Buckle Up, Canada. The Next Four Years Are Going to Be a Bumpy Ride.

Beating the odds again in the 2024 presidential election, Donald Trump not only bested the Democrats in the Electoral College but also won the popular vote. The Republicans took majorities in the Senate and House of Representatives as well, making it a Republican sweep. In combination with a much more organized campaign apparatus and unquestioned control over the Republican Party, President-elect Trump will now be able to deliver on his agenda in a way he wasn’t in 2016. This unrivaled mandate is likely to mean substantial tax cuts, less immigration, escalating tariffs, higher inflation, still-elevated interest rates and yawning federal deficits south of the border.

For Canada, a Trump victory of this magnitude spells tough times ahead. Back in early October, we published our analysis External link. of what a Republican sweep would mean if Trump was able to execute effectively on every policy he opined on. Under the assumption that tariffs would be enacted by the end of next year, we determined they could lead to a recession in Canada, starting as early as the end of 2025. In our most recent Economic & Financial Outlook External link., released on Wednesday, we tempered that view somewhat, reflecting both the uncertain timing of tariffs and the possibility that cooler heads will prevail in the incoming administration, or that Canada successfully negotiates some exemptions. And while we have our doubts that we should be so lucky, hope springs eternal.

Unfortunately, the timing couldn’t be much worse for Canada. The country’s productivity is in the dumps. External link. And one of the key drivers of growth over the past couple of years—surging population gains—is about to grind to a halt External link.. While this could spur investment in labour-saving technologies and machinery & equipment in normal times, the uncertainty posed by the impending upheaval in global and North American trade could keep some businesses on the sidelines. That despite likely higher export demand in 2025 before tariffs take effect, which should boost headline real GDP growth next year. But assuming the Government of Canada achieves only part of its planned reduction in newcomer admissions and the Trump administration decides to take it a little easier on Canada than the recent campaign bluster might suggest, economic growth will probably be much weaker than we projected in October. This is especially true in 2026 once tariffs and slower population growth really begin to bite (graph 1). The impact will be even more pronounced if policies proposed by both the US and Canadian federal governments are fully implemented. And while we assume only one additional Bank of Canada rate cut over the next couple of years relative to our pre-election projection, the risks are clearly tilted to the downside of the central bank’s especially rosy economic outlook.

All else equal, this is likely to spell larger deficits for the Government of Canada. As we published External link. in late October, just reaching planned population reductions and NATO’s defence spending target of 2% of GDP by 2032 would lead to a steadily rising federal debt-to-GDP ratio. Now that Trump is soon to return to the White House, that’s almost a foregone conclusion (graph 2). It’s a tough starting point to be hit with this kind of shock. But it wasn’t inevitable. Responsibility should be taken for running sustained budget deficits, even if they are smaller than in other major advanced economies as a share of GDP External link.. And while tax hikes offset higher spending in the federal budget External link. and some recent provincial fiscal plans External link., that well is running increasingly dry External link..

Then there are the provinces. In our earlier analysis of a potential Republican sweep, we assumed energy may be exempt from tariffs to avoid raising the cost of gasoline for American consumers. If this comes to pass, it may help energy-producing provinces, especially Alberta, escape the worst of the tariff impacts. But other provinces are likely to be less immune, including Ontario, Quebec and Manitoba. (New Brunswick’s exports are also highly exposed to the US, but these are disproportionately made up of petroleum and coal products.) These provinces have a relatively large share of their economic activity linked to non-energy exports destined for the US (graph 3). This could spell trouble ahead for GDP and revenue growth, potentially weighing on budget balances.

All told, the Canadian economic and fiscal outlook is going to be in for some serious challenges ahead. While the diplomatic charm offensive has already begun, it’s time to kick it into high gear. The case for a continued close economic relationship between Canada and the US is strong, but that doesn’t mean it won’t be tested. So buckle up, Canada. The next four years are going to be a bumpy ride.