^InsightsA Looming Trade War: How Tariffs could Reshape Canada’s Economic Outlook

The global economic landscape could shift dramatically following the U.S. administration’s threats to impose sweeping tariffs on key trading partners, including Canada, Mexico, and China. As we brace in anticipation for what could follow the current 30 day pause on Canadian tariffs, we dive into the consequences these tariffs would bring.  According to National Bank of Canada’s latest Forecast Update, led by Chief Economist Stéfane Marion, these protectionist measures will have profound effects on the Canadian economy, financial markets, and policy decisions.

New Tariffs and Retaliation: What’s at Stake?

On February 1, 2025*, the U.S. announced a 25% tariff on all imported goods, excluding energy products and critical minerals, which will face a 10% levy. Canada responded with its own retaliatory tariffs of 25% on $155 billion worth of U.S. imports, rolled out in two phases:

• February 4: A 25% tariff on $30 billion of U.S. imports
• February 25: A 25% tariff on an additional $125 billion in goods

These measures mark a sharp escalation in trade tensions, with far-reaching consequences for businesses and consumers on both sides of the border.

*Prime Minister Justin Trudeau and U.S. President Donald Trump said Monday that U.S. tariffs on Canada will be “paused” for up to 30 days after Trudeau agreed to border security measures in an afternoon call.

The Economic Fallout for Canada

National Bank’s revised forecast paints a bleak picture for Canada’s economic growth due to the disruption caused by tariffs.

• GDP Growth: Expected to slow to 0.4% in 2025 (down from 1.4%) and 0.9% in 2026 (down from 1.5%)
• Labour Market: Unemployment is projected to rise to 7.4% in 2025 and 7.6% in 2026
• Inflation: Expected to increase slightly, reaching 2.3% in 2025 and 2026, driven by higher import costs and currency depreciation

With weakened exports, slower consumer spending, and tighter financial conditions, Canada faces two years of below-trend growth—a challenging adjustment period for businesses and households alike.

Interest Rates and Market Impacts

To mitigate the damage, the Bank of Canada (BoC) may need to act swiftly. National Bank’s analysis suggests that an emergency interest rate cut of 50 basis points (bps) could be on the table, followed by additional 25 bps cuts in March and April. This would lower the policy rate to 2% by spring 2025, helping to cushion the impact on financial markets.

On the currency front, the Canadian dollar is set to weaken significantly, with USD/CAD expected to hit 1.55 (65 cents US) by mid-2025 before recovering slightly to 1.50 by year-end.

Stock markets will not be immune either. National Bank forecasts a 15-20% correction in equity markets, reflecting the broader economic uncertainty and weakened investor sentiment.

Looking Ahead: Canada’s Response Strategy

While the trade war presents immediate economic risks, Canada has an opportunity to adapt. National Bank’s report suggests policymakers should consider:

• Lower interest rates to support financial conditions
• Tax reforms to enhance business competitiveness
• Reducing interprovincial trade barriers to strengthen domestic markets

Despite the short-term challenges, Canada remains a vital player in the North American economy. The coming months will be crucial in determining how well the country navigates this turbulent period.

Source: National Bank of Canada, “Forecast Update: The Trade War Begins,” February 2, 2025.

For the full report, visit National Bank of Canada Economics.