Canada to see higher inflation on Trump tariffs – economists

TORONTO (ICIS)–Fallout from the policies and tariffs proposed by US President-elect Donald Trump will inevitably affect Canada’s economy, in particular the manufacturing sector, according to Oxford Economics.

• US tariffs and Canada’s retaliation
• Shrinking population
• Relaxation of mortgage lending rules

TRUMP PRESIDENCY
The President-elect has proposed increased fiscal stimulus, higher tariffs and curbs on immigration – all impacting Canada.

The stimulus, including tax cuts and increased defense spending, will provide the US economy with an initial boost, Tony Stillo, Oxford Economics’ director for Canada, and economist Michael Davenport said in a webinar.

Over the first half of Trump’s four-year term, the US stimulus could provide upside to the Canadian economy, “but not a whole lot”, Davenport said.

As Trump’s presidency then progresses into its second half, the boost from the stimulus would fade and a drag from his tariffs would set in, slowing down GDP growth, he said.

Trump has proposed to raise tariffs by 10-20% on all imports, and by 60% on imports from China.

In the case of Canada, Oxford Economics assumes that Trump will impose a 10% tariff on about 10% of US imports from Canada, starting in 2026/2027, targeted at steel, aluminum and other base metals, and that Canada will respond with counter tariffs.

US-Canada energy trade is not likely to be subjected to tariffs, they said.

The impacts on Canada will be higher inflation. Canada’s central bank will recognize the higher inflation outlook and react by hiking rates in 2026, Davenport said.

The Oxford experts think that Trump will likely use the tariff threat as a bargaining chip in the upcoming renegotiations of the US-Mexico-Canada (USMCA) trade pact.

However, they would not rule out a more severe “full-blown” Trump presidency, with a 10% import tariff on all Canadian imports, leading to much more significant impacts – in terms of inflation and monetary policies – in Canada.

“A full-blown Trump scenario”, and Canada’s retaliation, would be a negative for trade in heavy manufacturing sectors such as autos, base metals, chemicals and chemical products, rubber and plastics products, and autos, among others, Davenport said.

While Canada’s manufacturing sector would be most directly exposed to rising import costs from the retaliatory tariffs, the much larger impact on Canada’s economy would come from weaker aggregate demand due to higher inflation, tighter monetary policy, elevated uncertainties and lower consumer confidence, Davenport said.

As higher inflation and interest rates squeeze Canadian household budgets there would be big impacts on sectors such as construction and services, he said.

Should Trump – contrary to Oxford’s expectations – decide not to go through with his tariffs, then his stimulus measures should be a positive for Canada’s economy, in line with the often-used phrase “What’s good for the US economy is good for Canada’s economy”, he said.

However, “we think it’s most likely that Trump does impose substantial tariffs on countries, including Canada, and there is a risk there that tariffs could be more widespread”, he said.

In addition to the Trump tariffs and policies, the course of Canada’s economy will also be influenced by a decline in the country’s population and by a recently announced relaxation in mortgage lending rules, the Oxford experts said.

POPULATION
Following years of soaring population growth, with nearly one million people per year added over the past two years alone, the Canadian government announced it would restrict immigration. Here is a link to a recent video in which Prime Minister Justin Trudeau explains the measures.

The restrictions will lead to a decline in the country’s population, marking the first decline since the country was founded in its current form in 1867, Stillo said.

The contraction in the population will reduce both supply and demand in the economy, meaning that the economy will shrink, he said.

Over the mid-term, it will reduce the unemployment rate, lead to wage growth and to moderately higher inflation, he said.

As the tighter jobs market and the Trump tariffs raise inflation, Canada’s central bank will react towards the end of 2026 by raising rates, he said.

On the positive side, a tighter jobs market and a higher cost of labor should incentivize capital spending, he said.

Also, lower population growth would ease Canada’s housing squeeze, he said.

Oxford estimates that with a smaller population, Canada will need 3.7 million new homes to restore housing affordability by 2035, down from its previous estimate of 4.2 million homes.

Stillo added that a likely change in government in Canada – with the opposition Conservatives ousting Trudeau’s Liberals – could lead to even tougher curbs on immigration.

The Conservatives are well ahead of the Liberals in opinion polls on the elections, which will need to be held before November 2025.

Contrary to the government’s plans, however, Canada could soon face an unwanted surge in its population due to a wave of undocumented immigrants from the US, where the President-elect has committed to mass deportations, he noted.

MORTGAGE RULES
Recently announced relaxations to Canadian mortgage rules will affect not only housing but also the broader economy.

Effective 15 December, the government will allow 30-year fixed-rate mortgages for first-time home buyers and widen the eligibility for mortgage insurance.

The government also removed a “stress test” for existing mortgage borrowers who switch lenders.

Combined, the relaxations will boost household cashflows and “unlock” a new pool of home buyers, Davenport said.

They will improve housing affordability, driving up housing sales but also raising prices, he said.

Overall, Oxford Economics expects the mortgage measures to improve household finances “in a sustained way”, starting as soon as early 2025, and it expects them to “be key in underpinning a pickup in consumer spending and a pickup in housing”, he said.

However, while the measures will support economic growth, they will “exacerbate Canada’s long-standing household debt issues” – meaning that households will remain vulnerable to interest rate shocks and losses of jobs or income, he said.

Canada’s household debt is currently much higher than the US debt was just before the 2008/2009 global financial crisis, the Oxford experts noted.

Shortly after the Oxford webinar ended on Thursday, the federal government announced new debt-financed short-term stimulus measures, valued at more than Canadian dollar (C$) 6 billion (US$4.3 billion), which, according to economists, could push up inflation.

The stimulus includes a removal of the sales tax from a number of goods (including wine, beer and ciders) for two months, from mid-December to mid-February, and a C$250 tax rebate for 18.7 million “working Canadians”.

(US$1=C$1.4)

Thumbnail of photo Trudeau (left) meeting Trump in Washington in 2019 during Trump’s first presidency; photo source: Government of Canada