How will the current tariff war impact economic growth?
U.S. tariffs have always been part of the Trump platform, but it's fair to say they're coming significantly stronger than the market than we had originally expected. And so U.S. and Mexican tariffs proving quite large, steel aluminum tariffs and some reciprocal tariffs still coming at least as I'm recording this. And the bottom line is there are significantly negative consequences for economic growth that emerged from that.

There are positive meaning undesirable consequences for inflation as well. This is moving quickly and becoming arguably the central economic theme of 2025. And as we think about the questions to be asked going forward, it's no longer will the tariffs be big or small? The answer seems to be big. The question is now will these tariffs last or not?

It's certainly possible that they do last. And that would be the worst-case scenario and particularly problematic for close trading partners like Canada and Mexico. I think slightly more likely as these big tariffs don't last and prove to be, diminished or temporary in some form. Recognizing, of course, that the white House does want strong U.S. growth, if possible, recognizing that negotiating strategies are very much a part of this.

Likely room for some reduction. But it's simply hard to say. And we can't say with precision, say again slightly more likely that tariffs diminish. But there is a scenario in which they stick. And that really is the difference, particularly for Canada and Mexico between recession and not if these big tariffs stick, it likely is a recessionary outcome for those two countries.

It is substantially negative for the U.S. as well, if not to that same degree. If they prove temporary, of course, there's still significant damage that's done along the way. And indeed, the growth outlook is already somewhat diminished on the basis of recent action. But it doesn't quite accumulate to the effect of recession. And so really, the way to think of this from a geographic standpoint is Canada, Mexico, to a lesser extent, China, significant negative effects. The U.S., I would say moderately negative effects from a growth standpoint, the rest of the world potentially affected, but to a much, much diminished extent, to the extent just the trade ties are not nearly as deep with the U.S.

What is the outlook for the U.S. economy based on initial public policy announcements?
Coming out of the U.S. election, the assumption was that a Trump administration would probably provide at least some small boost to economic growth in the U.S. in the near term, and the logic behind that was that the combination of tax cuts and deregulation and a boost in animal spirits was probably enough to outmuscle the negative effects on growth from higher tariffs and from less immigration.

And that's being put significantly into doubt now, as we see really two things happen. One is simply that tariffs are coming in stronger than most of us had imagined, and so set to be a more negative influence. The other element is that we are seeing the animal spirits effect the boost in confidence that we'd observed in late 2024, significantly fade.

Consumer confidence has retreated. Business confidence, and indeed the stock market has retreated to some extent as well. And so it's less clear that's going to be a boost for growth. And when we retally then, the headwinds and the tailwinds, we're left with the conclusion that perhaps growth is set to be a little bit weaker, perhaps, than it would otherwise be in 2025 and potentially beyond, as opposed, to a little bit stronger.

And it does mark something of a contrast from the first Trump term. The first Trump term, did see a bit more growth perhaps, than otherwise. And in particular, it was a front loading of fairly large tax cuts and then later a back loading of fairly small tariffs. And so this time, not only is the sequencing reversed the tariffs, the growth, destroying element is coming first, but also we're seeing big tariffs instead of small tariffs.

And to the extent tax cuts come which isn't yet certain, they're set to be fairly small and really just offsetting, what would be tax hikes as prior tax cuts expire.

What factors are contributing to the acceleration of economic growth outside North America?
It's been fascinating that as the U.S. economy has decelerated somewhat into early 2025, we've been seeing something of the opposite trend in the rest of the developed world. And we've seen economic surprises and indeed, economic data accelerate somewhat in the eurozone and the UK and Japan and in Canada as well. And so, something of a different trajectory, something of an unfamiliar path, given the profound underperformance of those economies in recent years.

And when we try to think through why that might be happening, I would say you start first and foremost with observations such as the fact that central banks outside of the U.S. are in a position and have been cutting interest rates more, and so that's provided additional stimulus. Many of those markets also have weaker exchange rates, which do boost competitiveness as well.

And many simply have room to grow. They're not overheating as the U.S. long has been. And so there is space there. And as an example, household savings rates are higher in a way that can unleash additional consumer spending as confidence grows. And so it has been a somewhat better story, obviously somewhat complicated recently by tariffs, which are, of course, of great relevance to places like Canada and have perhaps moderate relevance to some of the other markets.

But there are also made, in those local countries effects that work as well. And in particular, in Europe, in the European Union, we are seeing a commitment to significantly increased military spending as the U.S. steps back. And so that's something that can boost economic growth. We've seen the German debt break lifted in a way that can unleash a lot of infrastructure spending as well.

And so there is a feeling that perhaps this period of stagnation, particularly in Germany, is now in a position to end and to see that countries start to move and perhaps claim a more important mantle on the world stage. And so, broadly speaking, seeing pretty good growth trajectories there. And we think that can likely continue, perhaps with the exception of the likes of Canada.

Will economic uncertainty lead to recession in Canada?
The Canadian economy had been accelerating recently, in part for fundamental reasons such as lower interest rates and a weaker currency. And just some bounce back after a period of weakness in prior years. But some of the recent strength had also been very much artificial. And so, U.S. businesses front-running tariffs, looking to import Canadian resources before the tariffs hit.

