Canada’s economy is already grappling with the potential fallout from the recent U.S. election, with significant risks looming on the horizon. The incoming U.S. administration has pledged to impose a sweeping 25% tariff on all goods imported from Canada and Mexico as early as January 20, 2025. If implemented, such tariffs could severely impact Canada’s economic outlook.
Cross-Border Challenges
The United States accounts for over 77% of Canada’s total exports, making it by far Canada’s largest trading partner. At a previously proposed 10% tariff rate, the Canadian Chamber of Commerce estimated a $30 billion annual hit to the Canadian economy. A 25% tariff would exacerbate this economic strain, though skepticism persists regarding whether such extreme measures will materialize due to the likely economic damage on both sides of the border.
This uncertainty underscores how deeply intertwined the U.S. and Canadian economies are, creating heightened risks for both nations’ growth outlooks in the near term.
Bond Market Dynamics
Canada’s bond yields continue to mirror movements in U.S. Treasury yields. Following the U.S. election, the prospect of inflationary fiscal policies in the U.S. tempered expectations of Federal Reserve rate cuts, causing Treasury yields to rise. In response, Canada’s 10-year bond yield peaked at 3.45% in November, up 22 basis points from its monthly low. However, this rise was reversed after a fiscally conservative U.S. Treasury Secretary nominee was announced, bringing the yield back to 3.22%.
Domestic Developments
On the home front, Canada’s economy received a lift with the announcement of temporary federal relief measures. These include a two-month Goods and Services Tax (GST) holiday and $4.7 billion in federal stimulus cheques to be distributed in early 2025. Ontario residents are also set to benefit from additional provincial stimulus payments, further boosting short-term economic growth in the region.
The GST holiday, however, is expected to have a more modest impact, and retailers have raised concerns about potential logistical challenges in implementing the temporary tax break.
Bank of Canada’s Cautious Approach
Given these cross-border and domestic developments, the Bank of Canada is likely to adopt a cautious stance. Expectations for a December interest rate cut have been tempered, with a 25-basis-point reduction to 3.50% now seen as the base case. The likelihood of a larger 50-basis-point cut has fallen sharply, from 60% earlier in the month to just 12%.
Economic Highlights
- Inflation: Headline inflation rose to 2.0% in October 2024, while core measures CPI-median and CPI-trim climbed to 2.5% and 2.6%, respectively.
- Retail Sales: September retail sales grew 0.4% month-over-month, with early estimates indicating a 0.7% increase for October.
- Employment: October saw 14,500 new jobs added, keeping the unemployment rate steady at 6.5%.
Conclusion
The interplay between U.S. policy shifts and Canada’s domestic economic measures paints a complex picture for the months ahead. The potential implementation of high tariffs and domestic fiscal responses are shaping a cautious outlook, with elevated uncertainty for Canadian businesses and policymakers alike.
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