- Jimmy Jean • Randall Bartlett • Benoit P. Durocher • Royce Mendes • Mirza Shaheryar Baig • Marc-Antoine Dumont
Tiago Figueiredo • Francis Généreux • Sonny Scarfone • Hendrix Vachon
Economic and Financial Outlook
A Recession is Likely as Trade War Impacts Loom
March 20, 2025
Highlights
- The full and final scope of the Trump administration’s trade policies has yet to be determined. The economic and financial outlook presented here is based on the first policy elements that have been implemented, namely higher tariffs on imports from China, an additional 25% tariff on steel and aluminum and new tariffs on Mexico (25%) and Canada (25% on all goods except 10% on energy). But it’s clear that President Trump is just getting started. Despite temporary exemptions on CUSMA-compliant goods, we can expect more protectionist measures to come. Consequently, our forecast predicts the United States will end CUSMA exemptions in April while simultaneously imposing reciprocal tariffs of 25% on imports from other countries. We expect some relief in early 2026, with tariffs being reduced from 25% to 10% (0% for energy). That said, we’ll update our economic and financial scenarios as the burgeoning trade war evolves.
- US trade policy is disrupting both the American and global economies. These changes, even the ones that haven’t yet been implemented, are already triggering a reaction. Financial markets, businesses and households are showing heightened anxiety. Estimated US real GDP growth was revised lower for the first quarter, but it’s also been downgraded for future quarters, with the possibility of a recession now looming. Meanwhile, US trade policy is expected to drive up inflation. For the most part, global economic forecasts have also been revised downward. But Chinese authorities seem fairly optimistic, and China’s real GDP growth may prove relatively resilient despite the increase in US tariffs on Chinese goods.
- With US tariffs ratcheting up, we are of the view that Canada’s economy is likely to experience a recession starting as early as the second quarter of 2025. US economic policy is expected to hold back trade, investment, job creation, consumption and growth here in Canada. That will be exacerbated by the pre-existing headwinds of rapidly slowing population growth and an impending spike in mortgage renewals at higher interest rates. Retaliatory tariffs will further deepen the economic drag while forcing inflation higher. However, with pain being felt south of the border as well, we anticipate the US administration will ease up on tariffs on imports from Canada starting in early 2026, allowing the Canadian economy to rebound somewhat. That said, the level of economic activity is unlikely to recover fully from the tariff shock as uncertainty and some customs duties remain in place. And while there have been some early signs of progress on reducing structural barriers to economic growth, such as internal trade barriers, we’ll remain skeptical until we see substantive change.
- Since tariffs on Canadian goods vary depending on the type of product, their impact on Quebec’s economy in 2025 will be harsher than the national average. We expect real GDP to contract for three quarters, with growth returning in early 2026 once some trade barriers have been lowered. But uncertainty will curb investment in export-oriented manufacturing sectors, which will make for a fragile recovery. Slower population growth will also sap economic momentum, serving as a cap on the unemployment rate, which should reach 7% by early next year. Next week’s 2025–2026 budget will provide further details on how the government will support sectors affected by the reduction in trade, as well as its willingness to address weakness in the export sector by accelerating some planned investments.
Risks Inherent in Our Scenarios
The first few months of Donald Trump’s second term have triggered a massive spike in uncertainty all over the world. Although the president has already put forward a number of protectionist measures, that uncertainty has been amplified by his postponement of some tariffs and additional threats, as well as questions over how far other nations will go to retaliate. Furthermore, the other policies implemented by the new Trump administration, especially regarding immigration and the federal government apparatus, could send the economy into a tailspin. Even though we’ve already revised our forecasts, further adjustments will be needed as we get more clarity. Notably, President Trump has threatened to use economic measures to coerce Canada into seeking statehood. The nature of these potential measures is still in question. As for inflation, although it’s currently close to target in many countries, an escalating trade war could catapult it higher. Unemployment could also spike in many nations, depending on the scope of the trade war. There’s also a lot of uncertainty over how much room central banks have to cut interest rates if their economies are hit by stagflation. The weakening of US regulatory authorities could lead to financial excesses and ultimately imbalances, to say nothing of the potential environmental and even public health issues that could result. We also need to keep an eye on whether the Federal Reserve manages to maintain its independence over the long term. Governments around the world have been hit by political crises, which could further undermine their ability to respond to economic downturns while keeping public finances on solid footing. Bond markets may react by sending yields soaring. Trends in the global economy, financial markets and commodity prices could become increasingly unstable if the geopolitical backdrop and economic environment deteriorate further.
Financial Forecast
Given the heightened likelihood of prolonged trade war with the United States, the Bank of Canada will likely need to ease policy rates more than initially forecast. The revised outlook sees the central bank cutting rates to 1.75% this cycle. During a typical recession central bankers would have eased policy further, but rising inflation expectations will keep central bankers wary of delivering too much stimulus. Yields have fallen across the curve, reflecting the elevated downside risks to the Canadian economy.
Proposed trade and immigration policies are also increasing downside risks stateside. But, since inflation still hasn’t normalized and inflation expectations are rising sharply, the FOMC will ease policy at a much slower pace than the Bank of Canada. Our outlook now sees the FOMC cutting its policy rate by 75 basis points this year.
The Canadian dollar has depreciated due to tariff and recession fears. However, the increasing likelihood of a US recession has also undermined the US dollar, keeping USDCAD in a broad trading range. Looking ahead, we see a balanced risk outlook for USDCAD, with the worst likely over for the loonie. As we now anticipate the US economy to enter a recession, the Federal Reserve may need to cut rates more than the market currently expects, leading the US dollar to depreciate against a wider range of currencies, including the loonie. We are also monitoring the reciprocal tariff announcements on April 2, as a significant tariff hike on Canada could cause currency volatility.
With downside risks to the US economy rising, the outlook for US equities is much weaker and should see global equities continue to outperform as result.
Forecast Tables
