Today’s Labour Force Survey for January surprised on the high side as businesses expanded employment despite threats of a tariff war with the US.

According to Statistics Canada, employment increased by 76,000 last month, bringing the jobless rate down to 6.6%. Economists in a Bloomberg survey expected a smaller rise of 25,000 jobs, with the unemployment rate rising to 6.8%. This pattern of stronger-than-anticipated employment data has continued since November, with increases in both part-time and full-time work.

The employment rate—the proportion of the population aged 15 and older who are employed—increased 0.1 percentage points to 61.1% in January, marking the third consecutive monthly increase. These recent increases follow a period in which employment growth had been outpaced by population growth, resulting in the employment rate declining 1.7 percentage points from April 2023 to October 2024.

Manufacturing employment rose by 33,000 (+1.8%) in January, following an increase of 17,000 (+0.9%) in December. The increase in January was concentrated in Ontario (+11,000; +1.3%), Quebec (+9,700; +1.9%), and British Columbia (+8,700; +4.9%). Despite the gains in the past two months, overall employment in manufacturing changed little year over year in January.

Employment in professional, scientific, and technical services rose in January (+22,000; +1.1%), the second increase in the past three months. On a year-over-year basis, employment in the industry was up by 66,000 (+3.4%).

Employment gains led by manufacturing in January

Employment in construction increased by 19,000 (+1.2%) in January, building on a net increase of 47,000 (+2.9%) recorded from June to December 2024. On a year-over-year basis, employment in construction was up by 58,000 (+3.6%) in January.

Employment also increased in accommodation and food services (+15,000; +1.3%), transportation and warehousing (+13,000; +1.2%) and agriculture (+10,000; +4.4%) in January. At the same time, there were fewer people employed in “other services” (which includes personal and repair services) (-14,000; -1.8%).

The unemployment rate declined 0.1 percentage points to 6.6% in January, marking the second consecutive monthly decline from a peak of 6.9% in November 2024. The unemployment rate had previously increased 1.9 percentage points from March 2023 to November 2024, as labour market conditions cooled after a period of low unemployment rates and high job vacancies following the COVID-19 pandemic.

Many unemployed people are facing continued difficulties finding employment despite recent employment growth.

Wage inflation slowed markedly in the past three months, which is welcome news for the Bank of Canada. While the strength of this report has led some to speculate that the central bank will ease less aggressively, we agree that jumbo rate cuts are a thing of the past. However, monetary policy is still overly restrictive, especially if the Trump tariff threats come to fruition.

We expect the BoC to reduce the overnight rate from 3.00% today to 2.5% in quarter-point increments by the spring season. This should significantly boost Canadian housing market activity, particularly given the recent decline in mortgage rates.

Bottom Line

Employment in manufacturing may be particularly susceptible to changes in tariffs and foreign demand. The sector has the most jobs dependent on US demand for Canadian exports,

According to the Labour Force Survey, there were 1.9 million people employed in manufacturing in January, comprising 8.9% of total employment—the fourth largest sector in Canada. As a total share of jobs, manufacturing employment has decreased over the years, particularly in the 2000s, but has been more stable since 2010.

Automotive manufacturing industries are highly integrated with US supply chains; an estimated 68.3% of jobs in these industries depend on US demand for Canadian exports. People working in automotive manufacturing (which includes motor vehicle manufacturing, motor vehicle parts manufacturing and motor vehicle body and trailer manufacturing) were concentrated in Southern Ontario, particularly in the economic regions of Toronto (which accounted for 27.7% of all auto workers), Kitchener–Waterloo–Barrie (19.8%) and Windsor-Sarnia (14.8%) in January. In Windsor-Sarnia, automotive manufacturing industries accounted for 38.3% of manufacturing employment and 7.3% of total employment (three-month moving averages, not seasonally adjusted).

In January 2025, a collective bargaining agreement covered over one-quarter (26.5%) of automotive manufacturing employees. In comparison, the union coverage rate in the automotive industry was nearly twice as high in January 2002 (49.9%).

