The ongoing trade tensions initiated under the Trump administration continue to shape economic conditions in North America. As Canada navigates an increasingly unpredictable electoral landscape, the United States is facing economic challenges that highlight its vulnerabilities.
Canada: Economic Resilience Amid Political Uncertainty
Despite ongoing tariff disputes, the Canadian economy demonstrated resilience in late 2024, with GDP growth exceeding expectations in the fourth quarter (+2.6% QoQ annualized) and an upward revision of third-quarter figures (2.2% vs. 1.0% previously). However, these developments preceded the transition of the U.S. administration, introducing new variables into Canada’s economic trajectory.
Economic data provides valuable insights into market conditions, yet it is often subject to delays. Hard data indicators, such as industrial production and retail sales, offer concrete assessments of economic performance but typically lag by several months. In contrast, soft indicators, such as the S&P Global Manufacturing PMI, offer more immediate signals (though they can be less reliable). A reading below 50 suggests economic contraction, and in February, this index declined by nearly four points, reflecting deteriorating business sentiment.
Despite these indicators, Canada’s economic fundamentals remain stable as of Q1 The tariffs currently in place—targeting steel, aluminum, and non-USMCA-compliant goods—have had a relatively limited macroeconomic impact compared to the broader threats previously issued by the Trump administration. However, uncertainty persists, with potential new tariffs on key industries such as dairy, lumber, and copper. The incremental implementation of trade restrictions suggests a strategy aimed at showing a willingness to act without triggering a severe downturn in the U.S.
Canada’s political landscape has also been shaped by these trade tensions. Initially, a Conservative Party victory appeared highly probable, but shifting voter sentiment has revived support for the Liberal Party. Key developments include:
- The Canadian government’s imposition of retaliatory tariffs on $42 billion of U.S. imports, reinforcing national unity.
- Prime Minister Mark Carney’s repeal of the consumer carbon tax, a move aimed at appealing to centrist and conservative voters.
- The Liberal Party’s efforts to regain support from both centrist voters and those who previously aligned with the New Democratic Party (NDP).
With early elections scheduled for April 28th, the outcome remains uncertain. Both the Liberals and the Conservatives can achieve a majority. They can also fall short, which can bring smaller parties (the NDP or the Bloc Quebecois) into play.
Regardless of the election outcome, trade relations with the U.S. will remain a key issue. While Canadian leaders may continue to adopt a firm stance in the short term, prolonged economic strain could ultimately incentivize a shift toward de-escalation.
Data for the graph in .xls file
The U.S. Economy: exceptional but not invincible
Rising recession concerns in the United States suggest that trade policy decisions could have significant economic repercussions. The U.S. administration has indicated a willingness to tolerate short-term economic disruptions in pursuit of broader trade objectives. However, the extent to which this strategy can be sustained remains uncertain.
The imposition of 20% blanket tariffs on Chinese imports, with similar measures expected for the European Union on April 2, is projected to exert downward pressure on U.S. economic growth. Given that trade with the EU is comparable in scale to trade with Canada or Mexico, materially increase the risk of recession in 2025.
Identifying economic vulnerabilities
Assessing the impact of tariffs requires an analysis of sectoral dependencies on foreign imports. U.S. industries with high import reliance are more susceptible to trade disruptions. While the automotive and steel industries have garnered significant attention, other sectors, such as retail , are also highly exposed. The U.S. remains dependent on apparel imports from China, and in the short term, diversification efforts may be insufficient to offset rising costs, impacting retailers and wholesalers alike.
Recent labor market trends highlight additional vulnerabilities. While government workforce reductions have been a focal point, layoffs in the retail sector have also been significant. Given ongoing economic headwinds, further contractions in consumer-driven industries could materialize.
Data for the graph in .xls file
Outlook
The trade dispute between the U.S. and Canada remains dynamic, with no clear resolution in sight. Both economies face challenges, and continued policy uncertainty could exacerbate economic volatility. While near-term economic conditions remain fluid, businesses and policymakers must closely monitor these developments to adapt to an evolving landscape.
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