A Canadian recession is now inevitable. The only questions are how long it will last and how deep it will cut. The only certainty is more economic uncertainty.
The self-inflicted Trumpcession is a warning. Our intertwined economies mean where they go, we usually follow. Until January, solid economic growth and falling inflation meant low unemployment and rising stock markets. By March, the American economy was shrinking by 2.8 per cent, the fastest rate since the pandemic.
That was before U.S. President Donald Trump announced Wednesday’s tariffs, a mangled mix of new “rules” that seem to mostly exclude Canada and Mexico. We’re still subject to a 25 per cent tariff on aluminum and steel, but not the new 10 per cent minimum tariff on foreign goods sold in the U.S. or the 25 per cent auto tariff for goods compliant with the free-trade deal Trump himself negotiated in his first term, the USMCA. But who knows? The meaning of compliance or the rules could change tomorrow.
Policy whiplash, a trademark of the Trump administration, has eroded U.S. and Canadian business confidence, growth and wealth. Before Wednesday’s announcement, the S&P 500 and the NASDAQ stock exchanges saw a combined $5 trillion (U.S.) go poof since January. By Thursday morning, $7.5 trillion had vanished.
The Canadian economy has a better chance at stability than the U.S., but none of the contenders for your vote in this federal election has openly grappled with the possibility of a recession.
How bad could it get?
In Canada, 2.4 million jobs are vulnerable to the impact of U.S. tariffs. That’s one in seven jobs in Ontario. Not all will disappear, but uncertainty creates stiff headwinds for public policy.
Estimates of a U.S. 25 per cent across-the-board tariff on Canadian goods and dollar-for-dollar retaliation could shrink GDP by 2.6 per cent, siphoning an average $1,900 from each Canadian. Apart from the pandemic, no other recession since 1961 comes close to this impact.
How long could it last?
The classic definition of a recession is that GDP shrinks in two, back-to-back quarters. That’s the usual duration recently, though the 1981-82 recession lasted six quarters, continuous economic contraction for a year and a half.
How long could the Canadian economy shrink this time? It depends on what we do, but uncertainty will accompany the second term of this presidency. What is sure: the American consumer will bear the brunt of this madness. Their falling purchasing power will impact ours.
What solutions are on offer in this election?
Tax cuts: Every party offers tax cuts. The federal government is still running deficits, so taxpayers will borrow to pay for this largesse.
But tax cuts for households won’t be enough to reduce job loss as prices start rising. And tax cuts for trade-exposed businesses won’t help most businesses, which operate in the service sector. Less purchasing power for households means less revenue. By the end of 2024, business bankruptcies were at rates last seen in 2009, after the global financial crisis. Tax cuts don’t help failing businesses.
Less U.S. reliance: Every party wants more internal trade and diversification of international trade. Let’s drink to that! But shipping more wine freely across provincial borders and dropping provincial restrictions won’t offset the billions lost in trade with the U.S. And if investors move factories to the U.S. to avoid tariffs, internal trade will fall, too. Most interprovincial trade is between places with little manufacturing capacity and Canada’s two manufacturing giants, Ontario and Quebec.
As for trade with other nations, sheer volume makes it painful to say goodbye. Of the roughly $70 billion in monthly merchandise Canada exports, almost 80 per cent goes to the U.S. The next biggest buyer, China, buys 3.7 per cent of what we export, followed by the U.K. (3.3 per cent) and the EU (3.2 per cent). Mexico imports only 0.9 per cent of our exports. Replacing just 10 per cent of shipments to the U.S. could take years.
More investments in Canada: Each party talks about investments. Largely not in you.
There are bold ideas about the auto sector and the energy sector. The Liberals talk about investing in people and industrial capacity, from raw materials to finished vehicles. The NDP talks about using public spending to buy fleets or other manufactured supplies public services need, from facilities taxpayers paid to build or keep open. The Conservatives have been bizarrely silent on anything but oil and gas.
Infrastructure, housing and defence are also hot topics for party leaders, most supporting investors and businesses.
Each party has at least concepts of a plan to rebuild Canada, though none will materialize fast enough to stop what’s coming.
First comes recession. And Canada is not recession-ready, with only 35 per cent of the jobless receiving EI. That means unemployment will increase and last longer than necessary. It’s a totally fixable problem. With 1.5 million Canadians already unemployed, maybe a million more on the way, why wait?
We also need a long-term fix: industrial strategy. As Prime Minister Mark Carney rightly noted, Trump’s deliberate destruction of the existing world order will change the global economy. A Made-in-Canada plan must address that reality.
Canada has the wealth, ingenuity and rediscovered sense of nationhood to move mountains. Medicare came out of poverty, not plenty. We can build tomorrow’s future from today’s daunting conditions, too.