In January, food manufacturing was the most significant manufacturing subsector overall, accounting for 16.4% of all manufacturing employment. It was also the largest subsector across all provinces except Ontario. This subsector relies less on foreign demand, with 28.8% of jobs dependent on US demand for Canadian exports.

The recent acceleration in job growth may not prevent the Bank of Canada from cutting interest rates further this year. The recent wave of hiring likely won’t be enough to placate concerns that a potential Canada-US trade war could plunge the economy into a recession. Still, overnight swap traders eased expectations for a cut at the March 12 meeting to about 60% from close to 80% previously. We expect another 25 bp rate cut at the March and June BoC meetings.

The data were released simultaneously with US nonfarm payrolls, which increased by 143,000 in January as the unemployment rate was 4%. The loonie reversed the day’s loss against the US dollar, trading at C$1.4300 as of 8:34 a.m. in Ottawa. Canada’s two-year yield rose some seven basis points to the session’s high of 2.65%, with Canadian debt underperforming the US and developed markets.

Heightened trade uncertainty will continue to plague Canadian business hiring and spending decisions. Consumers, as well, will likely moderate spending in response to the uncertainty.

The Consumer Price Index (CPI) increased by 1.8% year-over-year in December, a slight decrease from the 1.9% rise in November. The main contributors to this slowdown were food purchased from restaurants and alcoholic beverages bought from stores. Excluding food, the CPI rose by 2.1% in December.

On December 14, 2024, a temporary GST/HST exemption on certain goods was introduced. The major categories affected by this tax break included food; alcoholic beverages, tobacco products, and recreational cannabis; recreation, education, and reading materials; as well as clothing and footwear.

On a monthly basis, the CPI dropped by 0.4% in December after remaining flat in November. However, on a seasonally adjusted basis, the CPI increased by 0.2%.

Prices decline for items impacted by the GST/HST break

Approximately 10% of the all-items Consumer Price Index (CPI) basket is affected by the tax exemption.

In December, Canadians paid less for food purchased from restaurants, experiencing a year-over-year decline of 1.6%. This marked the index’s first annual decrease and the largest monthly decline of 4.5%, attributed to the GST/HST break.

On a year-over-year basis, prices for alcoholic beverages purchased from stores fell by 1.3% in December, compared to a 1.9% increase in November. Monthly prices also dropped by 4.1%, nearly tripling the previous largest monthly decline for this series, which was recorded in December 2005 at 1.4%.

The prices for toys, games (excluding video games), and hobby supplies decreased by 7.2% year-over-year in December 2024, a significant drop from the 0.6% decline in November. Additionally, the index for children’s clothing fell by 10.6% in December compared with the same month in 2023.

The shelter component of the CPI grew at a slightly slower pace in December, rising by 4.5% year-over-year, following a 4.6% increase in November. Rent prices decelerated on a year-over-year basis in December, rising by 7.1% compared to a 7.7% increase in November. Since December 2021, rent prices have increased by 22.1%.

The mortgage interest cost index continued to slow for the 16th consecutive month, reaching an 11.7% increase year-over-year in December 2024, the smallest rise since October 2022, which was at 11.4%, as interest rates continued to climb. Additionally, gasoline prices rose due to base-year effects, and consumers paid more for travel services.

The central bank’s two preferred core inflation measures stabilized, averaging 2.65% year over year in October and November. Both core inflation measures rose a solid 0.3% m/m in seasonally adjusted terms and have been up at a 3+% pace over the past three months. Excluding food and energy, the ‘old’ core measure dipped to 1.9% year over year, its first move below 2% in more than three years.

The central bank’s two preferred core inflation measures declined, averaging 2.55% y/y in December. Both core inflation measures dipped m/m in seasonally adjusted terms and are up at a 3+% pace over the past three months.

Bottom Line

The inflation report for December 2024 showed a downward distortion due to the sales tax holiday, which will also affect the data for January. However, this effect will reverse in the following months. Core inflation measures are concerning, as the three-month moving average of trimmed-mean and median inflation has risen above 3.0%.

