Direct impacts of tariffs on lumber and the economy.
Notably, the tariff on lumber directly impacts a crucial building material. But it is not as straightforward as it seems.
“US tariffs on Canadian softwood lumber are keeping lumber here, which means they're creating a glut or a surplus of lumber in the local market,” says Sinisa Vujovic, a Professor of Economics at Kwantlen Polytechnic University. “[That] pushes the local price of lumber – which is relevant for local developers – down and not up. So, it is a bit counterintuitive to expect the cost of lumber to instantly rise, right?”
Combined with the fact that recent trends in house construction have moved away from high-rises toward mid-rises and multiplexes, this could lead to lower costs of building, since there would be surplus inventory sitting in the Canadian market.
However, the impact of this on the local economy could also mean layoffs and anxiety. Estimates place job losses in BC at around 11,000 and 9,000 in Alberta. This could lead to fewer people entering the housing market. Since demand would drop relative to supply, home prices could continue to see declines, instead of the levelling off many were predicting before the current trade talks reached an impasse.
The impact of tariffs on business sentiment in general is harder to predict. Even in industries not forced into layoffs, plans for expansion or hiring may be suspended. Since many businesses count on stability with Canada’s largest trading partner, they may play it safe instead of taking risks.
What could happen to interest rates?
There are also retaliatory tariffs to consider. These would end up being paid by Canadians on imports from the US. These could in turn lead to higher costs and further economic strain. However, not all imports need to come from the US. Take steel for high-rises, for instance. “Let's be aware that it can also be imported from China,” says Vujovic. “And the BC demand is small relative to Chinese supply.”
The tariffs themselves could slow down economic growth, while the counter-tariffs could have inflationary effects. During times of inflation, the Bank of Canada may raise interest rates, to counter the effects that easy access to funds could have.
However, “Interest rates are generally not a particularly good tool to deal with the stagflationary shocks,” says Vujovic.
And there’s also more to it than that. Vujovic thinks that the Bank of Canada would not want to raise or lower rates. Even if official inflation exceeds their target, Vujovic states that this is primarily due to energy costs, which do not come from consumer demand, but rather supply constraints.
In fact, the Bank of Canada could cut rates if the economy slumps enough. But most analysts agree that the Bank of Canada will likely continue to hold interest rates while taking a wait-and-see approach. If rates do change, it will likely be 0.25% either way, and not major spikes or cuts.
The Federal Government is also offering tariff relief measures in the form of a $7.5 billion package for businesses, while the Business Development Bank of Canada will offer $500 million in loans to support small businesses.
As for the everyday impacts of this trade war, analysts state that many consumers may see them during their weekly shopping and grocery trips. This could further impact Homeseekers, as more income goes toward everyday essentials, they may feel less confident about buying or selling their home.
