Trade uncertainties create two potential paths for economy

The threat of a trade war has created two potential outcomes for the Canadian economy, says Avery Shenfeld, managing director and chief economist with CIBC Capital Markets. 

“One quite negative, if we can’t get ourselves away from this trade war, and one that looks decidedly positive for later this year and into 2026 if the trade threat goes away,” he said in a March 14 interview. 

Listen to the full conversation on the Advisor To Go podcast, powered by CIBC Asset Management.

According to Shenfeld, while the 30-day pause on tariffs provides some relief, sectors that need access to the U.S. market, like automotive, assembly and machinery, will still face difficulties in the interim.

Further, if there is a more protracted trade war that lasts a couple of years, and Canada faced 25% tariffs on all non-energy exports and 10% on energy, for instance, then there is a possibility of a significant recession in the Canadian economy, he said.

“If it’s lifted and those clouds go away, then the momentum of the Canadian economy will really go back to where we looked in the second half of last year, where the interest rate cuts we’ve had were poised to stimulate domestic spending.” 

Regardless, Shenfeld said that while trade uncertainties will put a dent on growth, Canada will still “see some rays of sunshine emerging later in the year.” He forecasted growth at about 1% in the second half of 2025.

“For investors, if the trade war goes away, there’s room for a substantial rally in Canadian equities, for some solid performance by Canadian business, beginning late this year and into 2026,” he said.

Shenfeld warned that investors should still take trade war uncertaintines into consideration and position portfolios conservatively. Also, focus on sectors of the equity market that aren’t exposed to exports, and that could benefit from low interest rates, like utilities.

“Having a portfolio that has some weighting in the U.S. would be helpful in a trade war,” he said. “Within the Canadian market, there are companies that have operations on both sides of the border that may have some wins to offset some of the strains on the Canadian economy.”

Further, the bond market could also “provide some potential shelter,” he noted. “In the event that we do fall into a trade war recession, we would expect that interest rates will come down, [and] that will provide some reasonable returns to government bonds and high-grade corporate bonds. A diversified portfolio always makes sense for investors.”

Finally, while there has been some weakness in the loonie, Shenfeld still expected to see a recovery “should Canada successfully engage with the U.S. and dial down this tariff threat in the coming months.”

He added: “Really, that’s the decisive factor, and everything else will be secondary to those developments between [the] U.S. and Canada on the trade side.”

This article is part of the Advisor To Go program, sponsored by CIBC Asset Management. The article was written without input from the sponsor.

Suzanne Yar Khan

Suzanne has worked with the Advisor.ca team since 2012. She was a staff editor until 2017 and has since worked as a freelance financial editor and reporter.