Trudeau’s Resignation Adds to Growing Uncertainty…

Prime Minister Justin Trudeau’s announcement that he will step down and suspend Parliament until March 24 has thrown Canadian markets into flux. The potential for an early election and a likely shift to a fiscally conservative government could reshape Canada’s economic policy and market dynamics. Investors are grappling with how this evolving political landscape may intersect with economic trends.

Trudeau will remain prime minister until the Liberal Party selects a replacement. Elections are scheduled for October, but there is a growing expectation that they could be called much sooner, potentially as early as this summer.

The following insights come from market analyst notes to clients and responses to Morningstar’s request for comments on Trudeau’s decision.

Stephen Brown, deputy chief North America economist at Capital Economics

“Justin Trudeau’s resignation sets off a contest for who will lead the party into the election due by October, but which could happen much sooner if the opposition parties manage to topple the minority Liberal government with a no-confidence vote. There are few immediate economic consequences of this decision, given that the Conservatives seem likely to win a big majority this year, no matter who replaces Trudeau.

“But it does mean there will be a power vacuum in Canada just as the incoming Trump administration in the US is considering imposing a 25% tariff on shipments to the south.”

Carl Gomez, chief economist and head of market analytics at CoStar Group Canada

“Trudeau finally stepping down is a positive move for the country in most aspects because it will signal change and judging from the polls, a swing towards a more fiscally conservative government, which markets prefer.

“That is why the loonie briefly went up following the news of his decision to step down. A Conservative-led government in Canada could also ideologically align with the incoming Trump administration—a pro-growth agenda of lower taxes and cutting spending, as well as market-based solutions to infrastructure and housing.

“A new Conservative government could perhaps also negotiate better with Trump on the trade file—obviously, Trudeau had very little sway with Trump, given the latter’s comments last month. So that is a positive as well.

“One other important element is that Trudeau’s stepping down and the prorogation of parliament means the proposed capital gains tax changes are off the table. Markets, businesses, and investors will be very happy with that.”

Tu Nguyen, economist at RSM Canada

“Justin Trudeau’s resignation ushers in a new wave of uncertainty for the Canadian economy and financial markets.

“Expect delays in business decisions, sluggish hiring, and subdued investments in the immediate aftermath. Businesses and foreign investors are likely to remain cautious as they await clarity on Canada’s leadership and economic policies.

“Canada’s economic policy uncertainty has surged to the highest in decades, excluding May 2020—the early days of the covid-19 pandemic—and is significantly higher than during the 2007-08 global financial crisis.

“The jump in uncertainty highlights the risk to the economic outlook caused by the political sector. For nearly a decade, Canada’s political stability helped attract foreign investments. Trudeau’s resignation adds to the uncertainty in Canada’s economic environment, which could temporarily deter investment.

“The Bank of Canada’s rate cuts, combined with easing inflation, were expected to fuel economic growth by early 2025. This latest bout of political instability could postpone recovery as businesses could delay hiring and investments, adopting a wait-and-see approach.

“The current uncertainty could weaken Canada’s bargaining position at a time of tariff threats from the US. However, Trudeau staying on as Donald Trump’s administration begins may help smooth out some of the uncertainty with Canada’s largest trading partner in the meantime.”

Thierry Wizman, global FX and rates strategist at Macquarie Group

“We’ve asserted … that should Canada move toward an early election in which a Conservative-led government emerges, the Canadian dollar could appreciate, and/or USD/CAD might peak earlier than otherwise.

“This is based on the view that certain outcomes will likely improve for Canada under a Conservative-led government, and even in anticipation of a Conservative-led government.

“A Conservative-led government—under Pierre Poilievre—would be ideologically aligned with Donald Trump, and not just in regard to their shared vision for a pro-growth political economy. Specifically, Poilievre is against large deficits and is inclined to reduce personal taxes while cutting federal-level and provincial-level spending. He has also advocated divestment of government enterprises, to promote efficiency gains. He is a proponent of right-to-work deregulation and deregulation more generally, especially in transportation and housing. He likes market-based solutions to climate change that don’t involve new taxes, while promoting Canada’s native hydro-carbon economy.

“Poilievre is also a proponent of a strong Canadian dollar, and he has blamed the current government for helping to debase the value of the Canadian dollar. He has criticized the Bank of Canada, accusing it of promoting pro-inflationary policies, and has urged it to adopt more ‘hawkish’ policies instead of low interest rates (which Poilievre views as a facilitator of greater deficit spending). He has gone as far as Trump in saying that he would fire the Bank of Canada Governor (Tiff Macklem), audit the [central bank], and install a less ‘dovish’ head.

“In effect, Poilievre sounds like Trump, and traders should appreciate the correspondence and alignment of ideological interests. After all, if Trump’s election can lead to a stronger US dollar, why would the election of Canada’s Trump not lead to a stronger [loonie]? At the very least, the election of a Trump ‘mini-me’ would do another important thing—getting Trump off Canada’s back.

“Indeed, seeing that as a benefit of a Conservative-led government, Canada’s electorate might be more inclined to vote for the Conservatives and Poilievre under that logic. Trudeau and the Labor-led government of Canada could become among the first political casualties of US President-elect Donald Trump’s policies, as early as the first quarter of 2025, if not sooner.

“The bottom line is that with Trudeau’s pending resignation, we can now say with greater than 50% certitude that the Conservatives or a Conservative-led coalition will govern Canada in 2025.”

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.

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