TD Economics warns of potential trade disputes as Canada braces for impact from US presidential election
The outcome of the US presidential election poses the most significant downside risk to the Canadian economy, according to a new report from TD Economics, according to BNN Bloomberg.
Released on Tuesday, the report outlines Canada’s economic outlook in the near term, noting that the country “narrowly avoided a technical recession” last year and has shown “surprising resiliency” so far in 2024.
Despite this resilience, consumer spending is expected to slow, although other factors might mitigate this decline.
The report emphasizes that the US election could have a substantial impact on Canada. Although Canada signed the USMCA deal during the previous Trump presidency, the report suggests this agreement does not fully protect Canada from potential trade disputes.
The report states, “This will be of greater importance since Canada has increased imports from Mexico and exports to the US since 2020, while reducing exposure to China.”
It further explains that Canada is now more susceptible to US protectionist trade policies, which could hinder the anticipated GDP offset from Canadian business investment and trade.
While Canada avoided a recession last year, the report notes that consumers, despite being constrained by debt, have continued spending on activities such as dining out, travelling, and entertainment.
This trend has been supported by population growth that has exceeded expectations, creating a “bigger base for spending.”
However, the report questions how long this spending can continue, particularly with new government restrictions on non-permanent residents expected to curb population growth in the coming months, potentially acting as a headwind for consumer spending.
The report also highlights concerns for Canadian homeowners facing higher interest rates when renewing their mortgages, despite expectations that the Bank of Canada will lower rates in the future.
TD Economics remains optimistic, however, suggesting that a combination of business investment, government spending, and increased exports could offset the anticipated slowdown in consumer spending.
The report points to developments such as new EV and battery plants, purpose-built rental housing, and increased oil exports due to the expanded Trans Mountain pipeline as potential growth drivers.
Regarding population growth, the report indicates that while Canada’s population growth is “still running hot,” it is expected to peak and slow down by 2025, driven by federal efforts to reduce the number of non-permanent residents.
The report suggests that international students may be the first affected by these changes, as constraints on the issuance of study permits by educational institutions come into effect.
TD Economics questions whether the federal government will meet its goal of reducing the share of non-permanent residents to five percent by 2027.
The report forecasts that net outflows of non-permanent residents could reach 450,000 by the end of 2027, bringing Canada closer to this target but still shy by about one percent.
The timing of these reductions could influence the Bank of Canada’s policy decisions, with the report noting that the Bank appears skeptical of the government’s ability to meet its target, projecting that Canada’s population growth rate may remain elevated in the medium term.
