Hello and welcome. My name is Eric Lascelles. I'm the Chief Economist for RBC Global Asset Management Inc. and very pleased to share with you the economic portion of the 2025 PH&N Investment Perspectives. And indeed, there's a lot going on in the world of economics these days. And so we are going to share with you a double header, not just Canadian productivity, which is an important issue and likely remain one for the foreseeable future, but also tariffs.

And so of course, tariffs moving awfully rapidly right now, I'll confess the original plan was just to focus on productivity, but it became quite clear as the spring approach that we had to speak to this burning economic issue as well. I have to confess, there have been some twists and turns as it pertains to tariffs. And so I'll share with you our latest thinking, and I suppose without any quite guarantee that the story doesn't yet change again.

Okay, let's jump in. And I guess just on the tariff front, certainly they have been both terrifying and “tariff-ied”. I suppose, though, it's worth observing that in a Canadian context at least so far it seems as though Canada maybe not getting the brunt of the tariff impact that had seemed to be initially on the way. And I should note, I'm recording this on April 4th, just in case things change rapidly when you're watching this.

I'm teasing you, though, because we're going to start on the productivity side, and then we'll pivot back around to the tariffs at the end. And so indeed, let's begin on Canadian productivity. And so there is certainly much that is wrong. And I can show you that, I can talk a little bit about why productivity has lagged so poorly in Canada and perhaps what can be done about that as well.

Let's just jump right in and just with a definition to begin with. Let's recognize that the classic productivity definition is labour productivity. And it's really just how much output can you generate for every hour worked. And if you're wondering why that's the definition.

Well, the idea here is you want to get as much as possible out of your economy with as little human effort as possible or as much possible for each unit of human effort, you might say. And so, we can get more for the same output for at the same effort. Great. If we can get the same amount for less effort, that's great too.

Both of those will be picked up in improved labour productivity. I should note, of course, labour productivity is really important as it pertains to economic prosperity and long term growth and so on. I won't say that it's everything. Keep in mind it doesn't factor in things like inequality, or the environment or leisure for that matter, but I would say don't underestimate how far a high level of labour productivity or a rapidly rising rate of productivity, can go towards addressing those problems as well. If your productivity is high, governments are swimming in money, they're able to address inequality, they're able to address the environment and so on. Just as an example. People can choose to pursue more leisure if they're making far more money than they actually need.

In terms of just mechanically, how does one go about increasing productivity? You can increase, capital intensity. And so that is to say to invest in the capital stock and more machines and more equipment and more computers and more factories and so on. And so that's certainly a classic approach. Conversely, you can increase the quality of labour.

And so that's a reference to higher education or more experience or some variation of that. Or, you can do a better interplay of capital and labour. So that's what total factor productivity is called. And I can say on that front that you can achieve significant gains, in part via innovation. So, a better computer or a better computer chip or some variation on that.

Similarly, you can achieve that by improving processes. Just a better factory layout or a better process for getting your work done. And it's not more capital. It's not better worker. It's just a better process. And then similarly, recognizing that the diffusion of existing knowledge is also a big driver of productivity growth. If your coworker is doing things particularly efficiently, you can mimic that.

Or if a competing company is doing something well, your company can copy that. Or if another country has a great new technology, your country can mimic that as well. And so actually, most of the world is in the business of imitating, and really diffusing existing technologies. That's a big driver of productivity as well. Or certainly someone does need to be pushing against the technological frontier.

So, let's talk in just a few slides about what the productivity problem has been in Canada, just scaling that problem. I can start by saying the normal state of affairs for productivity is that it goes up over time. And that's because we usually are replacing old computers with new computers, and people are becoming more experienced and more knowledgeable and more educated over time.

So that's the normal state of affairs. You can see that's actually not what's happened in the last five years, though. Very unusually Canadian productivity has been falling, which is quite distressing, and that we think is a temporary phenomenon. And I'll speak to why that might be happening in a moment, but certainly to make the point that productivity has been very, very unsatisfactory recently.

If you're wondering what that spike was in 2020, well, that was a pandemic related spike. And really what happened was that when the lockdown occurred, a lot of low skilled jobs were temporarily halted. And so the average level of productivity just compositionally went up And as soon as those jobs came back, we saw a reversion to a more normal level.

Now, if we step back and say, well, okay, Canada has done very poorly in productivity in the last five years, what about the last 40 or so years? The answer there would be Canada has very distinctly underperformed the U.S. In 1981, Canada had about a 99% level equivalent to U.S. productivity. So almost as productive.

Today that level is down to about 75%, of U.S. output per hour. And so that is a significant loss. And it constitutes more than $20,000 of lost income per year for the average Canadian household. And so that's an awful lot of loss to have given up. It hasn't been a steady bleed in the sense that there have been decades when Canada's relative productivity level held loosely steady, you can say the 1990s, the 2010s were periods when actually there wasn't much further loss, but nevertheless, there wasn't much gain, and the productivity level was lower throughout

And there have been decades, such as in the 80s, the 2000s and the 2020s in which there has been a significant loss. So Canada well, well behind there. Then the third perspective is just to say, well, okay, Canada has badly lagged the U.S., but maybe the U.S. is the special country here.

