By Promit Mukherjee
OTTAWA (Reuters) – U.S. tariffs that took effect on Tuesday are threatening to derail Canada’s fledgling economic recovery and will fuel rise in consumer prices and unemployment, potentially triggering a recession.
Canada relies on the United States for 75% of its exports and a third of all imports. Its dependency on trade for economic growth leaves Canada vulnerable to a protracted trade war.
The Canadian economy had started showing signs of improvement after several anemic quarters thanks to six consecutive interest rate cuts from the Bank of Canada.
Canada’s fourth quarter annualized economic growth was 2.6%, surpassing expectations and the unemployment rate dipped thanks to robust job additions in January.
The growth spurt may be short-lived, however, depending how long tariffs are in place.
“If the tariffs are sustained indefinitely, it would almost wipe out two years’ worth of economic growth,” said Craig Alexander, president of Alexander Economic Views, an independent economic research organization.
The economy could at least see a mild recession, he said, but cautioned that this estimate does not take into account the impact of any further tariffs. Economists have also said the impact of tariffs on the U.S. economy will be broad, deep and time-consuming.
U.S. President Donald Trump slapped a 25% tariff on all imports from Canada except energy products, which are taxed at 10% from Tuesday.
After Canada announced immediate retaliatory measures on C$30 billion of goods, Trump threatened even more tariffs.
“We are at an inflection point,” said Randall Bartlett, Deputy Chief Economist with Desjardins. All the good news of the past in terms of GDP, jobs and inflation is likely to reverse, he said.
Canada is likely to slip into a recession, probably starting in the second quarter of this year, he said, adding that unemployment could go up to 8%. The unemployment rate is currently at 6.6%.
In Windsor, Ontario, just across the border from Detroit, the impacts on the auto industry will be felt in a matter of days, said Mayor Drew Dilkens. Layoffs for manufacturers could start in a week, he said.
“And that’ll cascade down in the supply chain. So some will be able to survive a little longer than others, but 25% across the board is in the realm of being catastrophic for the auto industry as a whole,” he said.
The central bank has said Canada’s growth will be permanently stunted by the tariffs, while inflation will see a spike that could persist if tariffs continue.
The BoC will announce its monetary policy decision on March 12 and currency swap markets see at least a 90% chance of a rate cut, almost double the chance expected on Monday.
Exports to the U.S. account for roughly 18% of Canada’s GDP and more than 2.4 million jobs in Canada are dependent on business with the U.S.
“I won’t sugar coat it. This is going to be tough,” Prime Minister Justin Trudeau told a press conference on Tuesday.
Economists said that if tariffs continue and keep stacking up, they will ripple through a multitude of sections of the economy.
Households will be pushed deeper into debt, company profits will be hit, government revenues will be dented, there will be sweeping layoffs, consumer and corporate defaults will jump, and Canadian provinces could lose credit ratings, they said.
“It will disproportionately affect the less fortunate economically,” said Dave McKay, CEO of Royal Bank of Canada, the country’s biggest lender.
($1 = 1.4451 Canadian dollars)
(Reporting by Promit Mukherjee; Additional reporting by David Ljjungren, Nivedita Balu and Anna Mehler Paperny; Editing by Caroline Stauffer and Lincoln Feast.)
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