In its latest assessment of the Canadian economy in October, 2016, the Bank of Canada identified several areas in which the Canadian economy continues to be vulnerable. Now, with a new U.S. administration about to take hold, Canadians are even more concerned about their economic future.Already, Trump designated- economic cabinet members are taking a hard line on trade issues that could impact Canadian industries. Although the degree of nervousness in Canada regarding U.S. policy is contained, the concerns are real.

Let us look at the outlook for the Canadian economy, prior to the U.S. election results. The Bank of Canada forecasts, call for a rather mediocre growth path for 2017 and 2018(Table 1). Of particular concern to Bank officials is the underperformance in exports. In 2017 net exports are expected to be a slight drag on the economy and the outlook for 2018 calls for some improvement to a slight positive contribution of 0.5 per cent to GDP growth. As the Bank argues international trade has been weak which explains about half of the shortfall in Canadian exports; the remaining factors are related to the inability to recover fully from the 2008 crisis. Other areas of weakness continue to reside in business fixed investment and overall government expenditures. Last, but not least, the Bank is well aware of the vulnerabilities in the household sector associated with the record levels of household debt combined with an overheated real estate.

Table 1 Contribution to Annual GDP Growth (percentage points)

Accordingly, the Bank expects that inflation will still trend below target so long as the economy is below full capacity. Hence, the Bank is biased towards maintaining the current bank rate and adopts a monetary policy that diverges from that of the Federal Reserve. In other words, the vulnerabilities have overtaken any reason to tighten monetary policy; in fact, one could make an argument that the bias should be in the direction of further easing.

Enter Mr. Trump

There are Canadian-U.S. trade irritants that will likely become more pronounced under a Trump administration. One such long time simmering issue is trade in softwood lumber. There will likely be little desire by the new administration to reach a deal with Canada to solve this dispute. In agriculture, we could expect the United States to reactivate measures to protect beef farmers and to challenge Canada’s supply management of dairy products. Also, a tough Buy America policy could shut out many Canadian firms from bidding on U.S. contracts in several different sectors.

On a broader scale, the America First policy risks launching a global trade war in which both American and Canadian economies will suffer. In the words of Gordon Ritchie, a member of the Canadian team which negotiated the 1989 Canada-U.S. free-trade agreement. ‘it’s going to be a scary, scary ride” when the Trump administration takes aim at its major trading partners.

So, where does this leave Canada? Aside from speculation on future U.S trade policy, Canadian growth will be at the 2 per cent rate, even if there is a pickup in U.S. economic activity. The introduction of new risks associated with a U.S. government that is bent on taking a hard line on trade issues, only accentuates the vulnerabilities we face.