Canada’s economy is facing significant headwinds as escalating U.S. tariffs and retaliatory trade measures drive a sharp contraction in economic activity. Recent Purchasing Managers’ Index (PMI) data reveals a deepening downturn across both services and manufacturing sectors, with business sentiment plummeting to multi-year lows.

Economic Contraction in Key Sectors

• Services PMI Plunge: The S&P Global Canada Services PMI dropped to 41.2 in March 2025, its lowest level on record, down from 46.6 in February. This marks the fourth consecutive month of contraction, driven by reduced client spending and tariff-related uncertainty.
• Manufacturing Downturn: The Manufacturing PMI fell to 46.3, a 15-month low, with new orders declining at the fastest pace since May 2020. Export activity slumped as U.S. tariffs disrupted supply chains and raised costs for critical industries like automotive and steel.

The Composite PMI Output Index sank to 42.0, the steepest contraction since June 2020, reflecting synchronized declines in services and manufacturing output.

Tariffs: A Catalyst for Economic Uncertainty

U.S. President Donald Trump’s tariff policies—including a 25% levy on imported vehicles and broader measures targeting steel, aluminum, and consumer goods—have destabilized Canada’s export-reliant economy. With 75% of Canadian exports destined for the U.S., businesses face:

1. Soaring Input Costs: Input price inflation accelerated to a 2.5-year high (63.6 in manufacturing), squeezing profit margins.
2. Supply Chain Disruptions: Over 40% of firms reported delays or cancellations in investment plans due to unpredictable tariff policies.
3. Reduced Demand: New export orders in services collapsed to a near-decade low (38.0), while manufacturing export demand fell sharply.

Business Sentiment: Recession Fears and Strategic Shifts

• Recession Expectations: 32% of businesses now anticipate a recession within the next year, up from 15% in late 2024. Consumer confidence has similarly eroded, with 66.5% of households bracing for economic decline.
• Hiring and Investment Freezes: Employment intentions hit pandemic-era lows, while capital expenditure plans were scaled back across sectors.
• Domestic Market Focus: Companies are pivoting to Canadian suppliers and non-U.S. markets to mitigate risks, though only 30% believe these strategies will offset tariff impacts.

The Bank of Canada’s Business Outlook Survey fell to -2.14 in Q1 2025, reflecting widespread pessimism. Firms expect to raise selling prices within six months to cope with higher costs, risking further inflationary pressures.

Policy Responses and Economic Outlook

The Bank of Canada faces a delicate balancing act:

• Rate Cut Expectations: Markets price in a 66% chance of an April rate cut (to 2.5%), the eighth consecutive reduction, to stimulate demand.
• Fiscal Support: Targeted relief measures, including tariff remission processes for businesses, aim to cushion the blow but may struggle to offset broader trade disruptions.

While the Conference Board of Canada predicts a potential recovery in late 2025 if tariffs ease, short-term pain is inevitable:

• 160,000 jobs could be lost, predominantly in manufacturing.
• Real exports may drop by 30%, with motor vehicle exports halving.

Conclusion

Canada’s economy is navigating a perfect storm of protectionism and uncertainty. Tariffs have not only stifled growth but also eroded confidence, pushing businesses and consumers toward precautionary measures. The path to recovery hinges on resolving trade tensions and diversifying export markets—a daunting challenge for an economy deeply intertwined with its southern neighbor. With inflationary pressures mounting and recession risks rising, policymakers face an uphill battle to stabilize sentiment and reignite growth.