Canada 2025 to 2026: The Trudeau Exit, the Carney Reset, and the Trump Tariff War

The Trudeau exit and the caucus revolt #

Justin Trudeau took office on November 4, 2015 and led three successive Liberal governments, a 2015 majority, a 2019 minority, and a 2021 minority. The 2024 byelection cycle exposed the breakdown. The June 24, 2024 Toronto St. Paul's byelection, a Liberal seat held since 1993, fell to the Conservatives by 590 votes. The September 16, 2024 LaSalle Emard Verdun byelection in Montreal fell to the Bloc Quebecois. By autumn 2024 Nanos and Abacus tracking placed Liberal voting intent in the 16 to 19 percent band against Conservative voting intent at 41 to 44 percent, the deepest opposition lead since the 1984 Mulroney landslide. The September 4, 2024 termination of the New Democratic Party supply and confidence agreement by Jagmeet Singh removed the parliamentary backstop carrying the minority since March 2022.

The decisive break came on December 16, 2024 when Chrystia Freeland resigned as Deputy Prime Minister and Finance Minister hours before she was scheduled to deliver the Fall Economic Statement, citing what she described as costly political gimmicks. Dominic LeBlanc was sworn in as Finance Minister the same day. The Fall Economic Statement recorded a fiscal 2023 to 2024 deficit of 61.9 billion Canadian dollars against a 40.0 billion Liberal pledge ceiling. Cabinet ministers and Liberal members of parliament publicly called for Trudeau's resignation across the recess. On January 6, 2025 Trudeau announced his resignation as Liberal leader and as Prime Minister effective on the selection of a successor, and Governor General Mary Simon prorogued Parliament until March 24, 2025.

The Carney leadership and the April 28, 2025 election #

The Liberal Party of Canada leadership convention closed voting on March 9, 2025. Mark Carney took 85.9 percent on the first ballot against Chrystia Freeland at 8.0 percent, Karina Gould at 3.2 percent, and Frank Baylis at 3.0 percent. Carney brought a credential stack unusual in Canadian politics: Bank of Canada Governor from February 2008 through May 2013, Bank of England Governor from July 2013 through March 2020, United Nations Special Envoy on Climate Action and Finance from 2020, and chair of the Glasgow Financial Alliance for Net Zero from its 2021 launch. He had never held elected office. Governor General Simon swore him in as the 24th Prime Minister on March 14, 2025.

Carney advised dissolution on March 23, 2025 and the writs dropped for an April 28, 2025 vote. The campaign turned on a single frame, the Trump tariff war and Canadian sovereignty, branded elbows up after a Mike Myers Saturday Night Live segment Carney repeated at rallies. The Conservative Party of Canada under Pierre Poilievre led the Liberals by 24 points in mid January Nanos tracking. The crossover came in the second week of February as Carney consolidated and Trump escalated. Election night returned a Liberal minority of 168 seats, the Conservatives at 144, the Bloc Quebecois at 23, the New Democrats at 7, and the Greens at 1, on the new 343 seat map after the 2022 representation order. Turnout reached 67.4 percent, the highest since 1993. Poilievre lost the Carleton seat he had held since 2004 to Liberal Bruce Fanjoy. Jagmeet Singh lost his Burnaby Central seat and resigned as NDP leader on April 29.

The Trump tariff war and the trade exposure #

On February 1, 2025 the Trump administration signed an executive order under the International Emergency Economic Powers Act imposing a 25 percent tariff on Canadian goods and a 10 percent tariff on Canadian energy, with implementation paused on February 3 after a Trudeau Trump call. On March 4, 2025 the tariff took effect, was modified on March 6 to exempt USMCA compliant content, and was overlaid on April 2, 2025 by a Section 232 reciprocal tariff framework retaining the 25 percent rate on Canadian steel, aluminum, lumber, and non USMCA goods. Ottawa imposed a 25 percent tariff on 30 billion Canadian dollars of US imports on March 4 as a first tranche, with a second tranche of 125 billion on hold pending negotiation. The US Census Bureau recorded total goods trade between the two countries at 762.1 billion US dollars in 2024, with the US running a goods deficit of 63.3 billion. Canada is the largest single source of US crude oil imports at roughly 4.0 million barrels per day on Energy Information Administration data.

