Navigating Tariffs: Economic and Market Impacts for Canada and the U.S.
Mar 6, 2025
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Douglas Porter, Managing Director and Chief Economist at BMO, and Yung-Yu Ma, Chief Investment Officer at BMO Wealth Management U.S., delve into the complex world of U.S.-Canada tariffs. They discuss how these tariffs are influencing economic growth, inflation, and market volatility in both nations. The conversation highlights the potential shifts in consumer confidence and strategies for investing amid uncertainty. Insights on currency fluctuations, asset allocation strategies, and the impact of potential Federal Reserve rate cuts make for an engaging and informative discussion.
Tariffs are expected to reduce Canadian GDP growth forecasts significantly while simultaneously increasing inflation, creating economic challenges.
The uncertainty around tariffs is declining consumer confidence, which may further hinder spending on major purchases like homes and vehicles.
Deep dives
Impact of Tariffs on Economic Growth
Tariffs and trade wars significantly weaken economic growth while simultaneously raising inflation, creating a challenging environment for both Canada and the U.S. The consensus is that weak growth will have a more considerable impact than rising inflation, leading to lowered GDP growth predictions, particularly in Canada. For instance, the growth outlook for Canada has been revised down by approximately 1.5 percentage points, shifting from nearly 2% to a range between 0% and 0.5% for the coming years. This is coupled with an expected uptick in inflation, which is projected to increase by half a point in Canada due to these tariffs.
Market Implications Amidst Uncertainty
Financial markets are poised for volatility as the ongoing trade war, alongside other economic disruptions, creates a sense of uncertainty among investors. Current indicators suggest that while the markets are adjusting to heightened risks, they may not fully incorporate the possibility of prolonged high tariffs, which could hinder economic momentum. Concerns over stagnant data and potential layoffs heighten market apprehension, emphasizing the need for patience and a long-term investment perspective. Although there is a belief that recovery factors, such as potential tax cuts and the Federal Reserve's rate-cutting strategy, may come into play later, short-term disruption is expected to persist.
Consumer Confidence and Economic Behavior
The degree of uncertainty surrounding tariffs is causing a notable decline in consumer confidence in both Canada and the U.S., impacting spending behaviors. While previous trends focused on business investment and export figures, the present outlook indicates that consumer spending on significant purchases, like homes and automobiles, will likely falter due to heightened market apprehension. For example, early signs of stagnation in Canadian home sales indicate that consumers are hesitant to make major financial commitments amidst uncertainty. This trend of reduced confidence is pertinent, as consumer behavior is a vital driver of economic growth.
Join BMO for a 30-minute discussion with our Chief Economist and market experts on how U.S.-Canada Tariffs will impact the Canadian and U.S. economies and markets.
Moderator:
Camilla Sutton , CFA, Managing Director, Head of Equity Research, Canada & UK
Speakers:
Douglas Porter, CFA, Managing Director, Chief Economist