The U.S. Election and Economic Policy – Implications for Financial Institutions

This report outlines potential implications to Canada’s financial sector and economy of Donald Trump’s return to office in 2025. It looks at anticipated U.S. policy changes based on the former President’s campaign platform and remarks made during the election, and how they could impact Canadian financial institutions (FIs).

Trump’s administration is expected to emphasize American interests and adopt a transactional approach. Key shifts include reduced support for NATO and climate change initiatives, and increased protectionism, leading to increased global uncertainty.

The following policy changes are most likely to impact Canada and its financial sector:

• Trade Policy: Tariff increases could disrupt supply chains, elevate consumer prices, and reintroduce inflation risk, causing market volatility and heightened credit risks in sectors reliant on U.S. trade.
• Fiscal Deficit: Expanding deficits from tax cuts may weaken the U.S. dollar and increase borrowing costs, affecting Canadian FIs’ cross-border investments and currency exposure.
• Tax Policy: Renewed tax cuts might pressure Canadian competitiveness, leading to capital outflows and a “brain drain” of skilled workers to the U.S.
• Monetary Policy: Challenges to Federal Reserve independence could amplify debt and market volatility, raising borrowing costs globally.
• Defence Policy: Heightened U.S. defence spending and pressure on NATO allies could increase Canadian military expenditures, potentially straining budgets and public debt.
• Climate and Energy Policy: Deregulation of the fossil fuel industry and scaling back key aspects of the Inflation Reduction Act could undermine Canadian commitments to clean energy and shift investments back to fossil fuels.

The report urges FIs to revise forecasts, scenario models, and risk assessments to navigate the elevated uncertainty.

For more in-depth analysis on the 2024 U.S. election, see Impact 2024: How Donald Trump’s Reelection Could Amplify Global Inter-systemic Risk.