Trump’s tariff turmoil could damage Canada’s economy for years

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The trade uncertainty sparked by Donald Trump’s tariff threats could wreak structural damage to Canada’s economy that won’t be easy to reverse, warns Royal Bank of Canada.

Statistics Canada’s survey on business intentions Wednesday showed a slight rebound in planned capital expenditures, but not nearly enough to reverse the slump investment has been in for the past two decades, said RBC senior economist Claire Fan, in a report yesterday.

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What’s worse is the survey, taken September to January, largely misses the escalation in trade tensions that have occurred since Trump took power.

Since then the outlook has become “decidedly cloudier,” Fan said. “Investment plans have likely already been dialled back, particularly in trade-exposed sectors like manufacturing.”

Executives at two of Canada’s Big Six banks said this week that clients are taking a more cautious approach to capital spending with the threat of crippling tariffs hanging over the economy.

“People are holding their powder dry and waiting to see what’s going to happen,” Phil Thomas, Bank of Nova Scotia’s chief risk officer, said on a call with analysts Tuesday. “As a result, whether it’s on the retail side, the corporate side or the commercial side, you kind of see a bit of stasis right now. It’s causing people to sort of pause and think about what they’re going to do.”

Even before this latest wave of challenges, business investment was nothing to write home about.

Wednesday’s survey showed private businesses planned to spend 5.5 per cent more on investment in 2025, with much of the increase coming from goods-producing sectors, particularly manufacturing.

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Much of this growth, however, was the result of higher prices, said Fan. “Real” investment that excludes price changes was down 2.3 per cent from a year ago and 2.2 lower than in 2019, before the pandemic.

Real investment has also lagged the rapid growth in population and workforce so, on a per-worker basis, it has been contracting.

A shortage of money isn’t the problem. RBC says non-financial corporations, as a whole, “are sitting on a stockpile of cash.” By its count firms were holding $992 billion in cash and deposits as of the fourth quarter of 2024, or 32 per cent of Canada’s gross domestic product, compared to 26 per cent of GDP in 2019.

The uncertainty Trump’s tariff talks has unleashed since then isn’t going to persuade businesses to let go of those liquid assets anytime soon, said Fan.

“Just like households who tend to save more during the onset of economic downturns for contingency reasons, rising uncertainty about the future Canadian trade backdrop also increases the risk that businesses keep holding on to their liquid asset instead of leveraging it to drive productivity-enhancing advancements,” she wrote.

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Slumping productivity has been an ongoing problem in Canada, so much so that a year ago the Bank of Canada declared a productivity “emergency.”

“Overall, another round of weak investment spending risks extending Canada’s decades long productivity crunch, turning trade threats in the near-term into structural damage in the economy that can’t be easily reversed,” warned Fan.

Today’s trade turmoil threatens to not only curb investment decisions and GDP growth now, but also have “far-reaching negative impact on the economy further down the road,” she said.

“The structural underperformance in productivity growth, due to persistent under-investment basically means there will be a speed limit on how fast the Canadian economy can growth in the long run, beyond the next four years,” she said.

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The good, old Keystone XL pipeline is back in the news, after U.S. President Donald Trump told the world he wants it built “NOW!” The doomed cross-border project that cost the Canadian oilpatch billions when it was cancelled in 2021 by the former administration is still the subject of an ongoing $1.3-billion lawsuit by the Alberta government.

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South Bow Corp., TC Energy Corp.’s pipeline spinoff, says it’s moved on, but a former Alberta premier had an interesting idea — use Keystone and Trump’s thirst for oil as a bargaining chip.

“We need leverage to deal with Trump. He is indicating one area where we have unused leverage and we should take ‘yes’ for an answer,” said Jason Kenney. Read more from the Financial Post’s Meghan Potkins.

• Today’s Data: Canada current account balance, United States gross domestic product, durable goods orders, pending home sales
• Earnings: Canadian Imperial Bank of Commerce, Royal Bank of Canada, Toronto-Dominion Bank, Quebecor Inc., Pembina Pipeline Corp.

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Talking about money can be tough for couples of any age, but it is especially difficult for younger generations, according to surveys. Read on for why these conversations are important and how best to open lines of communication.

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Calling Canadian families with younger kids or teens: Whether it’s budgeting, spending, investing, paying off debt, or just paying the bills, does your family have any financial resolutions for the coming year? Let us know at wealth@postmedia.com.

McLister on mortgages

Want to learn more about mortgages? Mortgage strategist Robert McLister’s Financial Post column can help navigate the complex sector, from the latest trends to financing opportunities you won’t want to miss. Plus check his mortgage rate page for Canada’s lowest national mortgage rates, updated daily.

Financial Post on YouTube

Visit the Financial Post’s YouTube channel for interviews with Canada’s leading experts in business, economics, housing, the energy sector and more.

Today’s Posthaste was written by Pamela Heaven, with additional reporting from Financial Post staff, The Canadian Press and Bloomberg.

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