The Agenda with Steve Paikin (Audio) - Is Tariff Uncertainty Already Pinching the Canadian Economy

Episode Date: March 13, 2025

For all his threats, U.S. president Donald Trump still has not imposed tariffs on Canadian goods covered by the Canada-US-Mexico trade deal, with the exception of steel and aluminum tariffs imposed today. In fact, he has delayed the start date of tariffs on Canada and Mexico twice. The economy is already being battered by uncertainty around tariffs. Will there be another delay? How long will tariffs last if and when they're imposed? See omnystudio.com/listener for privacy information.

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The economy is already being battered by uncertainty around tariffs. Will there be another delay? How long will tariffs last if and when they're imposed? Well, for a better understanding of all of this, we welcome Dawn Desjardins, who is chief economist for Deloitte Canada. Dawn, it's great to have you back in that chair.

Thank you. I want to have you take us back to prior to November of last year. What was the outlook for the Canadian economy prior to the presidential election? Well, you know what, it was quite bright. Our forecast was that the Canadian economy would grow 2% this year.

That's pretty good. When we consider we've only about one and a half for the prior couple, we were looking at inflation pressures that had eased substantially. We saw interest rates that were lower. Canadians were going to have to refi some of their mortgages, but that combination of steady employment gains, big increases in their savings and lower rates, we're going to make it okay. We'd get through that difficult period of refinancing and businesses were going to start

to invest. Those were the days, my friend. We thought they'd never end. We'd sing and dance and, oh, never mind, I won't go into the song. But we're going to show a chart here. This is a chart of Canadian Business Confidence. From February, it was published by the CFIB, the Canadian Federation of Independent Business,

keeping in mind that the vast majority of its members are small and medium-sized businesses. And for those listening on podcasts, let me just take you through this chart. It looks like a bit of an EKG going up and down a bit. A big drop, of course, in consumer confidence and business confidence in 2020 when COVID hit, but then it came back very strong. And then came November of last year.

What do we think happened in November of last year, Dawn, to make business confidence take a bit of a dip, as it clearly has in that chart? Well, I think it was the case that the new administration was going to be doing a lot to increase the competitiveness of U.S. companies. They were going to be reducing corporate tax rates. They were going to be reducing regulation. And all of this would make the U.S. a much more competitive place. So perhaps some Canadian businesses looking at that environment thinking, So perhaps some Canadian businesses looking at that environment thinking, hmm, might be a little more difficult to compete with these companies. But at the same time, a stronger U.S. economy, at least at that stage,

would suggest that perhaps we were going to have more demand for our exports. Of course, November 24th changed all that. What happened November 24th? We were threatened with tariffs. And tariffs is his favorite word in the English language, right? That's what he says. It's his favorite word. Most beautiful, apparently.

The most beautiful word. That's the way he put it. How has the Canadian economy performed from the first week of November last year to date? Well, we did see some actually strong data in the latter part of 2024. That was actually surprisingly strong and what we did see was some activity on the export side and this carried on into January because of course Canadian companies were looking at their buyers south of the border and those buyers were saying hey maybe you could send us a little bit ahead of time so we don't have to pay the tariffs when we import

your goods. And so we did see a bit of a flurry of activity in terms of that trade. We were seeing some buildup of inventories, the same here in Canada. We were importing more, not to the extent we were exporting, but we were importing more, trying to build up inventories of tariff-free goods because we know that we're pretty integrated as economies. And what was the exchange rate on the Canadian dollar vis-a-vis the U.S. dollar? Historically speaking, where were we at? Well, we were more, I think, in the 1.38. We're now today at 1.44, so 69 cents-ish.

