Canada is bracing for significant economic upheaval as U.S. President Donald Trump continues to threaten tariffs against key Canadian exports including aluminum, steel, auto parts, and pharmaceuticals. This growing trade conflict has ignited intense debates about how Canadian leaders and industries should respond to American pressure. Trump’s administration's potential tariffs could have sweeping repercussions not only on trade relationships but also on various sectors within Canada, particularly housing and construction.
John Manley, the former deputy prime minister of Canada, who was pivotal in managing the country's relationship with the U.S. during his political career, has weighed in on the dire circumstances facing the Canadian economy. "The consequences of a full-scale trade conflict would be severe... it would sharply reduce exports and investment," stated Manley, who is also the current chairman of Jeffries Securities, emphasizing the importance of proactive economic strategies.
The alarm bells are particularly loud among homebuilders across Canada. The Canada Mortgage and Housing Corporation (CMHC) has recently released its housing starts report, showing a modest 3% increase since last year, yet the future is clouded with uncertainty due to possible tariffs. Kevin Hughes, CMHC's deputy chief economist, expressed serious concerns about how tariffs could impact inflation and labor markets, stating, "One is: how this is going to impact inflation on goods... what are the consequences on the labour market?" This sentiment reflects fears of rising costs for housing and materials if tariffs come to fruition.
Scott Andison, CEO of the Ontario Home Builders' Association, reiterated the urgent need for predictability and stability within the construction industry during this tumultuous period. "Builders need predictability and they need stability when it come to these projects," he said, underlining the risks associated with undertaking new housing developments amid such uncertain trade conditions.
Current market dynamics reveal a buyer’s market attributed to recent interest rate changes. Yet, the imminent tariffs could discourage buyers from committing to new homes. Housing expert Clay Jarvis from NerdWallet elaborated, "If you have something like these tariffs and any sort of associated job losses... it’s just going to put another dent..." This quote captures traders' anxieties as dwindling consumer confidence threatens to dampen demand.
Canadian supply chains are deeply intertwined with those of the U.S., meaning many products and materials traverse the international borders multiple times during production. Therefore, impending tariffs could drive costs up for Canadian builders significantly. Currently, steel and aluminum are facing potential tariffs set to commence on March 12, threatening to make products less appealing to both Canadian consumers and builders alike. The effect of such tariffs would likely reverberate through the economy, making domestic products increasingly expensive.
Economic projections suggest severe consequences should the tariffs be implemented. Tiff Macklem, Governor of the Bank of Canada, cautioned about the broader implications of trade conflicts and suggested the impact of tariffs could culminate in higher inflation rates and decreased economic growth: "The economy would eventually start to grow again, but from a lower starting point." His insights hint at the structural changes the Canadian economy may endure should trade tensions escalate.
Macklem elaborated on how tariffs could lead to reduced household incomes due to lower exports, which would, in turn, diminish consumer spending. He noted the risk of growing inflation as prices for imports would likely surge alongside potential declines in investment as businesses brace for tougher economic conditions. The Bank of Canada has emphasized the need to balance these inflationary pressures with the realities of declining demand.
The ripple effects of this trade conflict are monumental, affecting the Canadian dollar's value and thereby raising costs for imported goods across the spectrum. With low growth trajectories due to reduced consumer demand, businesses could see their investment plans shelved, creating cycles of economic contraction.
This precarious backdrop has significant repercussions for the housing market. The push for government intervention could become louder, with many stakeholders calling for measures to alleviate the pressures on domestic builders, as Andison pointed out, noting how government fees and taxes comprise about 30 to 33% of the overall costs of homes today. Such disruptions could stall the Canadian housing recovery, accentuating the importance of maintaining fluid trade relations.
With the winds of uncertainty blowing between Canada and the United States, the coming weeks could define the future of Canadian trade and economy. Policymakers on both sides of the border must move swiftly to negotiate terms and explore avenues to mitigate economic fallout before tariffs become reality and significant changes to the Canadian economic fabric occur.