The Bank of Canada April 2025 Monetary Policy Report quantified the tariff scenarios. Under a sustained 25 percent reciprocal tariff with full retaliation, the Bank modeled a Canadian GDP contraction of 1.5 percent in 2025 and headline inflation rising 1.0 percentage point above the 2.0 percent target through year end. Under a partial tariff scenario with USMCA carve outs intact, the Bank modeled growth of 1.5 percent and inflation at 2.3 percent. Statistics Canada recorded merchandise exports to the United States at 76.4 percent of total Canadian merchandise exports in 2024, and energy exports at 28.1 percent of the total. The Carney government opened a USMCA review track with the Office of the United States Trade Representative under Chapter 34, with the formal review window opening on July 1, 2026.

The fiscal stack, the Bank of Canada path, and the housing residue #

The Department of Finance Annual Financial Report for fiscal 2023 to 2024 recorded a budgetary deficit of 61.9 billion Canadian dollars, 2.1 percent of GDP, against a Budget 2024 projection of 40.0 billion. The Parliamentary Budget Officer Economic and Fiscal Outlook of March 2025 projected a fiscal 2024 to 2025 deficit of 50.1 billion, with the federal debt to GDP ratio at 42.1 percent. The Carney first budget, tabled by Finance Minister Francois Philippe Champagne on November 4, 2025, separated capital from operating expenditures and projected a fiscal 2025 to 2026 deficit of 78.3 billion, 2.5 percent of GDP, on combined defence procurement, tariff response, and removal of the consumer carbon levy effective April 1, 2025 by Carney executive order. Federal debt servicing cost crossed 54 billion Canadian dollars in fiscal 2024 to 2025 against 24 billion in fiscal 2020 to 2021.

The Bank of Canada policy rate peaked at 5.00 percent in July 2023 and was cut by 25 basis point increments through 2024 and the first half of 2025 to 2.75 percent in March 2025, before pausing on April 16, 2025 as the tariff inflation pass through entered the projection. Statistics Canada recorded headline Consumer Price Index at 2.3 percent year on year in March 2025 against a June 2022 peak of 8.1 percent. The Canadian Real Estate Association recorded a Greater Toronto Area benchmark home price decline of 8.5 percent year on year in December 2024 against the February 2022 peak. Canada Mortgage and Housing Corporation reported a national rental vacancy rate of 1.5 percent in October 2024, the lowest in the series. Household debt to disposable income, on Statistics Canada national accounts, sat at 173.1 percent in Q4 2024.

Energy capacity, the Trans Mountain barrels, and the LNG Canada cycle #

The Trans Mountain expansion went commercial on May 1, 2024 after twelve years of regulatory and construction delay and a final cost of 34.2 billion Canadian dollars against a 2017 estimate of 7.4 billion. The expansion lifted nameplate capacity from 300,000 to 890,000 barrels per day and rerouted Western Canadian Select crude from the Cushing hub to the Westridge Marine Terminal in Burnaby, where Aframax tanker traffic into the Pacific basin began clearing in May 2024. The Western Canadian Select to West Texas Intermediate differential narrowed from a Q1 2024 average of 19.0 dollars per barrel to a Q3 2024 average of 13.5 dollars and a Q1 2025 average of 12.0 dollars, the tightest sustained band since 2018. The federal government acquired the project from Kinder Morgan in 2018 for 4.5 billion Canadian dollars.

LNG Canada Phase 1, the Shell led joint venture with Petronas, PetroChina, Mitsubishi, and Korea Gas at Kitimat, British Columbia, began commissioning in summer 2025 with first cargo loading reported on June 30, 2025. The phase one capacity of 14.0 million tonnes per annum, on a 2.1 billion cubic feet per day feedstock basis, opens the Pacific basin for Western Canadian Sedimentary Basin gas at scale. Coastal GasLink, the 670 kilometre TC Energy pipeline that feeds Kitimat, completed mechanical work in October 2023. The Carney climate ambition, framed by his Glasgow Financial Alliance for Net Zero chairmanship and the Building Canada Strong campaign, intersects the energy economy reality. Natural Resources Canada records oil and gas extraction at 4.7 percent of nominal GDP in 2024 and 31.0 percent of merchandise exports. The April 2025 carbon levy removal by Carney executive order ended the consumer fuel charge while retaining the industrial output based pricing system.

