Tariff Pause: What’s Next? Economics and Markets Impact

Lingering risk of trade tariffs being introduced by the U.S. and Canadian governments has injected uncertainty into the economic and investment outlook, though there may be long-term opportunities despite financial market volatility.

In a whirlwind of trade policy, U.S. President Donald Trump went from ordering a 25% tariff on all Canadian goods and a 10% duty on Canadian energy to pausing them on Monday for 30 days. The threat of U.S. tariffs and retaliation by Canada has upended economic projections and caused businesses and investors to revisit their strategies.

The potential impact of sweeping tariffs – on GDP, stocks, currency, and yields – was the focus of the “US-Canada Tariffs: Economics and Markets Impact” panel. Camilla Sutton, Managing Director and Head of Equity Research for Canada and the U.K. led the conversation that featured Michael Gregory, BMO Capital Markets’ Deputy Chief Economist, and Brian Belski, Chief Investment Strategist of BMO Capital Markets.

If you were to sum up how people are feeling about the week in one word, it would be “uncertain,” said Michael Gregory. And that uncertainty makes it difficult to develop economic forecasts. To understand the scope of the possible impact, BMO’s estimates for Canada’s GDP in 2025 went from a forecast for 1.9% growth, down to zero growth before rising to 1.7%, as tariffs shifted from being a risk to being a certainty and then back to being a risk again. “We decided we’re not going back to where we were before,” said Gregory. “That’s because there’s a lot more uncertainty out there now that tariffs have been revealed.”

Gregory flagged pronounced risks ahead of April 1. President Trump has asked various government departments and agencies to assess all aspects of U.S. trade policy. Their findings on April 1 could result in a wide range of additional tariffs.

There’s no question that Canada, where exports to the U.S. account for almost 20% of GDP, will be significantly more impacted by tariffs than the U.S., where total exports to Canada account for well under 2% of GDP, noted Gregory. Tariffs would potentially impact all sorts of Canadian industries, including energy, agriculture, auto production and broader manufacturing. And the strength or weakness in one major sector could send ripples across all parts of the economy.

One way to lessen the blow is to reduce interprovincial trade barriers, which could add anywhere between 4.5% and 8% to Canada’s GDP over the long run, said Gregory. While there are a variety of regulations that would need to be reworked, breaking down those barriers would be “powerful,” he noted. “What we’re facing might compel us to make those changes.”

At the same time, Canada needs to diversify globally, he said. In the latter half of the 2010s, the country signed free trade agreements with Europe and countries in the Pacific Rim, so there are other markets to consider. “We don’t focus on that because it’s easier to focus on the U.S., but now is the time we need to look at those options.”

While the stock markets reacted negatively to the initial news about U.S. tariffs, as Brian Belski explained, “it could have been a little worse.” Less than two trading days following the 30-day reprieve, the S&P/TSX Composite Index had almost erased its losses.

All that’s to say that markets may have overreacted to the tariff news, said Belski. He pointed to stocks of auto component makers as an example of how market volatility can lead to interesting opportunities for disciplined investors. Stocks in the sector had already reflected expectations for tariffs, falling by 6% prior to Monday. It then fell 7% on Monday only to rebound by as much as it lost. “There was a clear market overreaction to this, and we know that because auto component companies in Canada are some of the best in the world,” he explained.

This kind of pullback presents long-term opportunities, he said, adding that investors have to stay disciplined in volatile situations. “It’s like what they teach children at school for a fire – stop, drop and roll,” he said. “That’s my advice for investors. Do not react but instead act and employ discipline.”

BMO is sticking to its target of 28,500 and earnings of $1,600 for the S&P/TSX and 6,700 and $275 in earnings for the S&P 500, noted Belski. He continues to believe that the U.S. stock market is in the midst of a 25-year secular bull market, but that doesn’t mean that you can’t have cyclical bear markets. Canada, he added, is “coming along for the ride” and provides great value and cyclicality relative to the U.S.

Still, he explained, it’s going to be bumpy, but the choppiness presents entry points in the market, especially for those buying good businesses. “Worry more about the companies versus the market,” Belski said. “Concern yourself more about the implicit bottoms-up view on the stocks versus trying to make the big market call.”

Gregory expects that uncertainty over tariffs could continue to weigh on the Canadian currency. As for interest rates, Gregory said he is forecasting that the Bank of Canada will likely cut more to help support the economy, but if there are tariffs, they’ll have to slash even further. The markets are predicting that Canadian yields will remain well below American ones for some time, especially if tariffs do materialize. “In the worst-case scenario with tariffs, we’d likely see those spreads get meaningfully more negative,” he said, which would continue to weaken the Canadian dollar.

“We can hope for the best, but you have to plan for the worst a little bit, too, so we’re not caught off guard,” Gregory explained. “Yes, America has a trade deficit with Canada, but it’s mostly energy, and it has a trade surplus in manufactured goods. That’s a relationship that works.”

For Belski, it’s about controlling what you can by being mindful and disciplined. “Now is not the time to be hitting home runs. Now’s the time to be hitting singles and doubles ... take two steps back and look at the mosaic of the U.S. and Canadian stock markets. Relative to other areas in the world, these remain the most fundamentally sound, period.”

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