Canada faces a new economic reality

Canadian economists are calling for a reassessment of the nation’s economic structure in response to incoming US president Donald Trump’s renewed tariff threats. Speaking at the Economic Club of Canada last week, chief economists from five major banks highlighted the potential for long-term economic improvements, even as the country faces immediate risks.
Trump has proposed a 25% tariff on Canadian imports, a move that could impact Canada’s economy. Douglas Porter, chief economist at the Bank of Montreal, warned that such tariffs could reduce Canada’s GDP by 2%. Despite the dire projections, economists emphasized the opportunity to address persistent economic challenges, such as regulatory inefficiencies and interprovincial trade barriers.
Frances Donald, chief economist at the Royal Bank of Canada, underscored the importance of resilience. “We need to remember that we can simultaneously be building up our economic immune system,” she said, noting that geopolitical shocks are likely to persist in the future.
Focus on competitiveness and resource development
Beata Caranci, chief economist at Toronto-Dominion Bank, stressed the need for a competitive corporate tax structure to maintain foreign investment despite increasing protectionism. She also called for accelerated development of Canada’s natural resources, particularly critical minerals. These resources are essential as the US aims to reduce reliance on Chinese supply chains for battery production.
Caranci highlighted Canada’s potential to differentiate its economy by leveraging its natural advantages. “What we ultimately have to do is think through the structure of our economy, look at our competitive advantage, what we have, what they don’t, and move our economy in that way,” she said.
National Bank of Canada’s chief economist, Stéfane Marion, urged a renewed focus on manufacturing, supported by Canada’s affordable electricity and natural gas. “We’ve made ourselves irrelevant in the North American supply chain,” he said, advocating for the revitalization of the sector.
Economic implications of a weaker Canadian dollar
Uncertainty surrounds Trump’s tariff strategy, with reports suggesting his team may pursue sector-specific measures rather than blanket tariffs. The Canadian dollar has already weakened, dipping below 70 US cents for the first time in four years. Avery Shenfeld, chief economist at the Canadian Imperial Bank of Commerce, explained that a weaker loonie could make Canadian exports more competitive but warned of its broader economic consequences. “It makes us poorer. When we want to import things, we can afford less,” he noted.
Challenges for Trump’s trade agenda
Economists also pointed out potential limits to Trump’s trade ambitions. Tariffs typically fuel inflation, which can push up interest rates. Porter noted that rising US bond yields could constrain Trump’s agenda.
“One limiter from the Trump agenda is the bond market that could rebel,” Porter said. “It’s very interesting that even as the Fed has cut by 100 basis points in the last few months, we’ve actually seen long-term US bond yields rise to almost the highest of the cycle.”
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