Not that Canada has been particularly bad and there's something to that. And so, you look at the change in productivity by country since the year 2000. Everyone starts at the same point here and then we see just how much growth different countries have achieved. The U.S. clearly is the outlier. The U.S. has managed more productivity growth than just about everyone else, at least among G7 countries.

Canada, pretty middle of the pack there. So you can argue not that bad. But there is a bit more perspective. We can add, if you look at the level of productivity currently achieved, the U.S. is highly productive and towards the very high end of peer nations. Canada, in the pack, but nevertheless, you could say toward the lower end and so, underperforming, I think to some extent, even when you talk about, versus peer nations. And just keep in mind, Canada, a country right beside the U.S., has some commonalities, so you would think that Canada, more than anyone else, should be aspiring to better replicate that U.S. success. And then a last thought before I get into actually why the productivity has been bad. And so that would just be to note there is a distinction between competitiveness and productivity. Productivity we've defined. Competitiveness though is to say that you can be an unproductive country.

And indeed, many emerging market countries are very unproductive. If you're looking at the level of output per hour of work put in. But, if you have low wages, or if you have a weak exchange rate, or both, you can still go a long way and you can still be quite competitive. And so that is true.

And indeed, when we look at Canada right now, we can say that Canadian competitiveness is only a little bit below its long-term historical norm. The unfortunate reason is weak productivity has been offset by less wage growth than would have been achieved. So people are poorer than they would have been if productivity was higher.

And the Canadian exchange rate happens to be quite soft right now. And I would say that's appropriately so given the current situation. But there's no certainty the exchange rate stays this soft indefinitely. And so there is the distinct risk that poor productivity does come back to haunt Canada more if the currency were to normalize its valuation.

That was a big, long preamble. Let's just run through why Canada has weak productivity. And this is sort of your table of contents. And then we'll talk in a bit more detail about each one. And to me, maybe the big story is one in which it's not just one problem, it's a lot of different problems. And as we'll get to a bit later, of course, that's daunting.

But equally it means there are a lot of little things that Canada can do to help make this better. So let's talk about those problems. One would just be acute temporary factors. I'm thinking about things like, big surge in Canadian immigration in recent years seems to have hurt the productivity numbers. Talking about some distorting factors that lingering from the pandemic. More on that later. In fact, more on all these later.

Public policy that tends to come in for the bulk of the blame when you see conversations about Canadian productivity and tax rates that are too high, regulations that are too strict, and so on. I think generally this is true. I would push back and say it's certainly not the only reason Canadian productivity is poor so let's appreciate that.

Culture as well. I think you can say that Canada has a somewhat risk averse culture, perhaps somewhat complacent, perhaps somewhat antagonistic towards success, even. And so, that likely contributes to some extent as well. And then similarly, the structure of the economy. This is a big, big country with a not very big population.

And we have a particular resource endowment. And some of these things can be tweaked, but some of these things are fairly fixed and on the net, perhaps not the most favourable. And so that is something that's held Canada back at least versus the U.S., you might say.

Then business decisions. Businesses tend to get away scot-free a lot of the time here in terms of sort of blaming public policy and blaming some other things, but actually, when you dig in to the level of CapEx and R&D and so on that Canadian businesses engage in, you would struggle to put all of the blame for the low levels of investment on tax rates and this sort of thing. And so I would argue that some of the blame does accrue to businesses as well.

And then global forces are the sixth and really final force. Global forces really referring to the idea that there's just this ebb and flow of global productivity, and it's been more ebb than flow over the last 15 years or so. And so I suppose as we talk about that, we should acknowledge that Canada is not operating fully in a vacuum.

I said there were six things. I think there are six things, but I'll just throw a seventh up there. Which is to say, of course, you do also have to think about human capital, the quality of workers. But in Canada it's not obviously a problem. Actually, the level of post-secondary education as a share of the population in Canada is the highest in the world. There are some fairly impressive metrics here. And so I would say I don't think this is a problem, but it's nevertheless a relevant force to think about.

So let's jump now in and really recognize, first of all, that as we as we pretend that these are discrete buckets and each one can be examined in isolation. Of course, there's a lot of overlap.

And so the culture of a country does have a lot to say about the public policy and the structure of the economy and the sort of business decisions that get made. Let's appreciate that of course, public policy influences business decisions. It influences the structure of the economy to some extent as well. And for that matter, of course, your economic structure also has a bearing on business decisions.

So it's a big messy world, is the honest answer. But I will nevertheless pretend that these are discrete items, and we'll talk about each one in turn.

Let's begin with number one. So acute temporary factors. The idea here is there just happened to have been some things that have conspired against Canadian productivity in recent years.

One would be an unprecedented immigration surge. We saw population growth that was suddenly 3.5% a year at its peak. And the reality is Canada's capital stock. And this is what this chart shows. Canada's capital stock just did not keep up. We didn't see 3.5% more computers in factories and, and businesses operating and so on.

We saw a capital D intensification. We saw a decline in productivity from that. It was also the case that the sort of immigration that was targeted was low skilled foreign workers who were again, the low skill part tells you something, tended to pull down the average level of productivity as opposed to push it up.

