Some votes are still being counted, but these votes are not expected to change the ultimate outcome. Donald Trump has won the election and will be the next President of the United States. The Republicans have also secured a majority in the Senate, but it is not yet clear if they will retain control of the House.

The inauguration is still over two months away, but after providing some initial thoughts on Friday, we can narrow down the potential economic implications for Canada and Alberta.

The Trump Trade - Early market reaction

The S&P 500 index surged this morning to a record high on bets that Trump will implement policies that will benefit corporate America. U.S. long-term bond yields rose on a higher inflation and interest rate outlook. The Canadian dollar is trading lower versus the greenback, while the Canadian S&P/TSX 60 is largely flat, recovering from some early morning losses.

Tariff watch

Trump has promised a tariff of at least 10% on all imports into the U.S. with even higher tariffs applying to Chinese goods. If implemented, this effectively ends the Canada-United States-Mexico Agreement (CUSMA) and would be a major negative for Canadian exporters. Total goods exports to the U.S. last year were $548 billion from Canada, including $156 billion (nearly 30%) from Alberta.

The oil and gas sector

Canada’s largest export to the U.S., by far, is energy (see the chart below). In Alberta, it represented over 80% of U.S. bound exports last year. Some observers, including ourselves, have questioned whether a tariff would apply to Canadian oil and natural gas. The cost would be borne, in large part, by U.S. refineries and consumers and undermine Trump’s efforts to reduce the energy bills of Americans. During Trump’s first presidency, he limited tariffs on Canadian imports to steel and aluminum. However, if it does apply to energy, that implies downside, with the impacts growing the longer the tariff is in force.

Trump plans to boost U.S. oil and gas production in an effort to lower energy costs. At the same time, Trump will likely impose tough sanctions on Iran, constraining global supply, while broad-based tariffs weigh on demand. All eyes remain on OPEC, which earlier this week delayed a production hike. This paints a mixed picture for the direction of oil prices.

Trump’s attempt to boost the U.S. oil and gas industry comes at a time when the Canadian federal government has recently introduced regulations to cap oil and gas emissions, the first major oil and gas producer to do so and a measure that layers on existing policies. A move towards U.S. deregulation could increase the relative appeal of drilling in the U.S. At the same time, the U.S. dependence on Canadian oil and gas imports supports U.S. energy security relative to other higher risk foreign sources. Does this leave room for Trump to consider future pipelines from Canada?

Clean energy

A key question is whether Trump will abandon the measures introduced in the Inflation Reduction Act (IRA), which have supported a boom in clean energy investments. Canada has introduced clean energy incentives through investment tax credits, but not at the same scale. Some observers, however, are skeptical that the IRA would be repealed, noting the job creation from the IRA in red states. If only some measures are kept intact, it is most likely those that are linked to fossil fuels production, like subsidies for hydrogen and carbon capture.

Inflation pressures and U.S. Fed independence

Trump’s protectionist policies of broad tariffs and restraining immigration are widely considered inflationary. That may undermine recent inflation progress and lead the Federal Reserve to keep its policy rate at a higher level. There are also concerns about the independence of the U.S. Fed, with Trump seeking to provide greater input into Fed decisions. That pressure could include taking rates lower to support a weaker U.S. dollar.

Higher deficits

Expect higher deficits as tariffs and expense savings are offset by tax cuts. One ‘central’ estimate is that the Trump plan could add $7.75 trillion in debt between 2026-2035. The main tax measures include extending tax cuts under the Tax Cuts and Jobs Act (TCJA), ending tax on social security benefits, and exempting tax on overtime.

Forecast implications

The near-term boost to U.S. growth could lift Canadian exports, but longer term we see pressure from tariffs and the escalation of trade tensions providing a headwind. The ultimate impact will depend on whether campaign rhetoric gets translated to policy and, for the energy-producing provinces, whether tariffs would apply to Canadian oil and gas.

Some things are more clear: Trump’s inflationary policies should slow the pace of Fed easing, and put downward pressure on the Canadian dollar. This itself is inflationary for Canada, but the weak Canadian economy provides an offset and should keep inflation near 2%. This should keep the Bank of Canada in cutting mode through to the midpoint of next year. Trump's promise to deport migrants could result in higher than expected population growth, and may delay the Canadian government’s target for reducing temporary residents.

Canada will need to move quickly to preserve its trading relationship with the U.S. and prevent full implementation of broad-based tariffs. In the lead up to this election, Canada’s economic growth has been tepid and labour productivity has been falling. With full tariffs and escalation of trade wars, we see downside risks to our current forecast closer to our low case. In the case where the worst effects can be avoided, our base case still provides a reasonable view. Our next forecast is released in December.

Answer to the previous trivia question: Not including the pandemic years, the last time the U.S. unemployment rate was 10% or higher was in October 2009 when it hit 10%.

Today’s trivia question: What is the difference between gross domestic product and gross national product?