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Stock and bond markets are already reacting in anticipation of the changes
Published Nov 11, 2024 • Last updated Nov 11, 2024 • 6 minute read
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Former U.S. President Donald Trump holds a campaign rally at the PPG Paints Arena on November 04, 2024 in Pittsburgh, Pennsylvania. Photo by Chip Somodevilla/Getty Images
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To play on a familiar saying: if America sneezes and the world catches a cold, Canada is the first to get sick. As Donald Trump prepares to take office for a second term, Canadians are bracing for a range of policy changes that will inevitably affect our economy — and, by extension, our pocketbooks. While stock and bond markets are already reacting in anticipation of the changes, just how far Trump will go on issues such as trade and immigration remains to be seen. Here’s a look at what economists are predicting could lie ahead.
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Trade and tariffs
Canada and the U.S. are each other’s closest international partners, with daily trade topping $3.6 billion, according to the Canadian Chamber of Commerce. Canada buys three quarters of America’s merchandise exports, to the tune of approximately US$500 billion a year, and nearly $600 billion in Canadian exports go to the U.S.
While Bank of Montreal chief economist Douglas Porter said Canada’s economy might initially benefit from stronger U.S. growth, Canada would be one of the hardest hit from a possible trade tussle. One of Trump’s campaign promises was a 10 per cent tariff on all goods imported into the U.S. That, and the fate of the United States–Mexico–Canada Agreement (USMCA), which is up for review in 2026, could depress capital flows to Canada and weaken domestic investment, likely extending Canada’s productivity slump.
However, CIBC chief economist Avery Shenfeld noted that what Trump has said on tariffs and other trade barriers during his campaign may not all come to fruition. During Trump’s first term, there was a threat to end NAFTA, but the outcome was an updated trade pact, and tariffs on Canadian steel and aluminum were reversed after a year, Shenfeld said. Plus, one of Trump’s main economic advisors (and a leading contender for the role of Treasury Secretary), characterized Trump’s tariff threats as “maximalist” and suggested they could be “de-escalated” during talks with trading partners.
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There’s an expectation that Canada’s energy sector will avoid or withstand higher tariffs, but if a Trump administration ramps up oil production as expected, the cost of oil will go down, affecting Canadian producers and exploration companies up the chain. Lower profits for Canadian producers would likely bring down household incomes for those working in the sector.
Cost of living
For consumers, the upside of lower oil prices is of course savings at the gas pump and a reduction in overall energy costs. Tariffs remain the biggest threat to Canadians’ pocketbooks, however, since higher tariffs tend to have an inflationary effect, due to more expensive inputs for manufacturers and an overall higher cost for goods — costs that are ultimately passed along to consumers.
Ahead of the election, Desjardins economists suggested that a Republican sweep would result in as much as a 1.7 per cent drop in Canada’s real GDP by the end of 2028. A second Trump presidency, they said, would likely lead to lower global and U.S. GDP, which, combined with higher tariffs on U.S. imports, would reduce demand for Canadian non‑energy exports, again leading to higher cost of goods for consumers and lower corporate profits.
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Furthermore, Trump tax cuts and larger U.S. deficits could fuel inflation and lead to higher interest rates than are currently expected. “While a recession may be narrowly avoided, it can’t be ruled out,” the Desjardins economists wrote. “With that in mind, businesses and policymakers would be well advised to hope for the best but plan for the worst.”
Stock market
While the broader economic environment during a Trump presidency could be a drag on Canada, the impact on financial markets is another story, said the Desjardins economists. Corporate income tax cuts and deregulation in the U.S. would likely boost equity values in North America and abroad, they said.
Such was the case in post-election trading, when stocks rose broadly on the hopes of lower taxes and less regulation — the latter being a boon for the financial sector, in particular. The Dow rose 1,500 points on Wednesday, the day after the election, and the S&P 500 was up by nearly 150 points — their biggest single-day percentage increases in two years.