To the extent international students came, they were perhaps theoretically of a high skill or at least working in that direction, but students tend to work part time jobs that are low skill as well. So there were some real composition issues from the immigration surge that temporarily hurt productivity growth. We think there are some lingering pandemic distortions. Canada does have the highest proportion of work from home in the world and we believe that may be causing some subtle damage to productivity growth as well.

There was some capital misallocation when businesses wrongly judged that perhaps certain pandemic distortions would persist and that sort of thing. And that likely is temporarily hurt productivity also. And then I can also say, of course, we had an interest rate shock.

Interest rates rose to the highest level in 15+ years in recent years, and that discouraged some measure of borrowing and some measure of CapEx. And again, that's a temporary thing. And indeed already beginning to reverse. And then also just very high uncertainty and policy uncertainty and so on. Of course, U.S. tariff decisions central among those if I make a halfhearted attempt to connect the two parts of this presentation together.

And so all those things we think were temporarily hurting productivity, contributing to the outright decline, but probably not in a permanent way. And then we move on to Canadian public policy, which again, comes in for the bulk of the criticism. And it deserves a fraction, but maybe not the entirety. And so, yes, Canadian taxes are less favorable than in the U.S.

That's what that table broadly shows. Higher personal tax rate, higher corporate tax rate, lower government support for R&D, and so on. But, I would say I think that we tend to overstate this as the central driver. I look at the corporate tax rate, it's only slightly higher in Canada. R&D support is only slightly lower, and so on.

And so it's part of the story. But I don't think it's anything like the whole story. I will say within the public policies sphere, to me, bigger than the taxation issues are the regulatory issues. And it's just so incredibly difficult to engage in infrastructure projects and resource projects and heavy regulations on banks have made for more cautious lending there.

And lots of regulations around construction and building have made it very difficult for builders to generate new housing and so on. I think that is probably the biggest public policy issue. I'll talk about interprovincial trade in a moment, which is related to that as well. The size of the government. Canada's government has grown a lot in recent years.

And it's not clear that there's a lot more being returned for that. And then similarly, I'll just mentioned immigration, and this is more of a reference to the before times when Canada had a pointsbased system, and that was the main vehicle by which immigration came in and broadly celebrated, broadly successful. But it is notable that, it did tend to attract, maybe you could say conservative professionals as opposed to risk taking entrepreneurs for what it's worth.

And similarly, let's recognize within that, sphere of immigration, we need to think about emigration. And Canada has suffered from quite a significant brain drain over the years as well, attracted in part by lower taxation and better opportunities to build businesses and so on in the U.S. And so certainly a notable part of the story. I would say this, which is when you are this small open economy beside a big open economy, and that's Canada versus the U.S.

So I guess we could debate the open part of the U.S. given recent developments. Nevertheless, it's not enough to have tax rates that are almost as good or regulations that are almost as attractive as the U.S. I think it's not enough to have ones that are as attractive. You arguably need to be more competitive than the U.S. if you really realistically want a business to say, I'm going to move into these smaller of these two markets.

And so that's just the reality. And that's not where Canada is right now.

A quick digression, though, related to policy, provincial trade barriers. And so certainly come in for discussion recently. And so I think it's well appreciated and acknowledged that there is significant lost economic output because there are a lot of provincial barriers just between the provinces. And some estimates would say 4% of GDP could be gained, which is quite a lot.

And so certainly worth pursuing. I can emphasize this is not a new idea. Economists have been talking about this. Policymakers have been talking about it for a long time, including a 2017 Canadian free trade agreement between the provinces targeting this very problem. So, it's not a new issue. Let's recognize you're not going to fix it fast enough, by the way, to offset damage from tariffs.

This is sort of a multi, multi-year sort of project. But I would say do appreciate it's harder to implement than you might think. When we talk about these barriers, they're not tariffs. They are non-tariff barriers. These are just different rules and regulations and different packaging requirements and different safety requirements and different occupational rules.

And a big part of the theoretical gain from better connecting the Canadian provinces would be to say, why are there ten different distinct health services and why are there ten different distinct education services and utilities and so on. And so kind of what you're talking about is, removing just about everything provinces do and handing them to the federal government, which of course, the provinces don't particularly want and strikes me as being fairly unlikely.

I think there is room for action. And indeed, we're seeing some concerted efforts and it would seem that aligning job and occupation certifications and registrations is perhaps the most obvious first step, and we're seeing some movement in that direction. I would say the transportation sector, the fact that a truck just can't easily drive across the country commercially, and there are different axle rules and tire rules and so on in different places.

That's also an obvious opportunity for quick resolution. I don't doubt we'll see further gains over time, but I would equally say unless you think the provinces are going to cease to have any kind of function, we are likely going to continue to see some barriers that implicitly exist.

Okay, back to the main story here. On the Canadian culture as a productivity drag.

I think you can argue that Canada has a risk averse culture with an emphasis perhaps on consensus building more than disruptive innovation and, one in which failure is perhaps stigmatized. Whereas in the U.S. you have the fail fast, learn fast approach, and with conservative financing, be it bank lending or venture capital or angel investing, and one in which entrepreneurs generally sell to foreign buyers as opposed to trying to scale domestically.

