04:27 PM EST, 12/12/2024 (MT Newswires) -- The Toronto Stock Exchange closed sharply lower on Thursday, more than giving up day-prior gains following the Bank of Canada cut to interest rates, as investors eye the threat of a tariff war with the United States after Donald Trump is sworn in a U.S. President next month.

The S&P/TSX Composite Index closed down 246.99 points to close at 25,410.71. The biggest declining sectors in the session were Base Metals, down 1.66%, and Energy, down 1.74%, while the sole gainer on the day was Battery Metals up 0.64%.

Desjardins in a note published Thursday said the re-election of Donald Trump, and especially his protectionist stance, "could upend" the economy. It noted the President-elect himself floated many different ideas about what he intends to do, each of which would affect the economies of Canada and the United States differently.

On Real GDP, the Desjardins' baseline scenario assumes a 10% tariff will start being applied to all U.S. imports, with exceptions for imports of energy and autos from Canada, in late 2025, although full implementation won't happen until later.

Desjardins said surging demand for Canadian exports before tariffs are implemented, combined with recently announced domestic policy measures, should cause Canadian real GDP growth to accelerate from 1.3% in 2024 to 2.2% in 2025. But as tariffs are implemented, population gains slow and higher monthly mortgage payments mount, it expects Canadian real GDP growth to slow to 1.3% in 2026.

In its pessimistic scenario, Desjardins assumes a 25% tariff is applied to all U.S. imports from Mexico and Canada. All tariffs are applied in Q2 2025. It said this will likely push the Canadian economy into a recession in 2025, and the subsequent recovery will be "rather tepid." Ultimately, it added, there will be a permanent loss of productive capacity in the Canadian economy.

Its optimistic scenario is one in which tariffs are not implemented. As business investment gradually resumes, driven by demand for Canadian exports from a surging U.S. economy, the Canadian economy advances at a solid pace, it said.

On Inflation, in the Desjardins baseline scenario, solid economic activity before tariffs are implemented pushes CPI inflation higher due to excess demand. Then as tariffs are applied to U.S. imports, the downward pressure on Canadian inflation from slower growth is offset by a weaker Canadian dollar and reciprocal tariffs on the imports from the U.S.

However, Desjardins said, lower oil prices from a North America awash with crude puts further downward pressure on CPI inflation over the medium term. Its pessimistic scenario points to weaker Canadian CPI inflation than in the baseline scenario over most of the forecast, as greater slack in the economy and sharply lower oil prices more than offset the impact of the lower Canadian dollar and reciprocal tariffs applied to imports from the U.S.

It said the optimistic scenario with no tariffs applied has the lowest Canadian headline inflation in the near term, as the Canadian dollar depreciates least in this scenario and reciprocal tariffs are not applied. But over the medium-term, this scenario has the highest inflation as excess demand in the economy pushes core CPI inflation higher and more elevated oil prices further boost headline price growth, it added.

On the Unemployment Rate, Desjardins said the unemployment rate falls through 2025 in the baseline scenario, as surging U.S. export demand, a reluctance by businesses to invest due to uncertainty, and a slowing pace of labor force growth all provide a tailwind to hiring. However, it added, once tariffs are applied in late 2025 or early 2026, employment growth slows rapidly along with the broader economy, causing the unemployment rate to rise modestly.

As a result of Canada falling into a recession in the Desjardins pessimistic scenario, the unemployment rate rises rapidly, eventually topping 8% in Canada before gradually falling back to a still-elevated 7% as tariffs are kept in place and productive capacity is permanently lost. In the Desjardins optimistic scenario, the unemployment rate rises "somewhat" in the near term as growth slows modestly, but then gradually falls to below 6% in Canada as real GDP advances at a solid pace driven by a tax-cut-fueled U.S. economy.

Canada's response to any blanket U.S. tariff on imports from Canada is not yet clear. However Bloomberg News on Thursday reported the Liberal government is considering placing export taxes on commodities exported to the United States, a list that includes uranium, oil and potash, as a last resort. The report said retaliatory tariffs against US-made goods, and export controls on certain Canadian products, would be more likely to come first, citing unnamed officials.

In specific stock news, the federal government sold its roughly 6% stake in Air Canada ( ACDVF ) in the past few days, The Globe and Mail reported It noted the federal government bought $500 million in Air Canada ( ACDVF ) shares for about $23.18 apiece in April, 2021, becoming the biggest investor as part of a bailout package that aimed to shore up the finances of Canada's largest airline, which lost billions in the COVID-19 shutdown.

The average selling price was about $25 a share over the past few days, according to the paper's source, whom the Globe is not identifying because they are not authorized to speak publicly on the matter. A government spokeswoman declined to comment on Thursday.

West Texas Intermediate (WTI) oil closed lower on as the International Energy Agency said it continues to expect supply to exceed demand in 2025. WTI crude oil for February delivery closed down US$0.27 to settle at US$70.02 per barrel, while February Brent crude closed down US$0.11 to US$73.41.

Gold traded sharply lower late afternoon on Thursday following four days of gains as U.S. wholesale prices rose more that expected last month, though the data is unlikely to convince the Federal Reserve's policy committee to stand pat on interest rates at the its meeting next week. Gold for February delivery was last seen down US$52.00 to US$2,704.70 per ounce.