Will tariffs plunge Canada into a recession?

Even though Canada recently escaped retaliatory tariffs from U.S. President Donald Trump, the Canadian economy likely won’t be able to avoid a recession, delegates heard last week at the Insurance Bureau of Canada’s Commercial Insurance Symposium.

On Apr. 2, Trump signed an executive order imposing a 25% tariff on all cars manufactured outside the U.S. Automobiles under the United States-Mexico-Canada Agreement (USMCA) will remain tariff-free until U.S. Customs and Border Protection “establishes a process to apply tariffs to their non-U.S. content,” a White House fact sheet says.

The U.S. president also implemented a 10% ‘baseline’ reciprocal tariff on all countries, but some (like Canada and Mexico) were exempted.

Canada already has a 25% tariff on steel and aluminum exports.

“Canada and Mexico, competitively speaking, they seem to be well-positioned with respect to what’s been announced compared to other countries,” said IBC symposium speaker Jimmy Jean, vice president, chief economist and strategist at Desjardins Group. “Having said that, it’s not the case that we should think that Canada is off the hook.”

Recessionary fears

In its March economic forecast, Desjardins predicted a technical recession in the U.S. and a recession in Canada. “We had three consecutive quarters of contraction, so what was announced yesterday [auto and reciprocal tariffs], even with the caveat of the better competitive position of Canadian exporters, doesn’t change right now our view that what was announced is consistent with a recession,” Jean says.

“This is really the highest tariff rate since the First World War,” he says. “So, it’s a very important regime shift. You can even say that it’s a trade world war that we’ve entered into yesterday. We don’t think the…Canadian economy will be able to escape that in the grand scheme of things.”

In the U.S., households are preoccupied about the state of the job market, with consumers very worried about losing their jobs. “You’re seeing that index at levels only seen in prior recessions,” Jean says. “What’s interesting is, during the pandemic, this index didn’t [go] up too far.

“People felt really safe about their jobs, and that’s why we were able to see the economy recover very rapidly as soon as we reopened the economy. Now, it’s a very different context. And in parallel with that, you’re also seeing a big rise in consumers’ perception of inflation.”

Morale at all-time low

Here at home, morale at Canadian small- and medium-sized enterprises (SME) is at an all-time low, Jean says. “Even below the levels it was at during the [2008-09] financial crisis and COVID-19.”

Tariffs are hitting some sectors, such as auto manufacturing, particularly hard. Some auto producers are reportedly pausing operations. “This happens very fast because it doesn’t take too long for the industry to become unprofitable,” Jean says. “Auto is very low-margin and very price-sensitive at the consumer end.”

From a currency perspective, the U.S. dollar is depreciating, which is unusual when markets fear a global recession, Jean says. “So, Trump is really shifting that paradigm, that perception of the U.S. being sort of a safe haven.”

In one scenario for the Canadian economy, there would be three consecutive quarters of contraction. But by 2026, “Trump takes full measure of the damage on the economy,” Jean said. And with Congressional mid-term elections coming up that year, there is pressure on the U.S. to adjust.

In Canada, consumers are concerned about the job market going “deep in recession territory,” Jean said. Models also suggest the unemployment rate in Canada will rise despite slower population growth. “In other words, weren’t it for that, we would be looking at an even higher unemployment rate…” he said.

As for Canadian businesses subject to tariffs, most of them expect to pass off nearly the entire tariff increase to consumers.

“That’s something that, from the Bank of Canada’s perspective, is very concerning,” Jean said. “Another concerning thing is that…[households’] expectations for prices are increasing, but you’re also seeing households reacting by saving more already…which is a good thing. But at the same time, it means that already the impacts on consumption are likely to be felt…”