Canadian recession looms this year if U.S. tariffs stay in place: economists

TORONTO — Economists say Canada is poised to plunge into a recession this year if U.S. tariffs that took effect Tuesday remain in place.

Canada’s economic landscape “is set to change dramatically” because measures on both sides of the border will cause prices to increase, unemployment to rise and consumers to pull back, said RSM Canada economist Tu Nguyen.

While the manufacturing, energy and food sectors will be immediately hit, she said no sector will be spared and businesses will need to cut jobs.

U.S. President Donald Trump’s executive order hitting Canada and Mexico with 25 per cent across-the-board tariffs, except a 10 per cent levy on Canadian energy, took effect at 12:01 a.m. ET.

Prime Minister Justin Trudeau said Canada’s response will include retaliatory tariffs on $155 billion worth of American goods. That will include tariffs on $30 billion worth of goods immediately and tariffs on the remaining $125 billion worth of American products 21 days later.

“In contrast to the pandemic, when recovery quickly followed, tariffs deliver a structural shock to the Canadian economy with impact to be felt for years to come,” Nguyen said in a note.

As Canadian companies strategize to cope with the turmoil, they should do a full evaluation of their supply chains, said Michael Dobner, national leader of economics and policy practice for PwC Canada.

He said it’s crucial that business owners understand how much added costs they’re now facing, along with the amount they potentially have to pass on to customers.

“To what extent do you have, as a business, the leverage to increase or to pass through some or all of those tariffs to them?” said Dobner.

“Or are you in a disadvantage where you need to, so to speak, eat all of that?”

Corey Seale, who with his wife runs Nummy Creations, which makes a caffeine-free coffee alternative, woke up “in pure panic mode” over jeopardized business in the U.S. The company imports containers of the herbs-and-roots-based product from Europe, then sends it out to distributors and retailers across Canada and south of the border.

“Now we will not be able to ship it to the U.S. from Canada,” Seale said from The Blue Mountains, Ont.

“It’s too expensive. We wouldn’t be able to compete any longer with any U.S. competitors.”

Seale is considering sending some of his product directly to American buyers from overseas, but costs would still be higher due to the smaller shipment size, which means steeper freight rates.

“We’re just in our infancy in the U.S., and were just about to make a splash because we just landed our first large grocery chain,” he said. “We were hoping to produce in Canada, and this could very well cause that to not be an option.”

Dobner said some Canadian companies may seek to diversify into non-U. S. markets where they haven’t typically sold their products.

He said he’s heard of others considering a shift in production to the U.S. — an option that Trump endorsed Tuesday in a post on Truth Social, the social media platform he owns.

“If companies move to the United States, there are no tariffs!!!” Trump posted, in all capital letters.

Dobner said moving south of the border could be a realistic option for companies, particularly in the manufacturing sector, “if their reliance on the U.S. is very large and (a trade war) means an existential threat for their business.”

The flip side is giving up certain competitive advantages of producing in Canada, such as lower labour costs.

“When you move to the U.S., you may lose some of those advantages and you may find that, yes, you don’t have tariffs, but you may have other issues, and the transition is definitely not easy,” said Dobner.

Despite heightened tensions between the neighbouring countries, Capital Economics’ Stephen Brown said financial markets are likely still pricing in a “quick U-turn” from the Trump administration based on the loonie’s limited decline thus far.

The Canadian dollar was trading for 68.94 cents US on Tuesday afternoon compared with 69.31 cents US on Monday.

Still, Brown said the “best-case scenario” now is a sustained period of weaker GDP growth than previously expected.

“If the U.S. tariffs remain in place, Canada will undoubtedly fall into recession,” he said in a note.

“But even if the tariffs are soon lifted, their imposition represents a sea change for the U.S.-Canada trade relationship.”

He said the Bank of Canada would likely cut its key interest rate again next week and loosen by more than expected this year in response to the anticipated weakening in the economy.

Brown previously estimated that sustained 25 per cent tariffs would cause a hit of about three per cent to Canada’s GDP in the first year.

He said the smaller 10 per cent levy on energy exports does not change that assessment as it would be offset by higher tariffs on other products such as steel and aluminum.

Exporters of those materials could soon face 50 per cent tariffs, as the levy that kicked in Tuesday would stack on top of metal-specific tariffs that are set to kick in March 12.

Trump also signed an executive order to implement “reciprocal tariffs” starting April 2. He floated the idea of imposing duties on automobiles and signed executive orders to investigate levies on copper and lumber.

Trump added agricultural products to his growing list of tariff targets on Monday.

“With Parliament prorogued until March 24 and given the power vacuum following Prime Minister Justin Trudeau’s resignation, there’s a risk that a fiscal response will be slow to arrive,” said Brown.

“And if these tariffs remain in place for a long time, they will cause a semi-permanent blow to Canada’s long-run potential and there is only so much that fiscal transfers would do to offset that hit.”

—With files from Christopher Reynolds in Montreal

This report by The Canadian Press was first published March 4, 2025.

Sammy Hudes, The Canadian Press