This inflation report is sufficient for the Bank of Canada to cut the overnight rate by 25 basis points to 3.0% on January 29, the date of its next decision.

A significant question remains regarding the potential Trump tariffs, which have been postponed to allow federal agencies time to analyze the trade, border, and currency policies of China, Canada, and Mexico. Trump mentioned yesterday that a 25% tariff would be implemented by February 1. However, government agencies typically do not move that quickly. Moreover, Trump aims to maintain pressure on these countries to ensure a robust response on border control and to reduce China’s influence on manufacturing in Mexico and Canada. The new administration also wishes to prevent Mexico and Canada from selling strategically important products to China.

I believe Trump wants to renegotiate the free trade deal between the US, Canada, and Mexico. Canada has already pledged to tighten its borders and has rejected Trump’s claim that it is exporting fentanyl to the US. I do not expect 25% tariffs on Canada; even if they are imposed, there would likely be Canadian retaliation, making the tariffs short-lived. This is a significant threat. Some have suggested that tariffs would compel the Bank of Canada to increase interest rates in order to combat inflation. While inflation might initially rise due to tariffs, the long-term effects would likely include layoffs and a marked slowdown in business and consumer spending, leading to increased unemployment. The Bank of Canada’s primary concern would be recession, not inflation.

Today is President Trump’s inauguration day in the US, and contrary to earlier threats, officials have announced that he will not impose new tariffs on his first day in office. Instead, Trump will issue a comprehensive trade memo directing federal agencies to evaluate trade relationships with China, Canada, and Mexico.

The president had previously pledged to impose tariffs of 10 percent on global imports, 60 percent on Chinese goods, and a 25 percent surcharge on Canadian and Mexican products. Such tariffs would likely disrupt trade flows, increase costs and prices, slow economic activity and provoke retaliatory measures.

An official stated that Trump will instruct agencies to investigate persistent trade deficits and address unfair trade and currency practices by other nations, both of which have been longstanding concerns for him. The presidential memo specifically targets China, Canada, and Mexico, urging agencies to assess Beijing’s compliance with its 2020 trade deal with the US and the status of the U.S.-Mexico-Canada Agreement (USMCA), set for review in 2026.

While the memo does not impose new tariffs, it offers temporary relief for Ottawa and other foreign capitals bracing for immediate, stiff levies from Trump. Instead, the trade policy memo suggests that the incoming administration debate how to fulfill Trump’s campaign promises of widespread tariffs on imports and increased duties for adversaries, particularly China.

A senior policy adviser characterized the memo as an attempt to present a vision for Trump’s trade agenda “in a measured manner,” suggesting that the incoming president is currently adopting a more considerate strategy regarding the topic that fueled his political campaign. The adviser explained that the memo is a framework for potential executive actions that Trump might pursue on trade.

This memo is among several executive actions Trump is expected to sign once he takes office. According to sources familiar with his plans, these actions include declaring a national emergency at the U.S.-Mexico border, rescinding directives from the Biden administration on diversity, equity, and inclusion, and rolling back President Biden’s restrictions on offshore drilling and drilling on federal land.

For weeks, some of Trump’s more traditional economic advisers, such as Treasury Secretary nominee Scott Bessent, have argued that tariffs should not be universally applied—suggesting possible exemptions for specific sectors or gradual implementation of duties. More protectionist advisers, like incoming deputy chief of staff for policy Stephen Miller, have urged Trump to adopt a more aggressive stance by declaring a national emergency, granting him broad authority to raise tariffs significantly. There are ongoing discussions about which sections of US trade law to utilize in addition to a potential emergency declaration.

The memo also alerts Canada and Mexico ahead of the 2026 scheduled review of the updated NAFTA deal signed in 2020. For months, Trump has expressed his intent to renegotiate that deal, seeking assurances from his continental neighbours that they will limit China’s involvement in their economies, especially in critical sectors such as automobiles. The memo’s summary states that federal agencies will “now assess the impact of the USMCA on American workers and businesses and make recommendations regarding America’s participation in it.”

