Monthly Economic Letter

In a dramatic turn of events, the White House announced 90-day pause and major amendements to the latest round of tariffs (the reciprocal tariffs.)

While trade tensions in the first quarter were initially confined more to North America and China, the U.S. announced sweeping tariffs in early April that have thrown international trade as we've known it for decades into disarray. 

On April 2, the world's most important economic power announced tariffs targeting almost all countries. Doing so, the U.S. administration hopes, to reduce its trade deficit that has been growing for decades and, which reached unprecedented levels in January and February 2025.

But now, a new 90-day pause on tariffs was announced on April 9, the day reciprocal tariffs were meant to hit (almost) the entire globe.

Tariffs: Where we stand vs. the rest of the world

As the announcements multiply, it becomes difficult to know what is now subject to these new tariffs and by how much.

At the miminum, tariffs of 10% were imposed on imports from all countries from April 5 and “reciprocal tariffs” were supposed to be imposed starting April 9 with rates varying from country to country and product to product. 

Breaking news on April 9, the country-specific tariffs are now down to a universal 10% rate for all trade partners and were put on paused for 90 days, except China who saw its tarriff rate jump to 125% instead.

While Canada seemed to have avoided yet another layer of tariffs following the annoucement of April 2, the changes of April 9 should also be affecting Canada according the U.S. treasury secretary. At the time of writing, it’s not entirely clear what the specific impact will be for Canada.

For one, businesses in the automotive, steel and aluminum sectors are still facing significant challenges as their products were hit with 25% tariffs earlier that remain in place. Additionnal tariffs on lumber exports are also subject to higher rates (from 14% to 34 %).

Overall, Canadian goods were exempt from the initial 10% minimum from the reciprocal tariffs annoucement. Therefore, Canada appears to have retained a certain advantage over the rest of the world when it comes to access to the U.S. market since tariffs imposed on Canada are still less onerous than those on countries with a similar trading relationship with the United States as USMCA compliants remained favoured to 0% tariffs.

It's not the (total) end of international trade

International trade plays a crucial role in the global economy, acting as a powerful engine of growth, development and prosperity for nations. International trade was just picking up again at the end of 2024. 

There are fears the trade conflict could escalate with key economies hitting the U.S. with retaliatory measures. Already, China responded with 84% tariffs on imports of all U.S. products prior to the administration halt to reciprocal tariffs and hike of 125% tariffs on chinese goods. This trade war could trigger a brutal global economic slowdown and rekindle inflation. 

Even Canadian businesses that serve non-U.S. markets or are tariff-exempt under the USMCA may be adversely affected by a general economic slowdown and tariffs on supply chain partners.

The announcement of tougher-than-expected tariffs (on April 2) sent shockwaves through financial markets, sending global equities tumbling. 5 trillion US dollars that evaporated between April 2 and 4 alone. The stock market turmoil eased after the 90-day pause annoucement but, still losses of global wealth could also weigh on the real economy.

Manufacturers still on the frontlines 

Manufacturers are a leading force in the global economy. Their spending and hiring decisions can quickly affect global growth. This is obviously the sector that’s most sensitive to tariffs.

U.S. tariffs on Canadian raw materials—including steel, aluminum and automotive—will hurt Canadian exports of these products to the U.S. because of higher prices caused by tariffs. 

The U.S. oil and gas industry, as well as the transportation, construction and consumer goods sectors, are all major customers for imported products that have been hit with new tariffs. And, a slowdown is already being felt south of the border.

The U.S. economy could, therefore, be heading into a cycle of stagflation—a period characterized by above-target inflation and weak growth. Some 640,000 Canadian manufacturing jobs depend on U.S. demand. This dependence is even greater in the automotive sector, where about seven out of 10 jobs are linked to exports to the U.S. 

The scale of the challenge is undoubtedly huge for manufacturing companies linked to the steel, aluminum and automotive sectors. A slowdown will be felt most powerfully by these industries and in regions where they are concentrated, but the negative effects will extend throughout the economy.

On the bright side (dare we say it)?

The latest announcement should remove some of uncertainty. Now that the U.S. administration has provided more detail on its tariff measures, companies are in a better position to adapt to them and deal with trade tensions appropriately.

Over the past few weeks, challenges have continued to mount for the Canadian economy, due to both domestic and international factors. Since the announcement of sweeping tariffs by the U.S. on April 2, the Canadian (and global) economy has been able to see a little more clearly what lies ahead. 

The uncertainty hovering over households and businesses is likely to diminish somewhat more in the coming weeks. For one thing, Canada was exempted from the reciprocal tariffs announced at the beginning of April . Nonetheless, the Canadian economy will be put to the test as the tariffs earlier imposed (see main article for details) continue to work their way through the economy. An economic slowdown is inevitable, but its extent will depend on how long the tariffs remain in place.

A positive start to the year

The Canadian economy started the year on a solid footing, with GDP rising by 0.4% in January, following a 0.3% increase in December.

However, high levels of uncertainty prompted Canadian companies to delay investment, curb hiring and adopt strategies to reduce spending. Statistics Canada forecasted sluggish growth for February.

Jobs at risk in certain sectors

Threats of tariffs worried businesses, while consumers became increasingly cautious, reflecting their concerns about the economy and employment.

In March, the number of jobs fell significantly for the first time since January 2022 (-33,000 jobs). The decline in employment is probably related to tariffs on key sectors, including autos and energy since losses were concentrated in Ontario and Alberta.

