After a month-long pause (and plenty of chaotic chatter from US President Donald Trump), a 25% tariff on goods imported from Canada to the US — as well as a lesser 10% tariff on energy products like oil and electricity, and critical minerals like aluminum — is set to go into effect on March 4.
This all-encompassing 25% tariff would be in addition to a 25% tariff on aluminum and steel imports from all countries already confirmed by Trump in mid-February. Those will go into effect on March 12, and depending on the outcome of Trump’s address this week, Canada could end up seeing a 50% tariff on steel imports and a 35% tariff on aluminum imports, all said and done. On top of that, Trump ordered an investigation into a possible tariff on international lumber products on Saturday, and that could be at a rate of 25% as well.
To what degree Trump will follow through with any of this is unclear; after all, he walked back on his tariffs on international steel and aluminium imports (25% and 10%, respectively) in 2019, around a year after announcing them. But even a short spurt of tariffs could have far-reaching impacts, economists with Canada’s 'Big Five' banks are warning.
Uncertainty Over Economy, Interest Rates
“When forecasting the potential damage to the Canadian economy, the one unknown is how long punitive 25% tariffs would be in effect,” wrote TD Economist Rishi Sondhi in a report from Friday. “A two-year trade war would hamper growth well into 2026, whereas as a six-month duration could see growth rebounding smartly next year, although both scenarios would see deteriorating conditions in 2025.”
He added that tariffs of any kind will “thump the Canadian economy just as it’s on the mend,” pointing to the fact tht fourth-quarter GDP came in stronger than expected, jumping 2.6% annualized (“a story of what could have been for the Canadian economy,” according to a separate publication from TD).
“In the wake of the robust GDP data, markets pared back their expectations of a rate cut by the Bank of Canada on March 12th. However, markets are still placing about a 50% chance that a cut will take place,” Sondhi said. “Of course, if a Canada-US trade war does start next week, this would virtually lock in another cut.”
If Tuesday doesn’t bring the start of a trade war, economists with CIBC and BMO are calling for the central bank to hold the policy rate steady at 3% given the recent strength in GDP.
Tariffs were top of mind for economists with Canada's biggest banks leading up to the last interest rate announcement as well, and while all forecasted that the looming trade uncertainty would coax Canada’s central bank to lower the policy rate by a quarter point — which did end up being the case — Scotiabank’s Derek Holt simultaneously warned that tariffs could incite rate hikes down the line.
To back this up, Holt referenced the July 2019 Monetary Policy Report published the last time Trump sparked speculation of tariffs, which describes a scenario where a 25% tariff from the US leads to a 25% retaliatory tariff from Canada, something current Prime Minister Justin Trudeau has been very vocal about imposing this time around.
In such a scenario, “the direct effects of the tariffs on import prices, combined with a weaker Canadian dollar and lower productivity, put temporary upward pressure on inflation,” according to the 2019 report, and Holt’s assumption in that case is that the Bank of Canada would hold off on further easing and may even opt for further policy tightening.
A Drag On Housing And Hiring
More recently, Scotiabank Economist Patrick Perrier said in a February 18 commentary that tariff uncertainty has thrown a wrench in their view that Canadian housing markets will “witness a healthy level of housing activity in 2025” as mortgage rates come down and prices grow modestly over 2024 due to decreases in immigration and slower population growth.
“Of course, the increased uncertainty generated by tariff policy announcements by the new US administration has affected housing markets in January. This is supported by the statement in the CREA report that the weakness in sales came mostly from the last week of the month, at the time when governments, businesses, and households in Canada where waiting for potential drastic increases in tariffs imposed on US imports from Canada and other countries,” Perrier wrote.
“This uncertainty is still present and could stay for an extended period. Even though housing market fundamentals suggest a healthy level of activity in 2025 and the MLS HPI recovering, this increased uncertainty is weighing on the economy and housing demand.”
Based on Trump’s “constructive tone” when he negotiated with Trudeau and hit pause on his tariff threat last month, economists with Scotiabank are sticking to their outlook that Canada might avoid “sweeping tariffs,” but Perrier still cautioned in his commentary that “housing conditions would deteriorate” if their outlook is too optimistic, and the tariff package ends up being as “severe” as Trump has threatened.
Meanwhile, a housing commentary recently put out by RBC said that “any economic turbulence arising from tariffs would be felt by participants, whose confidence is critical to the stability of the housing market.”
Weaker housing market conditions tend to go hand in hand with weaker labour market conditions (think: less purchasing power), and on that note, RBC economists Nathan Janzen and Abbey Xu are warning that we’re already seeing implications of “tariff uncertainty” in certain areas of labour data. In a report put out Friday, they explained that though January brought a month-over-month rise of 0.4% in overall employment, according to Statistics Canada, the unemployment rate is still almost 1% higher than it was a year ago.
“Tariff uncertainty alone (without actual tariff hikes implemented) won’t be enough to fuel layoffs, but it could slow hiring,” they said. “Job postings on indeed.com edged lower in February after rising in December and January. And not all estimates of recent job growth in Canada have been as strong as the labour force survey numbers. Separately reported job counts from Canada’s Survey of Employment, Payrolls and Hours have been lower in recent months.”
StatCan’s latest labour market survey comes out this Friday (March 7), mind you, and CIBC Economists Ali Jaffery and Katherine Judge wrote in a recent note that they expect it to show signs of tariff uncertainty, “with a sharp slowdown in hiring and an increase in the unemployment rate expected.”