Sovereign rerating, the loonie, and the consultative residue #

Market response to the Carney election and the tariff escalation traced two cross currents. The Canadian dollar closed at 1.40 against the US dollar in late April 2025 against a January 2025 peak weakness of 1.4486, an appreciation that tracked the consolidation of Canadian fiscal credibility under a Carney technocrat brand and the bilateral negotiation rhythm with the Trump White House. The S&P Toronto Stock Exchange composite index closed Q1 2026 with energy and financials leading the rerating, on Toronto Stock Exchange data, while the Canadian sovereign credit default swap on a five year basis sat in a 32 to 38 basis point band through the spring of 2026. Moody's, Standard and Poors, and Fitch retained Canada at AAA equivalent ratings with stable outlooks through April 2026, citing the fiscal anchor and the institutional credibility of the Bank of Canada and the Department of Finance, while flagging the tariff war as the binding downside risk. The IMF Article IV concluded May 2025 projected GDP growth of 1.4 percent in 2025 and 1.6 percent in 2026, with the tariff scenario as the downside case.

The consultative residue is the political variable Carney must manage. Quebec, where the Bloc Quebecois held 23 seats and Premier Francois Legault's Coalition Avenir Quebec governs Quebec City, sits at the centre of the language law and immigration files. Bill 96, in force from June 1, 2022, tightened French language requirements on commerce, education, and immigration above the existing Charter of the French Language. Federal jurisdiction conflicts on temporary foreign worker caps and asylum claim processing remain open. The Conservative Party of Canada caucus elected Andrew Scheer as interim leader on May 7, 2025 pending a leadership review, and Poilievre announced on May 9 that he would seek a seat in an Alberta byelection. Calgary energy capital expenditure budgets, on the Canadian Association of Petroleum Producers tally, lifted to 40.6 billion Canadian dollars in 2025 against 39.6 billion in 2024, on the Trans Mountain de bottlenecking and LNG Canada Phase 2 front end engineering. The USMCA review opens on July 1, 2026. The binding question for Canadian capital allocation through 2026 is whether Carney can convert the elbows up mandate into a tariff settlement that protects energy, autos, and metals, a fiscal anchor that retains the AAA rating, and a productivity reset that closes the per capita GDP gap with the United States that widened by 5.6 percentage points from 2019 through 2024 on OECD comparable price levels.

Sources #

• Elections Canada, Forty Fifth General Election Official Voting Results, April 28, 2025
• Bank of Canada, Monetary Policy Report April 2025 and Governing Council policy rate decisions
• Statistics Canada, Consumer Price Index, Gross Domestic Product, and Merchandise Trade tables
• Department of Finance Canada, Annual Financial Report of the Government of Canada Fiscal Year 2023 to 2024
• Parliamentary Budget Officer, Economic and Fiscal Outlook March 2025
• International Monetary Fund, Canada 2025 Article IV Consultation Staff Report
• Organisation for Economic Co operation and Development, OECD Economic Outlook Canada chapter
• Office of the United States Trade Representative, USMCA joint review filings and notices
• United States Census Bureau, Trade in Goods with Canada
• United States Energy Information Administration, Petroleum and Other Liquids, Canada
• Trans Mountain Corporation, Project Cost Schedule and Operations Updates
• Canada Energy Regulator, LNG Canada and Coastal GasLink project filings
• Canadian Association of Petroleum Producers, Capital Expenditure Forecast 2025
• Canada Mortgage and Housing Corporation, Rental Market Report October 2024
• Canadian Real Estate Association, MLS Home Price Index and resale activity
• Liberal Party of Canada, 2025 Leadership Election results announced March 9, 2025
• White House Executive Orders on Canada Tariffs February through April 2025