Canada unlikely to escape Trump tariffs unscathed: economists

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U.S. President Donald Trump’s rather erratic approach to trade policy once left room for hope that maybe his tariff threats were just that — threats — but as the April 2 deadline nears a harsher outlook is setting in.

“Canada has born the brunt of President Trump’s tariff action despite having one of the most equal trade relationships of any country,” said economists at TD Economics.  “This leaves us skeptical that tariffs can be avoided no matter the negotiation tactic.”

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And the deadline is ticking down. Trump’s month-long exemption on blanket tariffs for goods covered by the Canada-U.S.-Mexico Agreement (CUSMA) runs out April 2. That same day his administration plans to announce “reciprocal” tariffs on all countries.

Toronto Dominion forecasts that Trump will levy widespread tariffs on most of America’s trading partners in April, raising the effective tariff rate from the existing 2.5 per cent to 14 per cent.

For Canada, TD expects the average tariff rate for exporters to the U.S. will rise to 12.5 per cent and remain there for six months, before easing to 5 per cent through negotiations.

“However, even with this, we doubt Canada’s trade and tariff relationship will return to the pre-Trump state,” they said.

Once a new CUSMA deal is reached, TD forecasts the average tariff rate will fall to 2.5 per cent, higher than before Trump came to power.

The impact of this disruption will pull Canada into a “shallow” recession this year, eased by government support and less severe than a typical recession, the economists said.

The tariffs will further slow Canada’s housing market, and the pressure will build as the price of building materials rises because of retaliatory tariffs and a weaker Canadian dollar.

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“We expect residential investment to contract through much of this year,” said TD.

Economists at BMO Capital Markets for now are forecasting that the 25-per-cent duties on most Canadian goods that were partially delayed until April 2 will remain in effect for one year.

This will cause the economy to contract for two quarters, BMO predicts, lowering gross domestic product growth for 2025 by 1.5 percentage points to 0.5 per cent, a forecast that is lower than the consensus view of 1 per cent.

The economic downturn could lead to more than 100,000 net jobs losses and push the unemployment rate to 8 per cent by year end.

The Canadian dollar is expected to fall to 67 cents U.S. from just below 70 cents U.S. now.

“With the U.S. Administration threatening ‘economic force,’ Canada faces an unprecedented level of risk,” said BMO senior economist Sal Guatieri.

The duties on steel and aluminum exports which took effect March 12 will have a moderate impact on the overall economy and inflation but “potential reciprocal tariffs and industry-specific duties on April 2 could amplify the damage, prolonging and deepening the expected recession,” he said. “The motor vehicle industry would be decimated in a worst-case scenario.”

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Not all economists are assuming full tariffs in their base case.

Royal Bank of Canada economists continue to expect that blanket tariffs will be avoided because of the damage they will do to the U.S. economy.

TD says its forecast attempts to balance the risks of the worst with the best, taking into account Trump’s use of tariffs as a policy tool to achieve aims not related to trade and his desire to bring more production back to the United States.

Ultimately, all economists know uncertainty is the name of the game.

“We hope we are wrong, and that our assumptions prove pessimistic,” said TD.

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Canadians’ optimism has plunged to the lowest level in modern history — that’s lower than the depths of the pandemic in 2020 and during the great financial crisis of 2009.

The gap between Canadian and U.S. consumer sentiment is also one of the worst ever, said National Bank of Canada economists Stéfane Marion and Daren King.

Job insecurity and reluctance to make big purchases are at extreme levels, setting the stage for weaker consumer spending and slower economic growth ahead, they said.

• Bank of Canada governor Tiff Macklem will speak in Calgary, followed by a press conference
• Today’s Data: Canada industrial product prices, United States existing home sales and leading indicators

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Buy Canada isn’t easy when you are an investor. Julie Cazzin runs the numbers on what returns would be investing in a well-balanced portfolio that excluded U.S. stocks and bonds. Find out what the patriotic portfolio fares.

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Is the trade war having an effect on your finances? Are you making different decisions about your spending or saving habits? Is it changing your retirement math or portfolio construction? Do you see bigger plans like buying a house or starting a family slipping through your fingers? If yes, drop us a line at wealth@postmedia.com with your contact info and we’ll find some experts to help you out while writing a Family Finance story about it (we’ll keep your name out of it, of course).

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McLister on mortgages

Want to learn more about mortgages? Mortgage strategist Robert McLister’s Financial Post column can help navigate the complex sector, from the latest trends to financing opportunities you won’t want to miss. Plus check his mortgage rate page for Canada’s lowest national mortgage rates, updated daily.

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Today’s Posthaste was written by Pamela Heaven, with additional reporting from Financial Post staff, The Canadian Press and Bloomberg.

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