Election debrief: Why the era of uncertainty may continue in Canada

Key takeaways:

  • While one election has wrapped up, the next one might be underway soon. Mark Carney is expected to be sworn in on Friday as the next prime minister, and potentially call for a federal election.
  • Canada’s economy is likely to remain under pressure, with elevated uncertainty persisting. 
  • Interest rates could fall much more than what the market expects.
  • Fiscal policy could be a mixed bag, irrespective of who forms the next government. 
  • We continue to believe Canadian investors will likely benefit from sticking to a long-term framework in their portfolios. 

The Liberal Party of Canada has wrapped up its leadership race, with Mark Carney winning by an overwhelming margin. He’s expected to be officially sworn in as the next prime minister this Friday, replacing Justin Trudeau. But despite one electoral race wrapping up, the era of uncertainty in Canada may continue.

Another election?

Even though the Liberal Party of Canada has just wrapped up its election, another election could soon be underway in Canada. Unlike in the U.S., Canada’s parliamentary system does not impose a fixed date for federal elections. Rather, Canada sets a maximum gap between when consecutive elections must be held. For Canada, this means that the election must be held before October 20, 2025.

But the next election might come much sooner than that. The latest Nanos polling suggests that the Liberal party now trails the Conservative Party by only one percentage point—well within the margin of error. Mark Carney may opt to capitalize on the newfound momentum of the Liberal Party, and call an early election. With a minimum required campaigning period of just 37 days, Canadians could head to the polls as early as April.

The tight race means predicting the winner of the next election will be challenging. And regardless of which party takes the helm, chances are it will be a minority government, meaning that legislative compromises will be necessary.

Yelling “cut”

First, let’s start with the good news: Canadians may see some tax relief soon. That’s because both Pierre Poilievre (the leader of the Conservative Party) and Mark Carney have spoken out in favor of eliminating Canada’s carbon tax. While it can be tough to estimate the magnitude of the impact, directionally the lifting of the tax should help boost growth.

In addition, both Carney and Poilievre have indicated that they want to permanently axe the temporarily suspended plan to increase the capital gains inclusion rate. With the capital gains inclusion rate now remaining unchanged, it means that Canadians will no longer have to contend with an increase in the effective rate of tax on capital gains.   

But taxes aren’t the only thing on the chopping block. Both Poilievre and Carney have spoken out in favor of fiscal restraint, and suggested that they may seek to cut government spending. So where will fiscal policy end up? Canadians might have to wait for the next federal budget to find out.

Trade tensions linger

Canada and the U.S. are still embroiled in a trade standoff. As of mid-March, the U.S. has imposed 25% tariffs on Canadian steel and aluminum, as well as on goods that are not covered by the Canada-United States-Mexico Agreement (CUSMA). Meanwhile, Canada has responded with retaliatory tariffs on a subset of its imports from the U.S.

The situation continues to remain fluid. On the one hand, Canada could see even more tariffs imposed in early April, if the U.S. proceeds with tariffs on all Canadian imports after the exemption for CUSMA-covered goods lapses. And in addition, the U.S. could announce more tariffs as a part of its “reciprocal tariff plans.”

On the other hand, perhaps Canada and the U.S. may eventually reach a deal to settle the trade standoff. But even if a deal is reached, the exact parameters could still differ from the previous terms of trade. With the CUSMA up for renegotiation soon, it’s possible that the new CUSMA may apply to a smaller proportion of goods.

We continue to believe that Canada may be more adversely impacted by a protracted trade standoff than the U.S., in large part because Canada is much more reliant on U.S. exports than vice-versa. Should the trade standoff persist, the Canadian economy could face a significant likelihood of tipping into a recession.

Interest rate uncertainty

The Bank of Canada (BoC) has now already cut rates at seven consecutive meetings. But the resting point for interest rates is still uncertain. Although markets currently anticipate that interest rates will settle at around 2.3% by the end of 2025, the BoC’s decision will ultimately be guided by the incoming economic data. With the Canadian unemployment rate still more than 1.5 percentage points above its 2023 low, we’ve already seen some signs of economic fragility in Canada. And if a deeper economic slowdown were to take hold, the Bank of Canada may have to cut rates quite aggressively to stabilize the economy.

Canadian vs US unemployment rate
Source: LSEG DataStream, February 2025

Staying the course

Despite the significant economic risks and heightened uncertainty, we still believe that staying the course may be the most prudent way of navigating these challenges. Unless markets take a significant turn for the worse, we think investors may benefit from sticking close to their strategic asset allocations and letting security selection be the main source of risk.