When the U.S. unleashed a trade war in January, many observers were quick to warn of the risk of recession. Given current sluggish economic growth—Canada’s GDP growth is projected at just 1.8 percent for 2025—the Bank of Canada estimated that a 25 percent tariff would reduce GDP by 3 to 4 percentage points.
President Trump campaigned extensively on using tariffs as a tool to reduce the U.S. deficit and support tax cuts. During his first term in office in 2018, Trump imposed tariffs on Canadian steel and aluminum, which remained in effect throughout the renegotiation of the USMCA.1 As such, the imposition of some form of tariffs in March may not have come as a surprise.
Given this backdrop, is a recession imminent? As a reminder, a recession is often defined as two successive quarters of declining GDP. For now, Canada has some economic buffers in its favour: low interest rates, low inflation and a weak Canadian dollar, which may support exports by making them more affordable to international buyers or help offset the impact of potential tariffs on U.S. buyers. The federal government is also aware of the ramifications and, as we saw during the pandemic, may provide fiscal and monetary support to mitigate a prolonged downturn. Additionally, the tariff situation continues to evolve.
What Should Investors Do?
Without a doubt, a sweeping tariff would put downward pressure on the economy. Yet, even if tariffs slow economic growth, investors should maintain perspective. Why?
Markets and economies are not the same. Seasoned investors remember that markets don’t always reflect the state of the economy. At times, economic and stock market performance can diverge. Market composition plays a role. The S&P/TSX is heavily weighted in financials (33%), energy (17%) and metals and mining (12%).2 While these sectors are integral to the economy, they have an outsized influence on the index. Notably, the financial services sector, as one example, is expected to see minimal direct impact from tariffs, though an economic slowdown will still affect areas like loan loss provisions. As portfolio managers, we continue to assess the potential impact on investments.
Economic cycles are normal. While recessions have become less frequent in recent decades due to fiscal and monetary stimulus, economies, like financial markets, naturally expand and contract over time. It’s unrealistic to expect perpetual economic expansion; contractions are a natural part of the cycle and are often necessary to correct inefficiencies and spur innovation and growth.
Equity markets trend upward over the longer term. Despite financial crises, a pandemic, supply chain disruptions, war—and even recessions—the longer-term market trend has been upward. Between 1970 and 2024, we’ve seen all of these adverse events; yet, the S&P 500 delivered positive returns in 80 percent of one-year periods and 90 percent of 10-year holding periods.3 The S&P/TSX delivered positive returns in 75 percent of one-year periods and 100 percent of 10-year holding periods.4
Moreover, the economy may not always react as expected—especially in extreme scenarios. More recently, we saw this following the pandemic, which many anticipated would push us into a sustained recession. During periods of economic uncertainty, careful analysis and strategic investment selection become even more important. This is where our support as portfolio managers shines through. For a deeper discussion, please contact us to get you in touch with a wealth advisor at Precision Wealth Management or a portfolio manager at Q Wealth.
1. USMCA is the United States-Mexico-Canada (freetrade) Agreement that took effect on July 1, 2020;
2. At 01/31/25:https://www.spglobal.com/spdji/en/indices/equity/sp-tsx-composite-index/;
3.BMO Private Wealth Insights January 31, 2025, https://privatewealth-insights.bmo.com/en/;
4. S&P/TSX Composite Index total return 1970 to 2024.
Recessions in Canada Over 50 Years
Source: CD Howe Institute “BusinessCycles”
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