With the arrival of Donald Trump in Washington and his threats to impose a 25% surcharge on products imported from Canada, the economic outlook for 2025 is plunged into the greatest uncertainty.
• Also read: 2025, a pivotal year for Trump and Trudeau… but also for you
Because if the new American president carries out his tariff threats, all the forecasts presented this week in the Trudeau government’s Fall Economic Statement will almost fall apart.
Instead of recording the solid growth that economists anticipated before Trump’s election, Canada risks falling into recession, nothing less.
1. WHAT’S THE PROBLEM WITH THE FORECASTS IN TRUDEAU’S UPDATE?
The forecasts contained in Monday’s update were made in light of the survey that the Ministry of Finance conducted last September among economists at 11 major financial institutions, including Desjardins and the major Canadian banking groups.
These forecasts present us with three scenarios for nominal GDP growth in 2025. Here are the scenarios in question, with their respective growth percentages and, in parentheses, the value of Canadian GDP that will be reached in 2025 if said growth materializes:
- Pessimistic scenario: + 2.1% ($3,116 billion)
- Optimistic scenario: +4.8% ($3,210 billion)
- Anticipated scenario: + 3.7% ($3,173 billion)
As you can see, 2025 looked relatively good, according to these scenarios from September.
However, since last September, we have been treated to major events which risk changing the situation. I am referring in particular to the election of Donald Trump as head of the United States, to his threats of 25% tariffs on products imported from Canada, to the review of the federal government’s immigration policy, to the dramatic fall of the Canadian dollar, the sharp drop in the Bank of Canada’s key rate and the large federal budget deficits.
2. WHAT WILL HAPPEN TO THE CANADIAN ECONOMY IF TRUMP SURTAXES GOODS IMPORTED FROM CANADA?
The economic growth scenarios that have just been presented in the Trudeau government’s update are likely to become obsolete. In the worst case scenario, we could risk finding ourselves in a recession.
Obviously, everything will depend on the time in the year when said tariff surcharges would be applied and, another determining factor, the products covered. The later in the year the surcharges are applied, the less significant the damage in 2025 would be.
Another unknown: will Canada respond “dollar for dollar” to American tariff surcharges by also imposing surcharges on products imported from the United States?
One thing is certain, a war of tariff surcharges between Canada and the United States would have a negative impact on both the Canadian economy and the American economy.
We will lose on both sides of the border.
Fingers crossed that Trump drops his tariff threat.
3. IN THE EVENT OF TARIFF SURCHARGES, WHAT IMPACT WOULD A RECESSION HAVE ON QUÉBEC?
Of course, real GDP “growth” would fall into the red.
In such a scenario, households and businesses will tend to exercise caution by limiting their consumption and investment spending. This would inevitably lead to a decline in employment and an increase in the unemployment rate.
In its budgetary and economic update last November, the Legault government had also made, in relation to the scenario planned for 2025, the following forecasts in the event that Quebec fell into recession:
- Real GDP growth would fall from 1.5% to -0.3%.
- Nominal GDP growth would fall from 3.6% to 1.7%.
- Instead of creating jobs by 0.5% (+21,000), we would lose 0.5% (-21,000).
- The unemployment rate would rise from 5.8% to 6.3%.
- The increase in wages and salaries would be limited to 1.8% instead of 3.5%.
- The companies’ net operating surplus would fall by 3.2%, compared to a forecast gain of 2.1%.
- Growth in consumption (excluding food products and housing) would decline from 3.8% to 1.1%.
4. AND WHAT WILL HAPPEN TO OTHER ECONOMIC INDICATORS?
During 2025, the Bank of Canada is expected to lower its key rate by at least another percentage point, to 2.25%. This will allow borrowers (individuals and businesses) to feel less oppressed by their debt.
Due to the gap with the key rate of the American Federal Reserve, the Canadian dollar risks remaining below 70 US cents for a short time. Which is very advantageous for boosting our exports to the United States and attracting American investments to Canada. But on the other hand, imports of American products cost us significantly more.
As for our investments in the stock market, we must remain humble in our return expectations in 2025. After a breathtaking year in 2024, at least until the mini-correction on Wednesday, December 18, the bar for the stock market indices has become very high.
