08:48 AM EDT, 05/12/2025 (MT Newswires) -- After winning the parliamentary election at the end of April, Canada's Prime Minister Mark Carney travelled to the United States last week to meet President Donald Trump, noted TD.

The bar was relatively low heading into the meeting, so it was notable for simply being unremarkable, said the bank. The timing was appropriate though, as March trade data showcased the key economic issue facing the incoming Canadian government -- how to diversify trade when there is a superpower next door.

Trade discussions with the U.S. are likely to take time and involve renegotiating parts of the CUSMA trade agreement signed in 2018, stated TD. On the agreement, policymakers were likely keenly aware of President Trump calling it "great for all countries," before noting that it can be renegotiated or terminated. For the outlook, as long as the uncertainty about tariffs and trade agreements persists, it will hang like a cloud over the Canadian economy.

The deceleration is apparent in the labor market, pointed out the bank. The Canadian economy added a modest 7,000 jobs in April, and those gains were largely thanks to temporary federal election jobs. The private sector has shed jobs for two months in a row.

Canadian monthly employment data are notoriously volatile, but the trend has been toward softer job creation since the escalation in trade tensions. As employment growth has petered out, the unemployment rate has steadily crept higher, reaching 6.9% in April. The unemployment rate is now matching its high from November 2024, before a burst of late-year hiring showed some temporary relief for the labor market.

Pull the history back further and, excluding the pandemic period, the 6.9% unemployment rate is the highest since January 2017. It is also apparent that tariffs are behind the deceleration in the labor market, with trade-exposed sectors behind the recent slowdown in hiring -- the manufacturing sector has lost 43,000 jobs over the past three months.

Looking ahead, the challenges are apparent, added TD. Part of the lift to Q1 activity was due to U.S. firms attempting to front-run tariffs by stockpiling imports ahead of the new duties. Canadian exports to the U.S. grew nearly 7% per month between November and January, before falling nearly 10% through March once they were applied.

However, two silver linings emerged in the March data. First, the steep decline in exports to the U.S. was offset by a rise in shipments to the rest of the world.

Secondly, roughly 50% of Canadian goods heading to the U.S. were CUSMA compliant in March, up from the 38% average in 2024 and 40% last March. The increased compliance means avoiding the 25% tariff and reducing the economic impact. Nonetheless, as long as the uncertainty about the trade relationship persists, firms are understandably cautious. With the malaise hanging over the economy, it's unlikely things will turn a corner soon.

Faced with the prospect of domestic activity continuing to soften, TD sees the Bank of Canada having an opening to cut its policy rate by 25 basis points in June, bringing it down to 2.5%. The risk of higher inflation remains, but there are a few reasons for optimism that the worst-case scenario won't materialize.

First, a greater share of Canadian products have become CUSMA compliant -- offsetting the risk of supply chain snarls -- retaliatory tariffs have been restrained, and a stronger Canadian dollar offset rising cost pressures, according to the bank.