So we have certainly lost ground since that time. It's interesting though, the tariffs of course had not hit by November 24th of last year, and yet people were making decisions, businesses were making decisions based on words, right? Just on what they anticipated was about to happen. That's all it takes? Well sometimes if someone says it often enough and is committed to it and so certainly as you said we've had a couple of reprieves in terms of these blanket tariffs of 25 percent but when we're thinking about businesses and consumers Canadians and we're sitting back going, okay, there's

someone who's adamant about increasing the cost of our exports into their market and they're bound and determined to make this happen. So we start to examine, of course, okay, what should I be doing at this particular point in time? So for businesses, 77% of our exports go south of the border. That's going to be a real reduction, you would think, in terms of demand for our goods going into the U.S. 25% essential tax on that. That's going to be pretty damaging. So I think what we've seen is Canadian businesses pause and take a look at hmm should I be investing to expand my production capacity. It seems

like a lot of that has been put on hold which is natural and for Canadian consumers they're saying okay so these businesses not going to be as much demand potentially for their goods and as a result will they be looking to lay me off? So should I be spending right now? So today the Bank of Canada made a decision on interest rates and with that they released some updated news on these survey type things like your CFIB survey. And what they showed was exactly that happened, that Canadian businesses, increasing number

of them say we might have to do some layoffs. We're not going to be investing as much as we otherwise would have. We'll keep the projects we have already in process, but not going to add too much. Canadian households are going to continue to beef up those savings and probably not going to be spending on big ticket items right now. So it is as you would expect, as you say, this is just the threat outside of steel and aluminum, but this is of grave concern because it will have a significant impact on our economy. Well everybody's asking about the impact of tariffs, but I want to ask

a different question. The impact of just uncertainty. Not tariffs, but uncertainty. Talk to us about that. Well, I mean, I think it's pretty, we've seen it historically. In uncertain times, everybody kind of battens down the hatches. We're not sure how this is going to play out. We don't know how our costs of doing business, how that's going to play out. We don't know if there's going to be demand.

If we make a big expansion, are we going to be able to sell it? Are we going to get a return on that investment? And so to that extent, I think that's what we see. A giant step back by both businesses and then also consumers who are wondering, they're stepping back on spending money, what does that mean in terms of their labor market? Do they want to keep as many employees? So as you say, and we've also seen volatility in financial markets. One day they're feeling like, oh, this might be okay. The next day, they're feeling that, oh my goodness, this could cause a recession. Even in the US, the US data is also showing a pretty pronounced slowing. And that's sort of interesting, right?

Because everyone was anticipating another good year for the US economy. It was going to be great because lower taxes were going to spur investment, going to see strong job growth, we're going to see they thought at that point lower interest rates. So it was a very good story for the US but now when some of the data is coming out, survey indicators showing some deterioration in sentiment, some concern about orders that they're going to be having to fill. And so, as a result, it does suggest that the U.S. economy is also feeling the pinch from this talk of tariffs.

So when you take all those metrics together and you consider all of the millions of individual decisions that are going to be made by businesses, by consumers, by labor, et cetera, okay, lay that out for us. What does that look like in terms of how much the economy will contract, how many jobs we will lose,

what it will do to inflation, et cetera? Well, for Canada, if in fact, April 2nd, we see some tariffs, the reciprocal tariffs, which again, difficult to know exactly what that's going to look like, it would be likely, at least in our view, that we'll start to see the economy contract. Now how deep that contraction is will depend on a few things. First of all, A, if they come, but secondly, are they the widespread tariffs, the blanket tariffs that have originally been suggested by the Trump administration? Are there going to be carve-outs for autos, for example,

for energy? That will mitigate some of that hit to our economy. How long will they last? So we built into our forecast that we're still working on because we have a lot of things to keep changing every day that suggest that we'd probably see a couple quarters of decline in GDP for Canada. And that is- That's a recession. That is a recession.

Now, the depth and duration of the recession again is contingent on all of this continuing to be in place. So if we get big tariffs that are spread out through the economy and last six months, that's probably a recession for Canada. And that will lead to job losses. Now the depth of those again questionable but we could see significant job losses and an unemployment rate that moves up to seven and a half percent say so we're at six six that's a pretty big increase and we would see inflation pressures we think rise. Now when we're looking inflation, this is definitely the two-handed economist conversation. You know, you have the tariff impact because we retaliate.

