Republican presidential nominee and former U.S. president Donald Trump and Republican vice presidential nominee J.D. Vance point to the stage during Day 1 of the Republican National Convention at the Fiserv Forum in Milwaukee, Wis., on July 15.Elizabeth Frantz/Reuters
John Rapley is an author and academic who divides his time among London, Johannesburg and Ottawa. His books include Why Empires Fall (Yale University Press, 2023) and Twilight of the Money Gods (Simon and Schuster, 2017).
Ever since U.S. President Joe Biden’s debate debacle, the betting markets have favoured Donald Trump returning to the White House. So, regardless what happens next, we’ve begun pondering what a second Trump presidency would entail. For Canada, the short answer is that the economic shock would hit us fast – and it won’t be the expected shock.
Most of the discussion of a second Trump presidency focuses on how it might affect trade relations, or the possible benefits to the energy sector of Mr. Trump’s pledge to scrap Mr. Biden’s renewable energy policies and drill, baby, drill. But the risks and possible returns of such changes may be overstated.
For instance, we know Mr. Trump loves tariffs and that he’s said he’ll use them to protect American jobs and fund tax cuts. But while it would be disastrous if Canada lost access to its southern market, it’s not at all clear across-the-board tariffs are coming, nor that they’ll apply to this country.
As for the oil and gas sector, the link between it and the policy regime is surprisingly weak. The share prices of oil companies floundered under Mr. Trump, but they have boomed under Mr. Biden. It’s the economic cycle that determines their fortunes.
The factor we should focus on instead is that Mr. Trump won’t have the luxury of time. The U.S. Constitution is clear and he can’t change it: Having already served a full term in office, he will get only one more. Second spells in office already tend to be lame-duck presidencies in the United States, given the very long campaigns that precede elections.
Further reducing the time in which he’ll have to act will be the likely makeup of Congress. The odds currently favour the Republicans securing narrow wins in the House of Representatives and the Senate this fall, but that won’t likely be the case in 2026, when midterm elections will probably go the other way. If Democrats retake one and possibly both houses of Congress that year, they would then be able to rein in Mr. Trump.
So, with just two years in which to manoeuvre, he has to move fast. By all indications, he will. Mr. Trump is approaching his second term with more of a plan than he had in 2016, and a loyal team who cut their teeth the first time around. We can therefore assume that the next couple of years will give us a fast and possibly wild ride.
Because one thing we can anticipate with some confidence is that Mr. Trump will continue the fiscal expansion currently under way in the U.S. He’ll want to make the time-limited tax cuts implemented in 2017 permanent, and possibly add further to them. Conservatives talk of balancing these off with cuts to spending elsewhere, such as Social Security and Medicare. However, Mr. Trump has never shown much appetite for reducing spending, especially on popular programs. Thus, the more likely outcome will be a continued rise in the federal budget deficit.
This will add fuel to inflation, an effect which any tariffs Mr. Trump might implement would only exacerbate. That, in turn, could well cut short any monetary loosening the Federal Reserve was planning for later this year. Traders currently expect interest rates to fall by three-quarters of a percentage point by year end, but the prospect of a second Trump presidency could possibly end things there. Bond rates may even drift higher once more.
If this scenario comes to pass, Canada will get caught in the slipstream, for better and worse. On one hand, continued expansion of the U.S. economy will boost trade, lifting this country’s output too. On the other, investment will likely continue to get sucked toward the U.S. unless Canada responds with a fiscal expansion of its own, which currently seems unlikely. This would all weaken the Canadian dollar, raise inflation and keep long-term interest rates from falling much – if at all – here, with consequent impacts on the housing market.
If Mr. Trump gets his way and the Fed continues its monetary easing, the result could be a fall in short-term rates just as long-term rates are rising. That kind of steepening of the yield curve, as economists describe it, can end in tears: meltdowns in stocks and housing that trigger a crash, as inflation gets out of control. Although we can’t presume this will happen, there are some interesting omens: Crypto bros love Mr. Trump, apparently because they think he’ll juice a market that lost steam for a long stretch.
So, we could be in for a bumpy ride.