So there's a real risk aversion, I think. Of course, hard to quantify or prove any of this, but that's certainly the sense that we get. Complacency as well. There is a focus on equality, perhaps over excellence and something of a fixed pie mindset as opposed to a growth mindset. And of course, just observationally, there isn't a lot of competition in some of the major sectors of the Canadian economy.

It's fairly sewn up and not a lot of new small disruptive companies trying to upset the apple cart. And that sort of speaks to a degree of complacency. Then antagonism towards success as well. And so, just to the extent that maybe ambition and self-promotion and, wealth accumulation frowned upon to some extent and a degree of tall poppy syndrome, and you would struggle to identify five CEOs or five Canadian billionaires.

These are not people, in the popular discussion. And so, again, the tentative takeaway here is there likely is something in the Canadian culture that is perhaps discouraging a measure of innovation and risk taking and thus productivity growth.

Then the economic structure is certainly part of the story. It's a big country. It is a challenging geography, whether we're talking mountains or tundra or otherwise, it can be a challenging climate, certainly to live in a large fraction of the country.

Population density is low. Mega cities famously drive a lot of innovation and productivity growth, and Canada only has at most a few of those, and really not very many cities at all that you could call it really properly diversified, where you could do almost any job in them. And so that certainly is lacking.

A lack of scale. Just thinking here we are in this modern age of network effects, and scaling and so on and so crucial to businesses. And if you're in a country of 1.4 billion people like China, or 330 million people like the U.S., that's a big advantage versus 41 or 42 million people in Canada.

Similarly, just the sector tilts happened to be perhaps not always perfectly favourable in Canada. So government sector has just grown enormously. In fact, this chart shows that government productivity has been actively falling and falling fairly sharply over the last 6 or 7 years. And so that would suggest that perhaps the addition of many more workers is not yielding the addition of much more output. And so, that speaks to a productivity hit.

The housing market, countries with big expensive housing markets tend to have weaker productivity growth. Just capital is being funneled into housing as opposed to into more productive assets. And so Canada, of course, has that problem, in spades. And it's a complicated one, because of course, there's also a housing shortage. So, there is the need for significant investment in housing and in construction. But I think maybe what this refers more to is the idea that when housing is really expensive, when home prices are high, when affordability is poor, people are just dedicating a very large fraction of their wealth to that, as opposed to other, more productive forms of investment and spending.

So Canada has that challenge. Oil and gas is a high productive sector. However, oil and gas is a sector that has been experiencing outright declining productivity in Canada over the last few decades. And it's really a statement that each incremental oil well is slightly less attractive than the prior one. That's why it wasn't pursued first.

And oil prices have been high enough to render this still profitable for the oil and gas companies. They're still entirely rational in what they're doing, and I'm sure they're being as productive as they can manage, but it's just more difficult to extract this oil at the marginal barrel. And so the productivity has been falling in that really important sector.

You've got supply management, which of course is a fairly protected set of sectors. And so not one that lends itself to big productivity gains. You could level perhaps a similar critique of some of the service sectors elsewhere in terms of large semi-oligopolistic sectors that have also perhaps not been famous for productivity gains. And Canada happens to have a pretty big set of seasonal industries, which has workers idled for a significant fraction of the year, which is not productivity maximizing either.

And you can tweak some of these things. Some of them are maybe a bit more fixed. But again, just worth acknowledging the economic structure very much part of the productivity shortfall story. Then you get to business decisions. And so I think again, this is the part that you don't hear a lot of talk about. And yet I would argue it is very central to why Canadian productivity has been so woeful.

And so that chart on the left says a lot to me. And so, take a look at that dark blue line. And what that says is that the average Canadian business is spending barely more than half as much per worker on investments as the average American business. Essentially, spending half as much a worker, a little bit more than that.

You would struggle to justify that because the corporate tax rate is 1% higher in Canada. That hardly explains a nearly 50% lower level of CapEx per worker. And so, certainly there are sector differences. And when you've got a Google and an Apple, I'm sure they're spending all sorts on CapEx. And perhaps it's not quite completely fair.

But, even when we control for some of that and look across sectors, we do find that Canada lags significantly. And this is investments that likely do yield quite positive dividends should Canadian businesses do them. And they're just not.

Similarly, on the right side, just research and development spending. Canada fairly far down the list on this and lagging the U.S. quite profoundly on this front.

It's not a surprise if there's not much productivity growth happening when there's not much actual innovation happening earlier in the process.

And then global forces as sort of the last main force. And so let's recognize there have been global dampeners in recent years and a productivity trough of sorts over the last 15 years. You can see U.S. productivity mapped out into the 19th century and reflects the global trend, we think.

And so it's been actually a trough more than a boom recently. It's just hard to match the incredible waves of 20th century technology that came along. And whether you're talking about the internal combustion engine or electricity or mass manufacturing or the airplane or the computer and so on, just a pretty remarkable sequence of technologies. And we're probably not getting quite that same set and quite that same importance today.

But I will say we do see some global boosters out there. We think that internet revolution is still playing out. We can still pay a productivity dividend. Artificial intelligence probably the next big productivity driver. And so we think there's room for some improvement there. Don't forget that as countries like China, with those 1.4 billion people, reach the technological frontier, they're now pushing that forward and that kind of knowledge does eventually diffuse out to everyone else. And so that is, a helping hand for sure.