Canadian Sectors Most Vulnerable to Tariffs

The economists at Desjardin recently issued a detailed analysis of the sectors most likely to suffer US tariffs. They conclude that the energy and automotive sectors will likely be exempted from tariffs because no alternative sources can meet US demand. The sectors most likely affected by tariffs are primary metals (including aluminum), food and beverage manufacturing, chemicals, machinery, and aerospace. The transportation and wholesale trade sectors would suffer significant indirect effects from potential tariffs, as would agriculture, fishing and forestry. Industries less exposed to trade should fare better, including many service sectors. However, they could still experience ripple effects of any tariff-induced economic slowdown.

Over 70% of Canada’s goods and services are sold to the United States. Desjardins predicts that Trump will fulfill his promise, but likely with “multiple exceptions.”

The US Energy Information Administration identifies Canada as its top petroleum supplier, followed by Mexico, Saudi Arabia, Iraq, and Colombia. Canada represents nearly 60% of oil imports. Imposing a tax on oil imports would likely raise energy costs in the US, contradicting Trump’s promise to lower energy prices.

The highly integrated automobile sector is another area where the threat of tariffs could create significant issues. The North American auto industry is so interconnected that the tariff would ultimately hurt American manufacturers. Half of the General Motors pickup trucks sold in the US come from Canada or Mexico.

A more targeted approach to tariffs could well emerge. This would align with the experience that Canadian exporters had during Trump’s first presidential term when temporary tariffs were imposed on aluminum, iron, and steel before the Canada-United States-Mexico Agreement (CUSMA) was established.

Currently, US importers are preparing for these potential changes by stocking up on Canadian and other international goods. This trend is expected to continue into the first quarter, as both importers and exporters in Canada and the US await updates from Washington and Ottawa.

Highly Negative Impact

Implementing the tariffs would negatively impact primary metals, food and beverage, chemicals, machinery, aerospace, and parts sectors.

Manufacturers and those in the raw materials sector will require close monitoring. About half of the value of Canadian domestic production in the mining, oil, and gas industry is exported to the US This figure is approximately one-third of the manufacturing sector. Still, it exceeds 50% for the automotive industry and is over 40% in aerospace.

Several other sectors are also identified as “to watch.” These include pulp and paper products, wood products, plastics and rubber products, crop and animal production, fabricated metal products, mining and quarrying, non-metallic mineral products, fishing, hunting and trapping, transportation and warehousing, wholesale trade, forestry and logging, and petroleum and coal products.

Additionally, there is potential for a ripple effect that could impact transportation and warehousing, wholesale trade, and professional services. 

If some of these multinational companies have the option to invest in increasing production in Canada or in their US facilities, it becomes easier for them to decide they’re going to downgrade in Canada because that would mean importing from Canada afterward and incurring extra costs. The risk of reduced investment in Canada is quite real.

63% of Canadian exports to the US are intermediate inputs, while 21% are finished goods. This US dependence on imported inputs is particularly pronounced in three industries: automotive manufacturing, petroleum product manufacturing (made from crude oil, mainly from Canada), and primary metals, which depend on imported mined ores. Even industries such as air transportation and construction depend to a considerable extent on imported inputs (fuel, metal and lumber).

When we look at direct imports and intermediate inputs together, we see that a significant share of US domestic supply and production is dependent on imports, particularly the automotive sector, computers and electronics, electrical appliances, apparel, industrial machinery and primary metals. However, the US’s lower import dependence on certain products makes them more vulnerable to tariffs. These products include wood and paper products, nonmetallic mineral products (with some exceptions, including potash), nonautomotive transportation equipment (including aerospace), and agriculture and agrifood products.