Still, job vacancies are down and there is no evidence in the data of massive layoffs ahead. The slowdown in employment could, however, further hurt consumer confidence. Our surveys show that almost half of Canadian consumers are planning to reduce their spending this year.

The impact on inflation and interest rates

The Bank of Canada is due to announce its next key rate decision on April 16. Our forecast points to a possible 25 basis point cut to 2.5%. However, February's better-than-expected CPI reading of 2.6% may cause the bank to hold off on action until the effects of the tariffs is better understood. Tariffs on both sides of the border would typically push up inflation, but global and domestic demand is expected to slow further, particularly if domestic job losses rise. Our expectation is that further rate cuts will be coming this year.

The rise in inflation in February was partly due to temporary factors. Goods prices—where tariffs will be felt—recorded inflation of 1.5%. In the services sector, on the other hand, inflation has recently been in the range of 3.5% and 4.0%. Inflation in the service sector is strongly linked to wage growth and a weakening in the labour market could relieve pressure on service prices. 

In short, although headline inflation may rise, it should not significantly exceed the target range.

Canada-U.S. trade remains strong despite tension

Canadian exports peaked in January but slowed in February. The slowdown was anticipated, as the U.S. probably accelerated purchases of Canadian goods early in the year in anticipation of the imposition of tariffs. However, Canada continued to trade internationally with imports net of tariffs remaining strong in February.

In terms of exchange rates, the Canadian dollar rose to US70 cents after the April 2 tariff announcement as economic uncertainty eased. 

Although the Canadian dollar is likely to remain weak due to interest rate differences with the U.S., it could perform better than initially expected as confidence in the U.S. economy weakens, negatively impacting the U.S. dollar. At the current level, the Canadian currency is still supportive of exports and domestic trade.

In a nutshell...

The Canadian economy is navigating a complex landscape of trade tensions and domestic political decisions. While uncertainty remains high, recent U.S. announcements should bring more clarity for businesses. For now, as far as tariffs are concerned, Canada has avoided the worst, although companies in the automotive, steel and aluminum sectors face significant challenges. 

We’ve revised our forecast for Canadian GDP growth to an increase of 0.8% in 2025 from 1.2% previously. This forecast reflects the U.S. tariffs imposed on Canadian goods to date. 

The impact on your business

• The slowdown is here to stay. If you're not ready yet, now is the time to act to prepare your business.
• Consumers will probably continue to postpone their purchases of big-ticket items, so retailers may have to improve their value proposition to boost sales. However, the craze for Canadian-made products is still alive and well, so be sure to adjust your marketing campaigns and branding accordingly.

Alberta

Alberta’s economy held up well in 2024 despite high interest rates. The economy benefitted from robust consumer spending and a swift recovery in home sales in the last quarter of 2024.

The Trans Mountain pipeline expansion created momentum in the oil sector with production reaching record levels last year. With lower interest rates and limited tariffs directly impacting the province, growth is expected to remain strong in 2025 and match last year’s level of 2.0%.

Major projects will contribute to the economy in the coming years, positioning Alberta at the forefront among provinces. 

Unlike the national average, where population growth is expected to decline due to capped immigration rates, Alberta is set to experience a robust increase in its population of 2% while Canada’s population is expected to decrease by 0.5%. This surge will bolster consumer spending and housing demand.

Oil production to offset some of the downard pressure on oil prices. An increase in supply from OPEC producers, heightened uncertainty earlier this year and now tarriffs imposed on China and other countries will put downward pressur on oil prices this year.

However, oil production will continue to increase in Alberta and meet demand from the U.S. and elsewhere as producers could potentially seek to diversify their markets.

Saskatchewan

Saskatchewan's economy remained resilient in 2024, thanks to strong household consumption, decent activity in the mining and energy sectors, and strong residential and non-residential investment.

A solid job market kept unemployment low at 5.4% and will support further improvement in spending in 2025.

Exports increased since Q4 2024 and should remain strong as main exports are not subject to tariffs from the U.S. However, pressure on Canola oil (100% tariffs) from China remains despite exemptions on Canola seeds.

Overall, GDP growth is expected to rise slightly to 1.6% in 2025, supported by lower interest rates, a solid job market and major projects like the $6.4-billion Jansen Stage 2 potash project, which will bolster investment and jobs.

Manitoba

Manitoba's economy slowed in 2024 amid high interest rates, and 2025 is looking to be challenging as well for the province.

Trade tensions with the U.S. early in the year weighed heavily on investment intentions and consumer confidence. With U.S. tariff policy now clearer, sentiment should improve among businesses that are not impacted and consumer confidence should recover over time. 

However, despite its diversified economy, Manitoba’s manufacturing sector does have an important concentration in the transportation equipment sector (16%), which we expect to remain under pressure from tariffs.

On the plus side, lower interest rates should support spending going forward.  Public spending will contribute to growth over the next five years with $4.1 billion allocated for infrastructure projects.

While the economy will benefit from higher commodities prices, including for gold and copper, other sectors will struggle. Taking these factors together, we expect Manitoba’s growth to remain modest this year at 0.9%. 

The impact on your business

• Review your financial position and identify pain points and strategies to become more resilient. 
• The tariff picture has become somewhat clearer now. Start planning for your growth projects and investments to benefit from lower borrowing costs.