I would say, I think there is some scope for a global productivity revival with relevance to Canada. Not maybe with growth that's as fast as it was averaging across the 20th century but that can be faster than what we've seen averaged over the first part of the 21st century.

But clearly, I'm working my way into outlook as opposed to interpretation right now. So, let's do that properly. Let's do a something of a scorecard. Just to start with, we have those acute temporary factors. We think that's a medium sized force and fairly easy to fix. Just time is passing. Immigration policies have been tweaked.

Policy uncertainty will eventually decline. Interest rates are already declining. We should see some improvement here before too long. Public policy is big part of the problem, though not the whole problem. And taxes and regulations and so on. I would say not easy to fix, but there is scope for improvement. And of course, Canada has an election in the imminent future.

And it seems to me that both of the major parties are proposing some notable improvements that could help productivity. So I think there's some promise there.

Culture. Big part of the problem. Hard to fix. Culture doesn't change all that quickly. So we're not holding our breath here, but maybe there's some incremental improvement that can occur.

Economic structures, I would say medium-sized fraction of the problem. Hard to fix a lot of it. It's going to be a big country. It's going to be a small population for the foreseeable future. But, you can perhaps, right size government, you can improve housing affordability and get capital flows going in more productive directions. You can reduce entry barriers for certain sectors that have been fairly protected. And so there's some work to be done. But again, not big gains there.

Business decisions. We think a big part of the problem, we think there's some scope for improvement. And so we're hopeful that happens. But it does take businesses being willing to take that leap. And who knows, perhaps, the wake up call from U.S. tariffs and a U.S. policy shift could yet induce that.

And then global forces. So again, we think they're a medium part of the problem. And we think that we see some improvement down the pipe.

And I'll throw human capital up there as well. Wasn't a problem, but we can see some improvement potentially there as well.

To summarize it, first of all, productivity is super important, paramount importance in terms of financial well-being over the long run. It's almost the only thing.

Challenges. It's a big problem for Canada. It's a multi-faceted problem. The opportunity, though, is that that means there are therefore plenty of areas for improvement. And indeed, we see quite a number of potential catalysts to induce some improvement. Some of it is just the economy's done so poorly recently, that we can expect some gains.

Part is that the immigration policies are being changed, some as the tariff threat creates the need for more growth elsewhere and is creating a focus on this Canadian election likely to induce some useful policy changes. And then we see just new technologies on the horizon that could be productivity enhancing as well. And so just loosely, from an economic standpoint, we do think there's room for some faster Canadian productivity growth probably happens gradually.

Probably not that smooth. I think it's not unreasonable to aspire for productivity growth to go from averaging about 1% a year to maybe something like 1.5% a year, which would be a 50% improvement in the rate of growth and would make Canadians significantly more prosperous, within a generation. Just to put a thin veneer of markets on top of this, given that you're all investors of various sorts.

Well, to begin with, you would think a Canadian dollar would be a little bit stronger in a higher productivity environment. You would think that earnings, of course, would be somewhat higher, helping the stock market. You would think that interest rates should also equal be a bit higher as well. Just faster growing economies tend to have somewhat higher interest rates.

Okay. Let me make the big pivot here. A bit of a non sequitur other than productivity can maybe fill a tariff hole. But otherwise this is a very different subject. And it's a subject that's moving unbelievably quickly. And so I will reiterate I'm recording this on April 4th. I dearly hope this remains the final word on the subject forever, but I have a sneaking suspicion we will continue to see some twists and turns that could render parts of this stale.

So I'm going to try to give you the 30,000ft view that remains hopefully valid for as long as possible. So let's talk about the tariff story, outlook response and impact as well. Just starting from first principles. What is a tariff? I'll do this ever so briefly. It's a tax. It's a tax on importers. And so, the first order consequences would be government earns more money.

And of course, the money is paid by the importer. But very quickly, you realize there are just cascading implications that extend beyond that. And so, of course, second order effects on prices, on supply, on demand, on currencies and supply chains, the list goes on. So there are cascading implications. And you meet maybe just to sort of summarize those properly in a good, bad, net effect kind of context.

For the country imposing a tariff, there are some potentially good things they might enjoy more domestic production. If they've crowded out foreign producers, the government will enjoy a higher level of tax revenue from tariffs. So I suspect they then bleed revenue if the economy is weaker elsewhere. But nevertheless, they do collect some money right there. However, that is then pitted against some pretty significant negatives.

Tariffs increase prices and they lower demand because of the higher prices. They allow for less specialization. So domestic firms are now being stretched thin, and they're becoming doing things that are less good at, which is a lower productivity decision. Less selection despite the stretching thin. Ultimately, there probably are fewer products for consumers to choose from.

And so they lose something there as well. Normally, and I say normally, as the emphasis word here, because normally you would expect a country applying a tariff to see a stronger currency. Let me acknowledge, to the extent the U.S. is the main antagonist with tariffs right now, the U.S. dollar is falling, not strengthening. I suppose it speaks to the idea that these rules of thumb and theory and history don't always work quite precisely.

And I think the dominant concern for the U.S. is just the economic implications. And perhaps the decline in the global order is rendering the U.S. dollar less of an obvious safe haven currency. So I suppose other forces are dominating. But I will just mention normally you'd expect some punishment from a stronger currency and then of course, just massive supply chain headaches as everyone is forced to rejig their supply chain.

