The S&P/TSX Composite Index fell more than 2% at open on March 4 as sweeping new US tariffs on Canada took effect. The broad-based declines were led by energy and tech stocks; the S&P/TSX Capped Energy Index and the S&P/TSX Capped Information Technology Index opened lower, continuing their slide from yesterday.
US President Donald Trump had announced a 25% tariff on Canadian goods and 10% tax on energy and critical minerals in February, then paused their implementation for a month. That pause lapsed Tuesday at 12:01 a.m. and the measures came into effect. Canadian Prime Minister Justin Trudeau hit back swiftly with C$155 billion in counter tariffs on US goods, with C$30 billion worth of taxes effective immediately, while the rest will ramp up three weeks later.
The onset of a trade war has raised the specter of recession in Canada, which has grappled with a fragile economy, a high jobless rate, and weak business sentiment. “With no reprieve seemingly forthcoming, Canada must brace for the immediate impact of US tariffs,” warns Eric Lascelles, chief economist at RBC Global Asset Management.
Retaliatory tariffs by Canada were a certainty, alongside a menu of other potential responses which, though carefully calibrated to hurt US businesses, could cause further pain for 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.”
Analysts hope any consequent Canadian recession is short-lived. “There is a strong possibility of a recession if high tariffs are implemented for an extended period. However, we think the most likely scenario is that tariffs will be lowered after the Commerce Department report on April 1,” explains Ben Jang, portfolio manager at Nicola Wealth. He says that what level they’re lowered to will determine whether Canada is pushed into a recession.
Morgan Stanley strategist Michael Zezas says fully implemented tariffs would have meaningful consequences. Without a quick resolution, “the tariffs could go on as scheduled and be removed after a short period (limited scope/duration), or they could prove broad-based and durable, which would have the greatest impact for the economy and markets,” he wrote in a note to investors.
Indeed, the steep levies could prove disastrous for an economy struggling to regain strength, making a recession a clear and present danger. This would upend any plans the Bank of Canada may have to freeze its interest rate cuts, possibly necessitating further and deeper cuts.
Trump’s announcement that the tariffs would be implemented triggered a sharp selloff in the markets, with the S&P/TSX Composite Index retracting 1.5% on Monday 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, possibly an extension of the one-month delay from February. The markets appeared to be shaking off the last week’s swoon on Monday, until Trump told reporters there was no room for Canadian or Mexican officials to negotiate a reprieve from the levies. The imposition of the tariffs further intensified the downdraft on Tuesday. “We’re surprised that the markets haven’t priced in more risks with tariffs until recently,” says Jang.
Analysts stress that the new taxes would dent equities in specific sectors rather than the broader index. The Stanley strategists wrote that “sectors at most risk from increased tariffs [include] IT hardware and equipment, autos, and subsets of consumer.”
Canadian policymakers have had to walk a tightrope, trying to keep inflation contained and slow the pace of interest rate cuts while bolstering the economy and the job market. However, the US tariffs and Canadian countermeasures stack the deck against Canada’s economic fortunes changing. Any possibility of the Bank of Canada taking an interest rate cut pause may be off the table. In fact, policymakers may be under pressure to cut further and deeper than they would have liked.
A falling loonie may help offset some of the tax impact on Canadian exports, but the economy is unlikely to remain unscathed. “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,” warned Capital Economics chief North America economist Paul Ashworth in a note.
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