Reverberations from the U.S. election will be felt in the Canadian economy, potentially even driving it into recession, economists at Desjardins Group are warning.
In a new report, the firm’s economists revised their economic forecasts for both Canada and the U.S., based on the results of the election, which they expect to result in tax cuts, deregulation, tariff hikes, and reduced immigration.
“This could have some positive effects on [U.S.] growth in 2025, but we assume that the more negative impacts, especially as a result of higher tariffs, will probably start being felt in 2026,” the report said — including higher-than-expected inflation.
The economic effects of these policies are also expected to soon spill over the border.
“Our research suggests the impact on Canada could be swift and severe, potentially risking a recession in the worst-case scenario,” it said, adding that the downside risks are compounded by the Canadian government’s planned curbs on immigration.
“Add to this the impending squeeze on household budgets from the wall of mortgage renewals in 2025 and 2026, and we have been forced to revise our outlook for the Canadian economy meaningfully lower starting in 2026,” it said. “We expect the Bank of Canada will do the same.”
Much of the rest of the global economy will also be hit by higher U.S. tariffs, and likely retaliation from other governments, it said. Again, the negative effects will likely arise in 2026.
The firm’s economists warned that there are downside risks to its gloomier outlook too, given the heightened policy uncertainty that accompanies the new U.S. administration.
Additionally, inflation risks remain, it said, and labour disputes could increase, putting even more upward pressure on inflation, and weighing on economic growth.
Stiffer inflation and deteriorating U.S. government finances would also boost U.S. bond yields, which “could also mean Canadian bond yields won’t fall as much as expected,” it said. “That would result in less-attractive mortgage rates that could make it harder for Canadian homeowners to renew their mortgages.”
There are also ongoing geopolitical risks accompanying the economic concerns.
“The global economy, financial markets and commodity prices could adopt an even more unstable trajectory if the geopolitical and economic climate deteriorates further,” the report said. “Even if we ignore these risk factors, financial markets seem ripe for a correction after the exuberance that pushed the valuations of many risk assets to extreme levels this year.”
As a result, Desjardins has revised its financial market forecasts too.
“First, we expect there to be less room for interest rate cuts in the United States. In contrast, we’re predicting more rate cuts in Canada in response to bigger economic challenges,” it said, noting that this will weigh on the Canadian dollar as monetary policy diverges.
“Finally, we also revised our forecasts for commodity prices downward as global demand appears to be weaker than expected, while supply will probably ramp up due to increased production in the United States, especially with respect to oil,” it said. “We also think the more uncertain global economic outlook may cause stock markets to lose their upward momentum in 2025.”