You think back a couple of years to the supply chain problems then and recognize just how consequential that can be. In terms of what that means, there's some good, there's some bad, but usually it's a net negative. The bad almost always outweighs the good if countries retaliate. And that seems to be happening versus the U.S., then it's always a bad. It's always a net negative for the country imposing a tariff.

If you're a country being hit by a tariff, your currency usually goes down though with the recognition that that's not quite holding perfectly true right now. Of course, you then suffer lower production and exports. And you, of course, you grapple with supply chain headaches of your own. And so that's always a net negative. To be honest, though, most countries are ultimately likely to sit on both sides of this ledger in the sense that to the extent we see retaliation. Everybody's imposing, everyone is being hit. Everybody is a loser, unfortunately, on that front.

Okay. So let's actually talk about where we are right now. So of course we have this new White House and President Trump in for a second term, and he has a tariff agenda. We've been trying to sort out, as everyone has, just what these tariffs are likely to look like.

And there have been quite a number of dead ends and false turns. And again, we may yet see more, but I'll just say where we are right now, which is we can say we know the countries that are theoretically vulnerable to U.S. tariffs. Those are the countries with the big dark blue bars here. These are countries for which a large fraction of their economic output is consumed by Americans. Mexico and Canada are, unsurprisingly, a huge on that front. Vietnam more surprisingly, right up there as well. Taiwan, Malaysia, Thailand are notable exporters to the U.S. also. I will note that when I think about the economic damage we need to be worried about, we do need to think a lot and be worried about Canada, Mexico, Vietnam as well. I would say we certainly need to pay attention to other countries.

And of course, the U.S. is in the midst as the opposite party for all of these. It gets quite affected as well, though it is a very large domestically oriented economy. So, it's not hit as much as you might think. But it's certainly negatively affected by these tariffs. Two I would say don't lose sight of all the countries with those little numbers on the far-left side.

When I think about the UK or France or China or India or Germany or Japan, they don't trade with the U.S. that much. No more than about 3% of their economic output is consumed by the U.S. And so certainly there are companies and sectors that are very displeased with recent tariff announcements. But I would say I think those countries are going to be okay.

You reduce their growth forecast a little bit, but they are likely to be okay. The real danger is Canada, Vietnam, Mexico and add in the U.S., of course, as well. But I've been neglecting those gray boxes, the gray squares, I should say. Those are the reciprocal tariffs recently announced. For instance, Vietnam is a big problem.

A quarter of its economy is selling to the U.S. And it has just had a tariff put on,that is approaching 50%. So that's a big problem for Vietnam. You can say conversely and not to focus too much, but conversely the UK towards the left side, you know, not that trade oriented toward the U.S. and at least as tariffs go recently, a 10% tariff isn't as bad as a lot of countries got it, so much less exposure.

If you have sharp eyesight, you will notice there is no little gray square for Canada and Mexico. And that's because, of course, somehow and we're all a bit perplexed by this. But somehow Canada and Mexico did not have a reciprocal tariff put on them. And so it's a bit of a strange situation. They were enemies number one and two, seemingly as just a few days ago.

And now, what one thinks perhaps they are friends number one and two, and that's hard to fathom that sticks around. So more on that in a moment. We still think there is set to be some economic pain. I will emphasize as well, those countries do have a series of other non reciprocal tariffs that are hitting them as well.

So let's run through just a quick blotter of what the White House has been up to from a tariff perspective. And so you did have originally 25% tariffs targeting Canada and Mexico implemented on March 4th, partially lifted on March 6th. Some does remain in effect but partially lifted. I would still emphasize this could yet be revived at a later date.

It’s sort of hard for me to fathom that was it and somehow Canada and Mexico were just completely unexposed. China tariffs we've seen now three rounds. And that's just this term. There were rounds in the first Trump term too. So, 10 plus 10 plus 34. So 54% tariff cumulatively applied just in the last couple of months.

And China has retaliated pretty close to in-kind. And so that's quite significant there. Though China is less reliant on U.S. demand than you would think. Steel aluminum tariffs, those are in effect, they were implemented March 12th. They are still in place. Canada is the single most affected country by both of those, in the sense that it is the biggest exporter of steel and of aluminum.

And indeed for aluminum, it is almost an order of magnitude bigger exporter than anyone else. So, it's very directly affected. This did prove temporary during the first Trump term, but temporary is all relative. It was 14 months, which was a long time. I would say there is a lower probability of it being removed this time, just given it seems like ideologically the Trump administration is just more fundamentally pro tariff this time than last time.

Then you get the reciprocal tariffs, which we've just seen and are being implemented almost as I'm speaking. And so, big tariffs on a range of countries say the EU gets hit 20%, Japan 24%, China 34%. That's additional 34% to the prior 20%. Canada and Mexico though again, initially avoided further tariffs. So that was the big surprise. And so the net takeaway was for the U.S., on the whole, the tariffs were a bit bigger than expected for Canada and Mexico, though considerably lighter for the moment.

