Caution Required by Businesses and Investors After U.S. Tariffs Muddy the U.S. and Canada Outlook

Watch the event replay: Navigating Tariffs: Economic and Market Impacts for Canada and the U.S.

In this episode of Markets Plus, recorded March 5, our BMO Economists and Markets specialists discuss how US Tariffs could impact the Canadian and US economies and markets.

After the U.S. imposed tariffs on goods from Canada, the best course of action for business leaders and investors may be to avoid panic decisions and adopt a wait-and-see approach. This is a key message from a panel of BMO experts who addressed the Trump administration’s decision to place a 25% tariff on thousands of Canadian goods and a 10% tariff on energy imports.

The impact tariffs will have on both the U.S. and Canadian economies and how investors should respond to the shifting landscape were the focus of the digital event, “Navigating Tariffs: Economic and Market Impacts for Canada and the U.S.” Camilla Sutton, Managing Director and Head of Equity Research for Canada and the UK at BMO Capital Markets, led the conversation that featured Doug Porter, BMO’s Chief Economist, and Yung-Yu Ma, Chief Investment Officer at BMO Wealth Management U.S.

Even though the tariffs on Canada and Mexico officially launched on March 4, the situation remains fluid. Less than 24 hours after the tariffs went into effect, U.S. President Donald Trump said he would provide a one-month exemption to tariffs on the auto sector. That reprieve is expected to last until early April, which is also when the U.S. plans to launch additional tariffs that would presumably also apply to Canada and Mexico.

Although the exact impact the tariffs will have on the U.S. and Canadian economies is still up for debate, rising inflation and lower growth are both causes for concern. According to Doug Porter, the impending threat of more tariffs in Canada will weigh heavily on growth prospects and put a damper on the business environment, something early economic indicators seem to suggest. “We were looking at something close to 2% growth in Canada before this and now we’re looking at something between zero to half a percent growth this year.”

Porter forecasts roughly a half-percentage point lift to inflation this year, something that will likely wear off by next year. Tariffs haven’t had much impact on the Canadian dollar yet, but that trend is unlikely to last if the dispute drags on. “We think the Canadian dollar is ultimately going lower,” he said. The side benefit of a lower loonie is that it will dampen the impact from the tariffs, he added.

Though the impact of the tariffs will be more pronounced in Canada, the U.S. economy will also see a negative impact. “We're looking at a cut in U.S. GDP growth of between a quarter to a half a percent this year and next,” Porter said.

Tariffs aren’t the only thing investors need to be mindful of. Economic data out of the U.S. suggests the country is facing challenges caused by the disruptions and layoffs brought about by the Department of Government Efficiency (DOGE). Those cuts combined with reciprocal tariffs could lead to spending pullbacks and increased fiscal restraint, with lingering uncertainty weighing on consumer and business sentiment, explained Porter.

“Bottom line, in terms of what it means for the economy – and there are so many moving parts and unknowns – is that the net impact is that growth will be lower, especially in Canada, and inflation will be somewhat higher, probably a bit more in the U.S.,” said Porter. Of course, this all depends on how long the tariffs remain in place, he added.

Amid the economic uncertainty, Porter said he’s reluctant to throw around the “R” word unless it is very clear that’s the direction we’re headed. The key variable in the equation is how long the tariffs last. “If they were to persist for a year, it would be very difficult for the Canadian economy to avoid at least a technical recession. But it’s not at all clear they’ll last that long.”

Looking toward the end of the year, Yung-Yu Ma noted the fundamentals underpinning the economy, including the proliferation of artificial intelligence and sustained profitability by companies, continue to look favourable. “The problem is that these near-term disruptions are very acute and will dominate the headlines and the investor psyche for quite some time.”

Against that backdrop, Ma suggested investors may want to keep some cash on the sidelines and adopt a more neutral approach or extend duration on fixed income, particularly if the tariffs persist. “That will provide an element of stability,” he explained. “But you don’t want to be closed off. Good opportunities might come along, but you might want to wait for very good or even great opportunities before deploying new capital.”

Still, Ma doesn’t see the tariff war as a systemic issue. “I don’t think the President can keep this trade war going strongly for a long period of time,” Ma said. “But the markets are in for a bumpy ride. We’re not even halfway through this.”

In the near term, Ma stressed the need for patience and to avoid the impulse to panic sell or try to be opportunistic without focusing on the fundamentals. “It's more of a time for patience and time to look for longer-term opportunities and understand that this could be a very volatile period here,” he said.