Will US tariffs derail Canada's economic recovery?

Economists share their predictions as Canadian businesses brace for impact of proposed tariffs

Will US tariffs derail Canada's economic recovery?

The Canadian economy is projected to experience moderate growth in the first quarter of 2025, according to the latest Main Street Quarterly report released by the Canadian Federation of Independent Business (CFIB). However, concerns over potential US tariffs loom large, casting uncertainty over future economic stability.

The report, developed in collaboration with economic consultancy AppEco, estimates that Canada’s economy grew by 3.2% in the fourth quarter of 2024 and is expected to expand at a more tempered rate of 2.5% in the first quarter of 2025. Consumer Price Index (CPI) inflation, which dropped to 2.1% in the third quarter of 2024, is anticipated to stabilize near the Bank of Canada’s 2% target in early 2025.

Economic highlights and business confidence

Small business confidence, a key driver of private investment, rebounded at the close of 2024, showing signs of sustained improvement heading into 2025. The private sector job vacancy rate, however, remained static at 2.7%, reflecting 378,300 unfilled positions across the country.

Sector-specific trends reveal mixed outlooks. While professional, business, and financial services firms remain optimistic relative to other industries, their confidence has diminished over the past two years.

Tariff threats raise alarm

A significant point of concern outlined in the report is the potential imposition of US tariffs on Canadian goods. A special analysis indicates that 82% of Canadian businesses involved in cross-border trade expect severe operational impacts if a 25% tariff is introduced. According to CFIB’s chief economist and vice-president of research, Simon Gaudreault, such a measure would likely exacerbate inflation in Canada, disrupt pricing, and reduce customer demand, posing a serious challenge for small- and medium-sized businesses already grappling with fragile market conditions.

“Given a strong trade relationship between Canada and the US, a 25% tariff on Canadian products would likely drive inflation in Canada, causing price hikes and loss of customers, and heavily impact small- and medium-sized businesses already struggling with weak demand,” Gaudreault said.

While the outlook for early 2025 remains stable, Gaudreault noted that risks such as the looming tariff threat, uncertainty surrounding capital gains policies, and the GST/HST tax break must be addressed to foster a conducive environment for business growth. “It’s important now more than ever to balance the economic environment and create conditions where small- and medium-sized businesses can thrive and compete,” he noted.

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