Auto sector tariffs have now been implemented as well. That does include Canada and Mexico. Quite problematically, to the extent there is a big integrated North American auto supply chain and then sector specific tariffs still looming. And so we are still expecting to hear something on copper and pharmaceuticals and computer chips and forestry and certainly several of those copper and forestry and perhaps pharmaceuticals very relevant to the likes of Canada as well.

And then recognizing we're seeing quite unorthodox things done even within the realm of tariffs, which is, there are new tariffs threatened on countries buying oil from Venezuela. So, not to do with trade with the U.S., but just trade with a different country and the U.S. threatens those countries and China, India, Spain are pretty central countries that buy a lot of Venezuelan oil, so that could yet rear its head as well.

Let's spend a moment just on these reciprocal tariffs for a moment in a Canadian context. Again, Canada and Mexico got off very surprisingly lightly for now. That's the ominous addition at the end. The rest of the world was conversely hit harder than expected. Tariffs take effect April 5th for the first 10% of those tariffs, April 9th for any additional sum that was levied against a country.

I would just make the point,Canada is not fully off the hook in the sense that there are significant tariffs still affecting Canada right now. Anything not USMCA compliant is facing a 25% tariff. To everyone's great surprise, we all learned about a month ago that actually upwards of 60% of what Canada sells to the U.S. was not falling under USMCA.

In theory, this could be quite a significant tariff. What seems to have happened is a lot of those products were theoretically compliant, but it just didn't make sense to go through the logistical hurdle of making them compliant for a very small cost saving. So, we're seeing a lot of paperwork done now, which I think will result in most of the trade being compliant.

But nevertheless, there is a sliver that is being hit by that 25% tariff right now. The steel and aluminum tariffs, of course, do affect Canada the most. As I mentioned a moment ago, 25% auto tariffs do affect Canadian value added on cars and major parts and will affect all parts, within a month or so. And then again we're seeing sector tariffs coming in, and some could hit Canada quite badly. So, there is a significant blow. It's just not as big as feared. If there had been a full 25% blanket tariff. But I would just say unfortunately in my view, there is a distinct risk, indeed, outright scope for higher Canadian tariffs later. And so, just recognizing the number of surprises and twists and turns, I don't think we can conclude that was the final surprise on April 4th.

Again, as I said earlier, hard to fathom Canada and Mexico went from enemy number one to friend number one overnight. So, I'd be very surprised if that was it. President Trump indeed outright complained about the Canadian dairy sector in his speech delivering reciprocal tariffs so hard to fathom that there's no additional retaliation coming. And then we know the USMCA trade deal is going to be renegotiated in the coming quarters, likely no later than 2026, but probably sooner, would not surprise me.

And this is just a theory and a scenario, but it would not surprise me if the U.S. hit Canada and Mexico with tariffs leading up to those negotiations to induce concessions at that time. And we certainly know the U.S. still has many complaints and demands about and for Canada in the context of border security and military spending and the country's digital services tax and value added tax, the GST, and currency valuation and supply management.

At one point, the banks were a source of complaint. And so it would be strange if those complaints were all abandoned. And so unfortunately, I would expect there to be some additional pain, perhaps coming down the pipe for Canada as well, but not with a whole lot of precision on timing or on the exact magnitude.

Okay, so let's talk about the potential economic impact of the tariffs that have been announced.

And so for the U.S., I can say, well, there are quite a number of channels. You've got the classic tariff channel, which is plenty complicated by itself, obviously, and just raising prices and discouraging demand and so on. That's a substantial negative. However, there are other channels too. Uncertainty has been so high that we do see pretty clear evidence of some economic weakness emerging from that.

And that's not fully resolved yet. And to the extent there's uncertainty as to whether tariffs stick around permanently, that element stays for quite a while, potentially.

U.S. products being boycotted to some extent. That's not part of the tariff math. Models don't understand that. But that is likely an additional small supplemental negative for the U.S.

Long term reputation damage. If countries don't trust the U.S., that could be an enduring negative. Whether or not tariffs do stick around over the long run or not. Conversely, onshoring probably is encouraged. I don't think it's going to be a long-term positive for the U.S. economy, but there are likely some businesses that conclude we better build that next factory in the U.S. to avoid all of this.

And so, there is some small benefit the U.S. accrues there, conceivably slightly more stimulative monetary policy when it comes to tariffs. You generally get rate cuts, not hikes though very tentative ones because of the extra inflation that is in the mix.

And then fiscal stimulus possibly doesn't seem to be central focus right now. But nevertheless, I would say there is some scope for help there too.

When we tally that up and there are big, big error bars and uncertainties here. But we would say what we're seeing right now is loosely in line with something like a 1.5% hit to U.S. economic growth. I think the risk is it could be a bit bigger, particularly if we see additional tariffs on Canada and Mexico, but that's about where we are.

Inflation is about a percentage point higher, certainly undesirable. Not obviously a slam dunk recession though. I know there's been some fear to that effect. And then for Canada similar set of factors are not identical. Tariffs potentially quite problematic in terms of the direct effect though again uncertain magnitude right now because we don't have a clear sense for where things end up.

Canada did better than expected recently, does still have a significant blow. Could do worse later. Uncertainty even more relevant. In fact, we see some very real economic weakness in Canada related to that uncertainty. Canada is doing a lot of boycotting of the U.S. There is some small negative that accrues to Canada as well. Some people just don't buy as opposed to buying Canadian or buying from a different country.

