Trump's sanctions are a threat to Canada's economic recovery

OTTAWA — New U.S. tariffs that took effect Tuesday threaten Canada’s nascent economic recovery, potentially driving up consumer prices and unemployment and possibly even triggering a recession.

Canada depends on the United States for 75 percent of its exports and a third of its imports. That reliance on trade for economic growth makes Canada vulnerable to a protracted trade war.

Canada’s economy had begun to show signs of recovery after several seasons of weak growth, thanks to six consecutive interest rate cuts by the Bank of Canada.

Canada’s annual economic growth in the fourth quarter came in at a stronger-than-expected 2.6 percent, and the unemployment rate fell in January on strong job creation. Data released Wednesday showed that labor productivity will turn positive in 2024 for the first time since the COVID-19 pandemic.

However, that boost could be short-lived and depend on how long the tariffs are in place.

“If the tariffs continue indefinitely, they will wipe out about two years of economic growth,” said Craig Alexander, president of the Alexander Institute for Economic Research.

He added that the economy could face at least a mild recession, but cautioned that the estimate did not include the impact of further tariffs. Economists have also said that the impact of the tariffs on the U.S. economy would be broad, deep and long-lasting.

U.S. President Donald Trump imposed a 25 percent tariff on all imports from Canada starting Tuesday, except for energy products, which face a 10 percent tariff.

Trump threatened to impose more tariffs after Canada announced immediate retaliation on C$30 billion worth of goods.

Trump and Canadian Prime Minister Justin Trudeau are scheduled to speak on Wednesday, a source familiar with the matter said.

“We are at a tipping point,” said Randall Bartlett, deputy chief economist at Desjardins. He added that all the good news about GDP, employment and inflation in the past is likely to be reversed.

He said Canada is likely to enter a recession that could start in the second quarter of this year, and the unemployment rate could hit 8 per cent. The unemployment rate is currently 6.6 per cent.

The U.S. Commerce Department said the Trump administration will issue an announcement on tariffs on Wednesday, as Trump considers reducing tariffs on some sectors such as autos.

Drew Dilkens, mayor of Windsor, Ont., said the effects of the tariffs on the auto industry could be felt within days. He said layoffs in manufacturing could start within a week.

“The effects will also spill over into the supply chain,” he added. Some may be able to hold out a little longer, but a 25% tariff could be catastrophic for the auto industry as a whole.”

The Bank of Canada has said that Canada’s economic growth will be permanently reduced by the tariffs, while inflation will rise and if the tariffs continue, that rise could be sustained.

The Bank of Canada will announce its monetary policy decision on March 12, and currency markets are pricing in at least a 90% chance of a rate cut, nearly double the probability forecast on Monday.

Exports to the United States account for about 18% of Canada’s gross domestic product, and more than 2.4 million Canadian jobs depend on trade with the United States.

“I’m not going to make this pretty. This is going to be tough,” Prime Minister Justin Trudeau said at a news conference on Tuesday.

Economists said that if the tariffs continue and increase, the effects will be felt across the economy.

Households will have more debt, corporate profits will fall, government revenues will fall, there will be mass layoffs, the number of consumer and business bankruptcies will rise and Canadian provinces could lose their credit ratings.

“This will disproportionately affect the poor,” said Dave McKay, CEO of Royal Bank of Canada, the country’s largest bank.

(Reporting by Promith Mukherjee; Additional reporting by David Ljunggren, Nivdita Balo and Anna Mahler Pepperni; Editing by Carolyn Stauffer and Lincoln Feist)