Uncertainty around trade tensions could prove Canadians’ expectations of the economy

The coming year is expected to be one of moderate economic recovery.

 

That assertion runs counter to the latest survey of Canadian sentiment by Bloomberg Nanos.

 

About 60 per cent of Canadians responding to the survey expect the economy to weaken this year.

 

That concern is justified by Canada’s cost-of-living crisis and tariffs on imported Canadian goods that U.S. president-elect Donald Trump threatens to impose.

 

Yet forecasters at home and abroad expect the Canadian economy to strengthen rather than weaken this year and to outpace many G7 peers in GDP growth.

 

The forecasts cited here were made after Trump’s November threat of 25 per cent U.S. tariffs on imported goods from Canada and Mexico.

Despite the uncertainty around trade tensions, the International Monetary Fund (IMF) expects robust real GDP growth for Canada of 2.4 per cent in 2025.

 

By comparison, the IMF sees slower rates of GDP growth for our G7 peers, the U.S. (2.2 per cent in 2025); the U.K. (1.5 per cent); France (1.1 per cent); Japan (1.1 per cent); Germany (0.8 per cent); and Italy (0.8 per cent).

 

TD Economics has a more modest growth forecast for Canada of 1.7 per cent in 2025. And the Business Development Bank (BDC) expects a 1.5 per cent increase in GDP this year.

 

But all the forecasts show a healthier economy in 2025 than many Canadians expect.

 

The key is further declines in interest rates.

 

After deep cuts to its policy rate in 2024, the Bank of Canada will reduce rates still further this year. The size of the next cuts depends on the strength of the anticipated Canadian economic recovery.

 

Forecasters see the central bank reducing its policy rate to as low as two per cent from a current 3.25 per cent by year’s end.

 

Those next interest rate cuts should prove sufficient to stimulate a lacklustre consumer economy and spur modest upturns in economic sectors like construction that have been hobbled by high borrowing costs.

 

And if two per cent doesn’t do the trick, the Bank will cut even more deeply.

 

Recall that as recently as early 2022, when the Bank began hiking rates in its successful fight to subdue inflation, the bank’s policy rate was a mere 0.25 per cent.

 

Because of Ontario’s exposure to potential Trump tariffs on its auto sector, TD Economics forecasts GDP growth for the province lower than the national average, at 1.5 per cent in 2025.

 

That compares with the 2.2 per cent economic growth that TD predicts for B.C. this year, and an average for Western Canada of almost two per cent.

 

Selected economic indicators point to a broad-based economic recovery in the offing.

 

They include downward pressure on GTA rents as the region’s population of temporary residents drops.

 

Economists also expect an increase in per capita GDP this year after seven straight quarters of decline.

 

Looming trade disruptions with the U.S. have been largely priced into a depreciated Canadian dollar, which has fallen by almost eight per cent against the greenback in the past year.

 

The loonie is forecast to lose as much as four per cent more ground against the U.S. dollar in 2025.

 

But “a weaker loonie would help offset the impact of any tariffs,” says Nick Rees, senior foreign-exchange analyst at Monex Canada.

 

And Canada remains attractive to foreign investors.

 

Total foreign direct investment (FDI) is estimated to have hit $62 billion in 2024, up 38 per cent from 2022. And FDI in the manufacturing sector alone, at an estimated $28.1 billion in 2024, will have more than doubled in that period.

 

So, the biggest worry is Trump.

 

Going full bore with his tariffs could reduce Canadian GDP by at least 2.5 per cent, throwing Canada into recession. The damage would be even worse if Canada retaliates against the surtaxes with tariffs of its own on U.S. imports, as it did in response to Trump’s 2018 tariffs on Canadian steel and aluminum.

 

Canada has a high card as America’s top external supplier of crude oil, accounting for more than one-fifth of the oil processed by U.S. refiners. Market analysts expect a 10 per cent increase in U.S. pump prices from a Trump tariff on Canadian oil.

 

Trump is already under pressure from U.S. refiners not to impose tariffs on Canadian oil. And American consumers will join them if their energy prices rise.

But it pays never to be sanguine about Trump.

 

Deloitte Global Economics recently calculated the impact on the U.S. if Trump fully enacts his agenda of steep tariffs against America’s allies and China, mass deportations of illegal residents, fiscally harmful tax cuts, and reduced government spending on social programs.

 

In that worst-case scenario, Deloitte says, U.S. inflation and interest rates would rise, consumer spending would drop, and America would fall into a severe recession by 2026, as deep a downturn as the Great Recession.

 

To fear the worst from Trump is to believe he has a political death wish.

 

Let’s hope not.

David Olive is a Toronto-based business columnist for the Star

 

 

 

 

This article was first reported by The Star