By BDC
There is still a great deal of uncertainty surrounding the imposition and suspension of tariffs. Tariffs are shaking the global economy and nowhere is that more evident than on either side of the Canada-US border. The evolution of the conflict remains unpredictable, and much can still change.
We currently estimate that tariffs could cause Canadian GDP to shrink by 1 percent over the course of 2025. Even without tariffs, uncertainty will temper economic gains, holding growth to 1.2 percent this year, which is below the economy’s potential. While it’s impossible to say with any certainty how deep the economic downturn could be in 2025, it’s clear that trade instability is already having negative impacts.
Impact No. 1: A U.S. economic slowdown
The latest economic estimates are pointing to a decline in US GDP in the first quarter to around -2.4 percent. An expected increase in private investment (+4.8%) is unlikely to be sufficient to fully offset a slowdown in consumption, which is expected to be neutral (+0.4%).
The US Federal Reserve continues to face above-target inflation and a tight labour market. The federal funds rate should, therefore, remain in the 4.25-4.50 percent range when the Fed makes its first 2025 announcement.
Where US GDP growth is really being hurt is in the balance of trade. American companies appear to have brought forward orders from foreign suppliers to build up their tariff-free inventories. (Imports are deducted from GDP.)
Thus, the famous adage that “when the US sneezes, Canada catches a cold” likely won’t apply in the first quarter. Quite the contrary, Canadian merchandise exports are expected to have increased, supporting growth. Following a 6.0 percent increase in December, total exports rose by 5.5 percent in January to a record $74.5 billion. Exports account for 19 percent of Canadian GDP and 77 percent of the country’s merchandise exports go to the United States.
Impact No. 2: Canadian businesses grow cautious
Faced with uncertainty, companies tend to delay or reduce their investments. They may also adopt cost-cutting strategies, such as freezing hiring or reducing R&D spending. This is expected to be the case for Canadian companies in 2025, given the uncertainty in the business environment. Investment by Canadian companies will be modest, if not negative.
According to a BDC survey of business leaders conducted in January, many small and medium-sized businesses entered 2025 in a better financial position than in 2024. However, economic uncertainty and concerns about weaker economic conditions in the coming months are prompting many companies to put expansion plans on ice.
As a result, just 45 percent of SMEs said they plan to invest in the coming year, compared with 54 percent in October. This drop in investment intentions affects all three major categories tracked by BDC: non-residential buildings (down 5 points from October), machinery and equipment (down 8 points), and intangible assets (down 6 points).
Impact No. 3: Consumption, the engine of growth, gears down
When consumers become concerned about an economic slowdown and fear layoffs, they tend to spend less and save more. According to our most recent survey, Canadian consumers say they’re worried about tariff threats and expect to spend less this year.
The decline in consumption is typically felt more acutely in industries linked to consumer discretionary spending and this is likely to be the case in this slowdown too. The sectors that fluctuate more with disruptions in the economy include consumer durables and clothing as well as services such as hotels, leisure activities and restaurants.
What can we expect now
The good news is that the Bank of Canada has leeway to support the economy and hopefully mitigate a slowdown. Inflation has been well under control in Canada for several months now and the key interest rate, at 2.75 percent , is still in the restrictive zone. Therefore, we can expect the bank to continue easing credit conditions and lower its key rate further over the course of the year, without inflation picking up again.
The desire to reduce trade barriers between provinces and a surge in buy-Canadian patriotism should also help mitigate some of the impact of tariffs. Our data shows that nine out of ten Canadians plan to act in response to the US tariffs with 63 percent saying they will buy more local and made-in-Canada products, and almost as many plan to reduce purchases of US products.
Meanwhile, recent weakness of the Canadian dollar against the US greenback has continued with the threat of tariffs. A lower loonie reflects uncertainty as investors continue to shift towards blue-chip assets, including those priced in US dollars. The Canadian dollar should remain between US$0.68 and US$0.70 in the first quarter of 2025. At such levels, the currency supports exports and makes Canadian products and services more competitive with US imports.
What this means for your company
- For entrepreneurs, it will be challenging to navigate an uncertain trade landscape that’s impacting costs and the general economic climate. Business owners need to remain informed and agile, ready to adapt to new trade policies and economic conditions. Above all, now is not the time for panic decisions
- Unstable economic times generally lead to a tightening of bank credit. Entrepreneurs need to be prepared for possible difficulties in obtaining financing and may have to adapt their financial plans accordingly. It’s also important to determine an optimal human resources strategy for the short, medium and long term.
- All businesses will be affected by the trade turbulence, but the severity of the situation will vary according to the duration and severity of tariffs for your industry. Consider strategies to keep your customers engaged and loyal, whether you’re in B2C or B2B. You can also capitalize on Canadians’ new patriotism by promoting your home-grown products and services.
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