Canada’s economic landscape is set to change dramatically as U.S. tariffs take effect. A recession is anticipated this year if the tariffs and retaliatory measures remain in place.
Effective Tuesday, there is a 25 per cent tariff on most Canadian goods entering the U.S., while Canadian energy products face a 10 per cent tariff.
Businesses, especially exporters, could need to cut jobs at a time when prices increase, unemployment rises and consumers pull back.
While Canada’s manufacturing, energy and food sectors will be hit immediately, no sector will be spared.
In contrast to the COVID-19 pandemic, when recovery quickly followed, tariffs deliver a structural shock to the Canadian economy that could be felt for years to come.
While the economy will eventually grow as supply chains adapt to a new global reality, one lingering consequence could be a downward shift of the growth path for this year and next.
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The Bank of Canada will likely cut its interest rate in the next meeting to soften the blow of tariffs on the economy.
Canada’s economic policy uncertainty index surged to its highest level ever and has climbed since January. The U.S. index also jumped to its highest level recorded on Tuesday morning.
Volatility will remain high in the foreign exchange market, with the Canadian dollar staying low in the next few months. During times of global economic uncertainty and crises, the U.S. dollar often gains value as a safe-haven currency in relation to other currencies.
Multiple forms of retaliation against the U.S. have been discussed in addition to the federal government’s phased retaliatory tariffs on $155 billion dollars of U.S. imports.
For instance, Canada could impose export tax on energy. The lower 10 per cent tariff rate levied by the U.S., coupled with the decrease in the value of the Canadian dollar, might buffer the demand hit for Canadian energy.
To complicate the situation, Prime Minister Justin Trudeau is expected to be replaced as prime minister and federal Liberal Party leader on March 9—and a spring federal election could follow once Parliament resumes.
Looking ahead, new tariffs could be introduced by the U.S. government in April. These include so-called “reciprocal tariffs,” which would be charged using a country-by-country rate, as well as tariffs on digital services.
The U.S. also intends to introduce 25 per cent tariffs on steel and aluminum imports that are expected to take effect on March 12. These measures would apply to all countries, but Canada will bear the brunt due to how much it exports to the U.S.
The preferred outcome would be for tariffs to phase out based on certain conditions over the next few months. However, it’s unclear what needs to happen for this to occur.
The U.S. economy is edging toward stagnation as inflation climbs and consumers pull back due to uncertainty.
Mexico has stated they will wait until the tariffs come into effect before announcing their response, while China pledged retaliation.
Canadian businesses and consumers will face a bumpy road ahead fraught with volatilities and uncertainty.
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