Still, Derek Holt, head of capital markets economics at Scotiabank, called this is a highly tentative market scenario. “I think C-suites and markets have reason to be very cautious toward the future,” he said. “A surge of protectionism is all but assured to hang over the global economic outlook as a downside to U.S. and global growth.”
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Analysts are already predicting which sectors will win or lose under the new regime. Many are assuming that a Trump administration will be more friendly to fossil fuels and less friendly to renewable energy, with renewable energy companies already selling off last week. The pharmaceutical and biotech sectors, meanwhile, are edgy about the prospect of Robert Kennedy Jr., an anti-vaccine activist, potentially controlling health policy. And the American electric vehicle industry, which seemed a likely target for Trump at one time, now looks poised to thrive with Elon Musk at the president-elect’s side.
Interest rates and mortgages
Interest rates in Canada are heavily influenced by U.S. economic trends, meaning a Trump presidency could have ripple effects on Canadian mortgage rates. Mortgage strategist Robert McLister points out that rising U.S. bond yields — driven by Trump’s potentially expansive fiscal policies — could lift Canadian bond yields as well, affecting fixed mortgage rates in Canada. The correlation between U.S. and Canadian interest rates has historically been strong, he says, with a 0.88 correlation between Canada’s prime rate and the U.S. Fed funds rate, meaning Canadian borrowers could feel the effects quickly.
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Bank of Montreal economist Shelly Kaushik urges caution, however, pointing out uncertainties around future tariffs and commodity price shifts. “Sometimes the non-changes are as important as the changes to the forecast,” said Kaushik. “To that end, we have not yet touched our inflation call. While a Trump presidency has long been called an upside risk to inflation (through both stronger growth and higher tariffs), it is simply too early to tell when and what risks will materialize.” Kaushik says they’ll wait for the results from the House of Representatives race, for the commodity moves to play out, and for which tariffs are actually implemented.
Canadian housing market
A Trump presidency could indirectly influence Canada’s housing market, especially if U.S. policies prompt some Americans to explore relocation. This interest has already been observed, with an increase in U.S.-based web searches for Canadian properties in major cities, according to Royal LePage. Ross McCredie, chief executive of Sutton Group, a Canadian real estate franchiser, suggests that while Americans could bolster demand in high-end areas like Whistler, restrictions on foreign ownership might curb their ability to buy in non-recreational markets. However, he adds, “a weaker Canadian dollar could make Canadian properties particularly appealing, allowing Americans to buy ‘at almost 40 per cent off,’” as seen in previous cycles.
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If tighter immigration policies continue, demand could further strain Canada’s market, putting upward pressure on prices in key locations. McCredie points out that Americans’ interest in Canadian real estate could also act as a buffer against a housing market downturn, especially as “the U.S. economy picking up can also have a positive spillover effect on Canada.” However, he remains concerned about Canada’s competitive challenges in real estate development, where “higher costs and slower timelines” make it difficult for Canadian developers compared to their U.S. counterparts.
U.S. housing market and Canadian snowbirds
For Canadians owning vacation properties in the U.S., particularly in snowbird destinations like Florida, a Trump presidency could create challenges. McCredie again highlights the impact of a weaker Canadian dollar, which could raise the costs of maintaining U.S. properties. “The devaluing of the Canadian dollar will have a significant impact on Canadians who currently own U.S. property,” he notes, pointing out that this could make it more difficult for Canadian snowbirds to afford U.S. vacation homes.
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Moreover, the possibility of higher tariffs and uncertain trade policies could discourage Canadian investment in U.S. real estate. However, McCredie remains cautiously optimistic about the future of Canada-U.S. trade relations. “I believe more money will flow out of Canada into the U.S., especially from institutional investors,” he states. While concerns about cross-border complications persist, McCredie points to past agreements like NAFTA 2.0 as a potential buffer against harsher economic policies.
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