And some onshoring toward the U.S. likely hurts over time. But, we are seemingly getting more rate cuts in Canada, and there's some scope for action there. There is real scope for fiscal stimulus, indeed, that that that's actively being delivered already to some of the most affected sectors. And so, we end up with a Canadian economic hit that's actually a little bit smaller than the U.S.

If existing tariffs stick and the inflation impact is a bit smaller too, that's a complete reversal of what everyone was thinking as recently as a few days ago when it looked like big tariffs were going to hit Canada. I suppose we could yet be in a position of having to change that, but as it stands right now, if Canada dodges the worst of the tariffs, it's still a palpable blow, but it's not nearly as bad as it otherwise would have been.

And then just to maybe summarize on the tariff front, really three dimensions here. So far when you're talking about the size of the tariff, the tariff rate, the answer is big or high, at least for most, although the jury is still out on Canada and Mexico.

If you're talking about tariff breadth. In other words, is it just some niche sector or is it just oil and gas, or is it just, steel and aluminum? The answer is a lot of these are economy wide or pretty close to it. And so that is again another reason to think the tariffs are a pretty big deal.

And then the third dimension and there isn't usually a third dimension. Usually when public policy is enacted, it is now in place. And that is the new norm. And you presume it endures indefinitely or something like that. Duration though, is a big question. And so that's what's unclear right now. And so we've been working with a general view that tariffs would be big.

And I think for the most part they are proving big, that they would be broad. And again, for the most part they're proving fairly broad at least. But, that there would be likely scope over, say, a 3 to 6 month period for a partial reversal or partial unwind of those tariffs as countries essentially make concessions to the U.S., and perhaps as U.S., economic damage becomes less palatable there as well.

And so we still think that's likely the case. So big tariffs for now. Maybe it ends up being medium sized tariffs in six months from now. Still doing damage but doing a little bit less damage than would have otherwise been the case. And indeed still, to be perfectly honest, major questions about all three dimensions. I doubt that was the final word on any of those subjects.

Let me talk just about the implications for the overall U.S. economy, just from a broader set of Trump policies. I will start by saying, going into 2025, we had thought, the word had is important here, that the combination of tax cuts and deregulation and surging animal spirits might actually manage to outmuscled tariffs and lower immigration and allow the U.S. economy to move a little bit faster than it otherwise would have moved.

So that was the thinking as recently as a few months ago. However, here's where I'll click this open. However, the tariffs are clearly coming in stronger than expected. And so that has created a larger negative effect. The animal spirits boost that we had expected has faded significantly. In fact, we're being quite charitable and suggesting that there is any sort of boost at this point.

We've certainly downgraded that at a minimum. And so we now find ourselves in a world in which we have economic forecasts for the U.S .over the next couple of years that are weaker than they would have been without this set of public policy. And so that's where we are currently sitting. From an inflation standpoint, the expectation was always that there would be a bit more inflation.

The expectation is now that will be even a bit more than that, in the sense that tariffs are larger. And tariffs of course, are inflationary.

I want to finish just with a slight sidestep and to say of course we're all focused on tariffs. But from a policy standpoint there really is evidence of a fracturing international order right now.

And some of that has been ongoing for a decade or two, just transitioning from a hegemonic era where the U.S. was the only sheriff in town to a multipolar era in which China is also a big competitor and Russia is throwing its weight around and so on. So that's been going on for some time. But of course, it's gone into overdrive recently as the U.S. has in particular pulled back.

De-globalization is usually what you get in that kind of environment. Different cliques of countries, different spheres of influences forming. I think the big question right now is, there's some sort of U.S. sphere, there's some sort of Chinese sphere, maybe there's a Russian sphere. Is there now a discrete European sphere? They would have been under the U.S. sphere of influence until recently, but perhaps now going off on their own, and we'll see what countries might choose to join them.

And then in terms of the broader implications of all of that. Well, again, you know, de-globalization tends to lend itself to protectionism and tariffs and nationalism and so on. And we're seeing all of those things in spades right now. Prior international norms are being undermined. And so many of the international bodies that help to really create global laws are weakening.

And so whether it's the World Trade Organization or the World Health Organization or the International Criminal Court or quite a number of other entities, they are being somewhat undermined in a way that doesjust reduce the rules based order. National borders or even seemingly becoming more malleable. And some of the big global powers are proving more assertive, whether it's Russia in Ukraine or China in the South China Sea or the U.S. speculating about Greenland and the like.

And so we'll see where this all ends. But nevertheless, these were previously not thoughts that people seriously had. And just to turn this to the mundane economic implications. Well, normally when you see this multipolar era forming and de-globalization and protectionism, usually there is less economic growth, which I'd say we're tentatively seeing. Usually there is more inflation, which again, we're already tentatively seeing.

And, you know, just to be clear, these are trends that don't tend to last for just a few months or a few quarters or a few years. They tend to be something that lasts for an extended period, potentially several decades. So, we do need to be ready for some of these trends to persist for quite some time. And with that, I'll say thanks so much for your time.

I hope you found this useful and interesting and have a wonderful day.