We have the Canadian dollar, as we said, that is weaker, so that also increases costs of things we're importing. But if we're seeing a situation where the US economy is slowing, the global economy is slowing, the global economy is slowing, that does likely put downward pressure on commodity prices. And we have a lot of slack in our economy already, being eaten up as we had those stronger growth rates in the latter part of last year, but still slack that could mitigate some of the upward pressure on prices. So our reckoning says inflation

could be anywhere from a couple tenths of a percent higher than the two percent target as much as a percent higher. So definitely the case that the direction of inflation is up, the magnitude will depend on all of these variety of factors. Was it President Harry Truman who said, I'm looking for a one-armed economist because I'm tired of hearing on the one hand on the other hand, something like that. Okay, let me get your opinion about this because I have heard conflicting views

on whether or not if we bring genuine free trade within Canada to the fore, and we break down a lot of these non-tariff barriers that exist between provinces, we can significantly mitigate the damage that the tariffs will have on our economy. I've heard some people say that, yes, we can do that. I've heard other people say, not a chance. The effect of the tariffs will be significantly more.

Where do you come down on that? I think the tariffs will be more powerful. But having said that, it will, if we eliminate them, Deloitte did a paper on this in 2021. So we're going to revise and revisit this issue. But what it said was that at that point, inter-provincial trade barriers acted like a 7% tariff between Canadians, which, Wow, that seems...

Ten percent. That's a big number. Yeah, it's not 25, but it's certainly something. And that if we eliminated them, they would increase our GDP by about four percent. So that is not... that is something that would mitigate. I don't think it would totally offset the impact. And the other thing about that, if we eliminated them, and let's say eliminated them for good, that will raise our potential output for our economy. So that could be a really important and sustained change with the tariffs coming from south of the border.

Again, I don't know if it's our hope, but it's certainly our assumption that they won't last forever because the US economy is going to feel pain. Donna, I've had people ask me about this, so maybe you could give an example of what we mean here when we say we have free trade agreements with other countries, but we don't have it within Canada. Can you give an example of a kind of a typical inter-provincial trade barrier that inhibits

our economic productivity and as a result affects our growth? Well, the biggest one I think for me anyway when I think about it is labor mobility. You know the fact that you can be an engineer in one province but not automatically move provinces and be an engineer. This is a productivity loss. You've got to re-certify every time you change provinces. Exactly. So to me that is a big one.

We also know things are the high profile being you can't bring alcohol from one province to the other. That's a fairly high profile as we've seen in terms of a case that happened between New Brunswick and Quebec. But these are the types of things. It's also, there's really, okay this sounds bizarre, but first aid kits. What's in a first aid kit? What's in, you know, truckers? What are their different rules for their different tire sizes? These things are just impediments to freely moving goods across our country.

So there are many which seem niche, but nonetheless, are they really necessary? We have heard that this is a almost unique opportunity in Canadian history to do something about this. As you watch the premiers and their negotiators, their representatives deal with this issue, are you seeing us make some progress right now? I think we are. I mean, certainly everything I read suggests, oh, we're coming together, thinking about this, like, well, why would we do that?

Why are we hampering this trade? So I do feel that that is, it's a bizarre silver lining to all of this, that we're having this external negative factor really catalyze the Canadian policymakers, Canadians, to say, okay, let's look at our own house. What should we be doing to ensure that we have a more productive economy, that goods and services can flow more easily across our country, and what should we doing looking at other trade agreements that we have? And none of these things, in my view, are easy or quick. But if we can really actually lean into them, maybe it does not mitigate enough that prevents us from going in recession.

Okay, that's to me a sensible way to approach it. But over the medium term, does it mean that we have a stronger growth momentum as we get into 2026 27, but I think that's we're building those walks to having a stronger economy Let me do a follow-up on the recession issue if the United States and a recession if I remember Two negative quarters of growth consecutively if the United States goes into a technical recession where they have two consecutive quarters of negative growth, is it a given that we will too? Well, if it's all because of the tariffs, I think we will. We don't necessarily, we wouldn't necessarily, we are in a different spot, I think, than the U.S. in terms of the cycle. We have inflation that at at this moment, is under control.

