Canada’s economy is showing impressive resilience, but the looming shadow of Donald Trump’s threatened tariffs could change everything. The latest GDP numbers suggest that Canada ended 2024 on a strong note, but the real question is whether this momentum can survive a potential economic blow from its largest trading partner.
Statistics Canada reported that the economy grew at an annualized rate of 2.6 percent in the fourth quarter, surpassing expectations from analysts, including the Royal Bank of Canada’s projection of just 1.5 percent. A key driver of this growth was household spending, which saw its strongest expansion since mid-2022. Canadians opened their wallets for big-ticket items like trucks, SUVs, and telecommunications services, signaling a confident consumer base. Residential construction also rebounded, posting its most significant increase since early 2021. Business investment surged as well, with machinery and equipment investment alone jumping by 17.9 percent.
These are the signs of an economy that, at least for now, is on solid footing. But with Trump’s proposed tariffs set to take effect in a matter of days, the optimism could be short-lived. The export sector, which played a crucial role in the fourth quarter’s growth with a 1.8 percent increase, would be the first casualty of new trade barriers. While crude oil and bitumen exports led the way in 2024, the entire trade landscape could shift dramatically if tariffs hit.
The Cost of Uncertainty
One of the biggest threats tariffs pose is not just immediate economic damage but the chilling effect on business investment. Companies have only recently started showing signs of renewed confidence, with an eight percent increase in business investment last quarter. But as RBC’s assistant chief economist Nathan Janzen pointed out, even the threat of tariffs is enough to make businesses reconsider expansion plans. If these tariffs become reality, businesses may freeze hiring and capital investments, effectively stifling Canada’s economic recovery before it fully takes hold.
Tu Nguyen, economist at RSM Canada, captured the stakes well: “Canada’s economy shows promising growth in the last quarter of 2024 and is poised to have a robust 2025 given price stability, decreasing interest rates, as well as the sales tax holiday. Without tariffs, Canada will enter 2025 on solid footing.”
But with tariffs? That’s another story altogether.
How Will the Bank of Canada React?
The potential tariffs also complicate the Bank of Canada’s next move. Heading into 2025, there was optimism that rate cuts could help sustain growth, but Trump’s trade threats introduce new uncertainty. If tariffs take effect, the central bank will almost certainly have to consider additional rate cuts to cushion the blow. If they don’t, and the economy continues its current trajectory, the Bank may hold off on further easing.
Janzen put it bluntly: “The threat of U.S. tariffs remains significant, and even if not actually implemented could choke off early signs of recovery in business investment.” If the tariffs materialize, they could be the deciding factor that forces another rate cut.
A Pivotal Moment for Canada’s Economy
Canada’s economy has been proving its resilience, but it is at a crossroads. The fourth-quarter numbers paint a picture of a country bouncing back, fueled by consumer spending, rising investment, and a strong export sector. But all of that progress is at risk if Trump follows through on his tariff threats.
The lesson here? Trade uncertainty can be just as damaging as actual economic downturns. If businesses start second-guessing their investments and consumers brace for higher prices, the damage begins long before any tariffs take effect. For Canada to keep its momentum going, it needs stability—something that is in short supply with a volatile U.S. administration making economic decisions based on political calculations rather than sound policy.
Canada’s economy has proven it can grow under pressure. The real question is whether it can withstand the storm that may be just over the horizon.
