Economists say the Canadian economy is poised to plunge into a recession this year if U.S. tariffs that took effect Tuesday morning remain in place.
U.S. President Donald Trump's executive order hitting Canada and Mexico with 25 per cent across-the-board tariffs, with a lower 10 per cent levy on Canadian energy, took effect at 12:01 a.m. ET.
Prime Minister Justin Trudeau has said Canada's response will include retaliatory tariffs on $155 billion worth of American goods. That will include tariffs on $30 billion worth of goods immediately and tariffs on the remaining $125 billion worth of American products 21 days later.
Canada’s economic landscape "is set to change dramatically" because of the measures on both sides of the border, said RSM Canada economist Tu Nguyen, as the trade war will mean prices increase, unemployment rises, and consumers begin pulling back.
She said that while the manufacturing, energy, and food sectors would be immediately hit, no sector will be spared and businesses will need to cut jobs.
"In contrast to the pandemic, when recovery quickly followed, tariffs deliver a structural shock to the Canadian economy with impact to be felt for years to come," Nguyen said in a note.
"While the economy will eventually grow as supply chains adapt to a new global reality, the effect would be a downward shift of the growth path for this year and the next."
She said the foreign exchange market will remain volatile, with the Canadian dollar remaining low in the next few months.
But Capital Economics' Stephen Brown said financial markets are likely still pricing in a "quick U-turn" from the Trump administration based on the loonie's limited decline thus far.
The Canadian dollar was trading for 69.16 cents US after markets opened Tuesday compared with 69.31 cents US on Monday.
Still, Brown said the "best-case scenario" now is a sustained period of weaker GDP growth than previously expected.
"If the U.S. tariffs remain in place, Canada will undoubtedly fall into recession," he said in a note.
"But even if the tariffs are soon lifted, their imposition represents a sea change for the U.S.-Canada trade relationship."
He said the Bank of Canada would likely cut its key interest rate again next week and loosen by more than expected this year in response to the anticipated weakening in the economy.
Brown previously estimated that sustained 25 per cent tariffs would cause a hit of about three per cent to Canada’s GDP in the first year.
He said the smaller 10 per cent levy on energy exports does not change that assessment as it would be offset by higher tariffs on other products such as steel and aluminum.
Exporters of those materials could soon face 50 per cent tariffs, as the levy that kicked in Tuesday would stack on top of metal-specific tariffs that are set to kick in March 12.
Trump also signed an executive order to implement "reciprocal tariffs" starting April 2. He floated the idea of imposing duties on automobiles and signed executive orders to investigate levies on copper and lumber.
Trump added agricultural products to his growing list of tariff targets on Monday.
"With Parliament prorogued until March 24 and given the power vacuum following Prime Minister Justin Trudeau’s resignation, there's a risk that a fiscal response will be slow to arrive," said Brown.
"And if these tariffs remain in place for a long time, they will cause a semi-permanent blow to Canada’s long-run potential and there is only so much that fiscal transfers would do to offset that hit."