And so probably flattering the Canadian economy somewhat. Obviously, all of that has changed now in the sense the tariffs are now in place. And that set to be quite damaging to the Canadian economy. And so, we fully expect activity to outright decline over the next several months as significant adjustments are made to this new reality in a trade oriented nation that relies so heavily on the U.S. now in a position to do that significantly less.

And the question is whether these tariffs stick around or not. And if they do stick, this almost certainly is a recessionary outcome and potentially a deep recession for Canada. If they prove not to be permanent, to be significantly pulled back in the coming weeks or months or even quarters, it certainly would be a period of softness, but perhaps not quite reached the level of recession.

There would be room, in fact, for a pretty significant rebound, naturally as that tariff process came to an end. We think slightly more likely tariffs are significantly lifted than not. But it's impossible to speak with great precision. If we were to look beyond tariffs, and arguably that's a foolish thing to do right now, but if we were to look beyond, I would say, of course, Canadian immigration slowing significantly, which is something of a growth drag.

Conversely, we had seen productivity growth starting to turn positive, after a period in which it was falling over several years. And so quite promising on that front, I would say that it's worth paying very close attention to the Canadian election as well. And so, there is the possibility of some sort of reset there that could help to drive growth forward.

But it is all in the context of this huge hit from tariffs. And that's set to be the dominant force for the next several months, if not beyond.

How is your economic outlook for China evolving?
Certainly, there's a lot happening in the China space right now. And most obviously the U.S. has hit China with tariffs on a number of occasions. And that's not a trivial development. But I will say that China is much less exposed to the U.S. economy than popularly imagined. Just 2.5% of what the Chinese economy produces is ultimately consumed in the U.S.

We think this is very much a manageable blow for China. And in fact, we feel good about the Chinese outlook, at least in the context of quite grim consensus expectations right now. And some of that is just we've seen further proof that China is indeed at the technological frontier. Of course, Deep Seek, argues that from a natural language AI perspective, China is at least in the mix, if not necessarily leading, but China also very much at the forefront of electric cars and batteries and drones and trains and solar panels and the list goes on.

And so, of course, a country that is innovating as a country that can grow. And we think China is doing that despite some rumors to the contrary. I can say similarly that there had been this deep chill between the Chinese government and the Chinese private sector, which we thought was quite problematic. And, we've now begun to see that ease in an important way.

And it's not a shock, then, that the Chinese stock market has been strengthening. And indeed, we think the business sector is in a position to help to drive growth to some extent as well. When we look at, the housing market, of course, China's housing very weak, certainly not set to be strong anytime soon. But we do continue to think that we're seeing tentative stabilization, at least in that sector.

And indeed, there may even be some small green shoots, as well. And lastly, there is still room for Chinese stimulus. And so we think that there's room should it be needed for the government to continue to provide support to growth. And indeed, they have recently announced a plan to recapitalize Chinese banks in a way that should get credit flowing as well.

And you can even argue from a geopolitical standpoint, as the U.S. steps back to an extent from the international stage, that is an opportunity. It's a less crowded international stage for China, as well. And so when we tally that all up, it still only adds up to 4% or 5% GDP growth for China in the coming year, which of course is much less than China's old standards.

But we think nevertheless is a pretty good rate of growth, and one that is sufficient for the country to achieve its economic and political objectives as well. And we think that the market is probably a little bit too pessimistic still on China.

How is the global order changing?
So it's important not to rush to judgment. And obviously there can be a new U.S. administration every four years. There may yet be future pivots, but it's fair to say for the moment that the present U.S. administration is very isolationist in its instincts. It doesn't want to be the global policeman right now. It doesn't want to be as engaged with or leading various international institutions, be it the World Trade Organization or the World Health Organization or NATO, and others.

And so this is quite a profound change from the role that the U.S. has played in the world. Going back many, many, decades. And for the moment, it does leave a void. And it does arguably increase the risk of military conflict around the world. And it is also a part of the broader deglobalization narrative as we shift into this very hegemonic era with multiple spheres of influence, and potentially the sort of trade barriers and frictions that result naturally from those sorts of eras.

And so that's the world that we're in. We do see some parties, beginning perhaps to step up in a way to partially fill that void. I would say that's most obvious, in the European Union, where we see military budgets increasing, in a big way and a commitment to, a multilateral approach, but nevertheless, in the meantime, it is a source of additional uncertainty.

And, as we look to the future, I guess it's worth thinking in the context of spheres of influence. And so having shifted from this hegemonic U.S. dominated era, and that's been a process that's taken place over well over a decade now, to a multipolar era. The presumption had been that the multipolar would be a Chinese sphere of influence, a U.S. sphere of influence, and perhaps a Russian sphere of influence.

And it's fascinating to think now about the possibility that there was also set to be a European sphere of influence. And it's not quite clear how this all plays out, but perhaps some of the special status of the U.S. in the context or reserve currency or its market valuations and so on could be challenged over time as this shifts.