Fortunately for Canada, it would be more difficult for the US to find alternatives for aluminum, pulp and paper, grains and oilseeds, and bakery products, as nearly half of these imports come from Canada. Other sectors are between, with about 30% to 35% of imports from Canada and Mexico. This is the case for iron and steel products, nonferrous metals (excluding aluminum), plastic products and synthetic resins. The aerospace sector is relatively vulnerable, given the availability of European and Asian alternatives. The dynamics in each industry would shift if the US applies tariffs to other supplier countries as well.

Several key products imported from Canada include uranium ore, potash, cobalt, and graphite.

Uranium ore is expected to be exempt from tariffs. Nearly all US demand is met by imports, with Canada supplying 27%. All Canadian uranium mining occurs in Saskatchewan.

Potash, crucial for fertilizers used in agriculture, may also be exempt since it is not mined in the US and alternatives are limited. Canada is the largest potash producer, accounting for 33% of global production, all from Saskatchewan.

Cobalt and graphite are essential for lithium-ion batteries and electronic equipment. China produces 77% of graphite globally, while the Democratic Republic of Congo provides 74% of cobalt. Cobalt mining in Canada is primarily in Ontario and graphite mining in Quebec. The US Department of Defense has invested in Canadian projects to secure these metals, likely leading to tariff exemptions for Canada (Bloomberg, 2024).

Canada’s Response to US Tariffs

The selection of goods for Canada to target is strategic and aimed at creating a political impact. Canadian officials plan to focus on products made in Republican or swing states, where the implications of tariffs—such as job losses and the financial strain on local businesses—could directly affect Trump supporters. The hope is that these allies, including governors and members of Congress, will reach out to Trump to advocate for de-escalation.

Prime Minister Justin Trudeau and his cabinet will convene on Monday and Tuesday in what is being referred to as their “U.S. war room” to respond swiftly if US tariffs are announced. While the detailed list of targeted goods is confidential, it should include various consumer items, including food and beverages, as well as everyday products like dishwashers and porcelain fixtures such as bathtubs and toilets.

Depending on which Canadian goods Trump decides to impose tariffs on and their specific levels, Canada’s second move would be to broaden its tariffs to include additional American products, affecting imports worth 150 billion Canadian dollars from the US. The Canadian government is considering other measures to restrict the export of goods to the United States. This could involve implementing export quotas or imposing duties that American importers would have to bear, particularly for sensitive Canadian exports that the US relies on—such as hydroelectric power from Quebec that is used to supply energy across New England.

Given the relatively abundant domestic production, negotiating exemptions would be more difficult for products that the US does not significantly rely on for imports. This applies to wood products (notably, Canadian softwood lumber is already subject to a countervailing duty of 14.54%), transportation equipment other than automobiles, paper and cardboard products, agrifood items, and petroleum-based products. For these categories, less than 15% of the US supply is sourced from direct imports.

In contrast, imposing a tariff on motor vehicles and parts is less likely since 35% of the supply in the US domestic market consists of direct imports, with 14% coming from Canada and 38% from Mexico. The same pattern holds for industrial machinery and crude oil, which account for 34% and 31% of imports, respectively.

Tariffs are taxes on goods, which are typically passed on to consumers. This makes imported goods more expensive, often leading consumers to stop buying them and ultimately harming the foreign companies that export them. Trade restrictions, such as export quotas, aim to limit the availability of exported goods. They tend to be particularly effective when the importing country lacks accessible or sufficient alternative sources for those goods.

No matter how Canada implements its counter-tariffs or export restrictions, the main goal will be to pressure the Trump administration to retract its commitment to initiating a damaging trade war with its neighbour.

Canada and the United States have a substantial trading relationship, with nearly $1 trillion worth of goods exchanged annually. Canada frequently alternates positions with Mexico as the US’s largest trading partner, largely depending on oil prices.

Certain cross-border industries are deeply interconnected, making tariffs a difficult regulatory barrier for many companies. For instance, a single vehicle can cross the U.S.-Canadian border up to eight times before fully assembled. Implementing tariffs would disrupt auto assembly operations in the United States and Ontario, the center of Canada’s automotive sector.