We have interest rates that have come down significantly. Yes, we have a highly indebted household sector. But we are able to go through this period. Now, if the US economy stumbled for reasons that aren't necessarily to do with tariffs, could be some other. They've just hit their speed limit and now they're going to start to lose momentum.

I don't know that we necessarily follow into recession. Usually the cycles are, you know, synced. We're a little bit ahead this time and our rates are significantly lower than the U.S. So I think that might give us a little insulation. And that weak Canadian dollar, you know, it would make Canadian, it does make Canadian exports into the US cheaper. As you folks watch the White House trying to figure out what kind of policy and what statements are emerging so that you can do your jobs and give advice to your clients, we saw on one day Donald Trump, well, in the joint address to Congress,

say, we're gonna have a little adjustment, right? Like a minor adjustment in the economy. And then he was asked on Air Force One, are we gonna go into a recession? And he hesitated and said, might be a brief one. And then yesterday he said, oh no, it's gonna be all guns blazing, it's gonna be fantastic, we're gonna have the best economy in the history of the universe.

Which of those three statements are we supposed to take at face value? That is an excellent question. One I do not know the answer to. I do think that if this all goes according to the direction it looks like it's going to, we probably will see slower US economic activity. We've already seen US consumers in terms of their confidence. Their confidence has come down significantly. We have seen stock market correction recently. Now it's wobbling along but nonetheless it has had some

pretty horrifying days recently as investors take a look to see whether or not does this spell recession and what does that mean for all the companies I've invested in. We've seen earnings calls where some of these companies are saying, you know what, we're a little bit worried here about how we're going to be able to make our earnings targets and removing them down. So all of that to say, you're starting to see this shaking at the foundation,

I would say, for the US economy. Now, we know the administration wants to get their corporate taxes down. Can they do that? I don't think they're going to get the money from this tariff regime to offset the impact on their budget balance. So maybe they're not going to get to 15 percent and if that's the case what does that mean for companies when they're

thinking about investment and thinking about the returns on those investments. So I don't know that, I mean adjustment is, I'm not really sure what that refers to, but I do think that you will have substantially slower growth than you otherwise would have had in this environment of uncertainty. OK, in our last few minutes here, let's talk about, because we're about to get a new prime minister in this country, and he is no doubt considering

his options for backstopping the economy and the problems that we're having and are about to have as a result of all of the craziness coming out of the United States right now. What are his options? What can Mark Carney do? Well I think he can push forward with working with the provinces to alleviate these inter-provincial trade barriers. We know that the government has announced that they are going to be giving the Export Development Bank $5 billion in order to increase Canadian companies' ability to export to other countries. Is that real money? $5 billion, is that considered real money? Well, it certainly is. I think it's sufficient to get some companies, smaller companies in particular, in the market. Two trillion dollar economy, so five billion is a bit of a drop in the bucket.

But having, you know, we have also incentive from our trading partner letting us, the unreliable trading partner. And I think as well, just getting this it could build over time but certainly you know step in the right direction and a nod I think to Canadian businesses that hey we have 15 free trade agreements 1.6 billion customers in the world conceivably how can we move towards those markets and as I said earlier you know 77% of our experts going to the States suggests that we're we haven't moved a lot in that direction so far. So will that... we also have some support for the

consumer segment with the work sharing EI. So, you know, all of these things are there I think to signal to Canadians are there, I think, to signal to Canadians, whether they're workers or they're businesses, that there are other avenues that we can tap and that there will be some supports in place to get us through this hump. Now if tariffs just keep ratcheting up, I don't know that those are, as you say, it might be just a spit in the bucket. But assuming that we aren't going to go through a period of ratcheting up tariffs, which

is a grand assumption, I will say, at this stage, I think those are the types of moves that we're going to see support from the governments as we go forward. You ever seen stupider policy in your life come out of the United States? It's a little surprising. Surprising.

OK, you're just going to go with surprising. OK, I understand. That's the diplomat, Don Desjardins from Deloitte, Canada, joining us tonight here on TVO. Don, thanks a lot for your time. Thank you.