Canada’s economy is starting to crack under trade-war pressure

Canada’s economy was already stumbling a few months ago. Now, it is on the brink of recession because of President Trump’s tariffs.

Canada’s economy is starting to shed jobs after months of tariff-fueled anxiety, while the outlook among businesses and consumers has become increasingly dour as one of the U.S.’s largest trading partners braces for more pain to come.

“The tariff shock is hitting hard,” said Robert Embree, an economist with Rosenberg Research. Canada is teetering on the brink of a recession, he said. And that is even after Trump seemingly spared Canada from the worst of the reciprocal tariffs levied against virtually all of the U.S.’s trading partners.

Canada has been in Trump’s crosshairs since he took office in January. The U.S. leader has blamed Canada for allowing “massive” amounts of fentanyl to cross into the U.S.—an assertion that isn’t supported by the U.S’s own data—and said he wants steel, aluminum and cars now made in Canada to be made in U.S. factories. In his 2½ months in office, Trump has hit Canadian manufacturers with 25% levies on cars, steel and aluminum, and targeted billions worth of Canadian goods that aren’t part of the Mexico-Canada trade agreement.

The shock of those tariffs and the fear of more has already dented the Canadian economy. Last week, Canada’s statistical agency reported that 33,000 Canadians lost their jobs in March, the worst jobs report in more than three years.

On Monday, the Bank of Canada reported that businesses and households expect inflation to climb, and company executives warned they expect to pass on higher, tariff-fueled costs to customers regardless of the hit to consumer demand.

The central bank’s first-quarter business-outlook survey indicated that 32% of Canadian companies are now planning for a recession in the coming 12 months, more than double the average 15% reading in the second half of 2024. Hiring plans among business owners are on hold, the central bank said, adding that consumer confidence in the labor market has weakened. Investment intentions among business executives have also deteriorated.

On Monday, Canadian Prime Minister Mark Carney, in the middle of an election campaign, said Canada could also suffer indirect blows from Trump’s policies. The risk of a U.S. recession has escalated significantly, he said, which would further weaken demand for Canadian goods.

Carney’s incumbent Liberal government has offered billions in new, low-cost loans for trade-exposed sectors, allowed companies to delay payment of tax receipts to help bolster cash flow amid falling orders, and proposed new tax-relief measures for seniors whose investment portfolios have taken a hit.

The Ontario government, home to more than 125,000 auto-sector employees, announced on Monday a package of tax cuts worth US$7.8 billion to support small Canadian businesses and workers affected by the tariffs.

In the auto sector, which is one of the largest sources of exports to the U.S. after energy products and metals, Canada’s governments are scrambling to minimize the pain. Trump’s 25% tariff on foreign cars is expected to squeeze a domestic automaking industry that produced roughly 1.3 million cars last year and employed 54,000 people in car and truck assembly.

It has already done some damage. Stellantis last week said it was suspending production at a plant in Windsor, Ontario, for two weeks, temporarily laying off 4,600 workers.

The Stellantis assembly plant in Windsor, Ontario.Workers change shifts at Stellantis’s Windsor facility.

One senior government official said that Ottawa is considering offering money to U.S. automakers who build cars in Canada in a bid to defray the 25% tariff on foreign-built cars. The official said the arrangement would be a stopgap measure to give the Canadian auto industry some stability until Canada can negotiate with the U.S.

Canada’s fiscal and monetary outlook has also been complicated by the government’s decision to retaliate against the U.S. Carney last week said Canada would match the U.S.’s auto tariffs with 25% tariffs of its own on U.S. vehicles that fall outside the USMCA, potentially raising prices on 67,000 cars.

This tariff was the latest piece of retaliation from Canada, which has imposed 25% tariffs on over $40 billion of American-made goods entering Canada. That has lifted prices on American wine and liquor, peanut butter and appliances.

Desjardins Group economist Royce Mendes said the outlook for higher prices will likely lead the Bank of Canada to leave its main interest rate unchanged at its April 16 decision, or the first pause since it started cutting borrowing costs last June. “Unless financial system functioning begins to deteriorate, central bankers are unlikely to be in a position to cut rates in the near term,” Mendes said.

Write to Paul Vieira at Paul.Vieira@wsj.com and Vipal Monga at vipal.monga@wsj.com