Canada exports critical resources to the United States, with around 80 percent of its oil and 60 percent of its natural gas heading south of the border. More than half of the oil imported by the US comes from Canada. If the trade conflict escalates significantly, the Canadian government is prepared with additional measures to respond.

This potential third level of escalation in a trade war, which the Canadian government aims to avoid, could involve restricting the export of sensitive commodities valued at hundreds of billions of dollars. These commodities include oil, gas, potash, uranium, and critical minerals—exports vital to the US.

Alberta, known as Canada’s oil-exporting powerhouse, has opposed any measures that would negatively impact its key industry. The divide between the province’s leadership and the rest of Canada could widen if Canada uses oil as leverage against the United States.

Furthermore, a senior official noted that the Canadian government is preparing for a potentially prolonged trade war with the US by supporting domestic industries. The government is considering financial assistance for Canadian businesses severely affected by US tariffs, likely on a case-by-case basis. While large-scale bailouts or blanket funding for entire industries may not be feasible, the official emphasized that it would be unacceptable for a tariff war with the US to result in the loss of thousands of jobs and businesses without government intervention to mitigate the impact.

Economic Impact on Canada of Tariffs and Other Trade Restrictions

Canada and Mexico are much more dependent on trade than the US. Mexico, in particular, produces many manufactured products headed for the US.

However, there are reasons to believe that Trump will not carry out his threats. During his 2016 presidential campaign, Trump repeatedly threatened to impose a 30 percent tariff on Mexico. Once in office, however, he did not impose the tariff but demanded—and received—a renegotiation of the North American Free Trade Agreement (NAFTA). The renegotiation produced a new agreement with a new name—the US-Mexico-Canada Agreement (USMCA)—which modernized the agreement also by tightening rules of origin and lengthening schedules for tariff removal, moving the agreement away from free trade, and earning the new agreement the mocking sobriquet NAFTA 0.7.

Subsequently, in 2019, Trump threatened Mexico with a 5 percent tariff that would gradually increase to 25 percent unless Mexico stopped illegal immigration across the border, but he did not follow through.

USMCA is scheduled for review in 2026, but if the review is expedited to 2025, the tariffs could be avoided by making concessions in the agreement to placate the Americans. If Trump were to impose those tariffs, he would be blowing up (albeit for noneconomic reasons) the contract that his first administration negotiated. Indeed, a telephone call on November 27 with Mexican president Claudia Sheinbaum, which Trump characterized as a “very productive conversation,” seemed to lower the heat. However, Trump’s public musings about using economic coercion to make Canada the “51st state” contributed to Canadian Prime Minister Justin Trudeau’s resignation, and the upheaval in Canadian politics may make resolution via USMCA more difficult.

Tariffs raise prices and reduce economic activity. Businesses that are heavily impacted often respond by cutting jobs, which further slows economic growth. The negative effects can financially strain local businesses and discourage corporate investment in machinery, facilities, and equipment. While it’s unlikely, higher prices could prompt the central bank to temporarily reverse its easing policies. The Bank of Canada understands that the price effects are temporary, but the slowdown in economic activity poses a more significant and lasting problem.

Bottom Line 

The postponement of tariffs suggests that key advisors to Trump are aware of the potential negative impacts that Canadian and Mexican tariffs would have on the U.S. Canada’s agreement to strengthen its border with the US could lead to a temporary reprieve. Mexico faces a bigger challenge than Canada due to its more porous border. It is encouraging that the new US president has started to backtrack on a commitment he made repeatedly before his inauguration. While it remains uncertain whether tariffs are completely off the table or simply postponed, this situation provides us with time to further strengthen our border and address our financial commitments to NATO—two issues that are priorities for Trump.

If tariffs are eventually imposed, which I doubt, we will see a slowdown in economic activity, rising unemployment, and uncertainty that will likely hinder the robust housing market we anticipate this Spring. The new administration’s more measured approach to its trade agenda is certainly positive news. It is likely that the Canada, US, and Mexico trade deal will once again be renegotiated.