Canada’s economy could benefit from strong growth in the United States during a second Trump administration.
The U.S. dollar surged on Wednesday against all major currencies as promises of generous tax cuts and lax regulations attract more capital into the U.S.
And while the rising tide might not lift all boats, it will lift the one closest to it—Canada. Canada stands to benefit as the U.S.’s top trading partner. The two countries are so tightly integrated that a robust American economy will brighten the Canadian outlook.
A stronger American economy translates to more consumer demand, and this will include demand for goods and services from Canada. In addition, many businesses have cross-border operations. Loosening regulations will buoy the technology sector, adding to the significant number of tech workers employed by American firms in Canada.
This is why the loonie fell against the U.S. dollar on Wednesday but did not decline as much as other major trading currencies.
Trade
Two-thirds of Canadian exports, and three-quarters of merchandise exports, are to the United States. The biggest threat to this trade activity is tariffs. President-elect Trump promised a 10 per cent to 20 per cent tariff on imports from the rest of the world, which would mean a blow to Canadian exports. The adverse effect of these tariffs could dampen growth prospects. In addition, if Canada retaliates and imposes tariffs on American imports, Canadian consumers will have to bear higher prices, adding to inflationary pressures.
Inflation and monetary policy
The Bank of Canada’s task to maintain price stability is not simple. While the central bank seems to be undershooting the target as more disinflation spreads, a strong American economy and tariffs might lift inflation in Canada next year, keeping the Bank of Canada’s terminal rate higher.
The Federal Reserve might keep its policy rate higher, given the elevated inflation risks under the new administration, which could drive a wider wedge in the interest rate differential between the two countries.
Immigration
Both countries will have stricter immigration policies, which would lower the unemployment rate. But if migration flows from the U.S. to Canada increase because of a Trump presidency, that might soften the Canadian government’s goal to aggressively limit immigration and population growth. It could also mean more skilled workers in Canada, which could improve its lagging labour productivity.
Energy
Oil prices dropped following the election. As a Trump presidency opens the door for a significant increase in U.S. oil production, it also could thwart demand in China. An increase in supply while weakening demand could lead to a weak oil market, which could taper growth prospects in the Canadian energy industry.
