump told reporters there was no room for Canadian or Mexican officials to negotiate a reprieve from the levies. The announcement immediately triggered a market downdraft with the imposition of tariffs further intensified on Tuesday.
Analysts stress the impact of the new taxes would impact equities in specific sectors rather than the broader index. Strategists in the Morgan Stanley note identify “sectors at most risk from increased tariffs [include] IT hardware and equipment, autos, and subsets of consumer.”
The Canadian policymakers have had to contend with a challenge of walking a policy tightrope as they try to keep inflation contained, slowdown the pace of interest rate cuts while bolstering the economy and the job market. However, the broad-based tariffs and the similar counter measures from Canada against the US imports stack the deck against any possibility of a reversal of Canada’s economic fortunes.
Hefty broad-based tariffs could upend any plans for the Bank of Canada to take a rate cut pause, possibly necessitating further and deeper cuts to their policy rates.
It is expected that a further loonie weakness may help offset some of the impact on Canadian exports but the economy may still get hit.
“Even allowing for a further depreciation in the Canadian dollar, we estimate that the 25% tariff on Canada will hit exports, investment and consumption, resulting in a 2.5% to 3.0% decline in GDP, warns Paul Ashworth, chief North America economist at Capital Economics, in a note.
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