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Hello and welcome to our latest monthly Economic Webcast for the month of April 2025. My name is Eric Lascelles. I'm the chief economist for RBC Global Asset Management and very pleased to share with you our latest economic thinking. As you might imagine, and indeed, I think at least for the third consecutive monthly webcast, tariffs are in the title.

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And so tariff reckoning ahead, I should emphasize I am recording this on Thursday, March 27th. And so I am not privy to what actually happens on April 2nd. You might be, by the time you are watching this, but I'll try to give you a sense for where tariffs are likely going, and I'll try to speak at a sufficiently high level that all this content doesn't become stale too, too quickly. But suffice it to say that tariffs are front and center and they are enormously consequential to the Canadian economy and certainly the Mexican economy.

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They are a pretty sizable deal for the U.S. as well, maybe a little bit less problematic elsewhere in the world. Nevertheless, it’s one of the bigger issues that markets and economies are reckoning with right now, and the trend has been toward expectations of bigger tariffs as opposed to smaller tariffs. This has not been taken that well, in some cases, by risk assets.

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Let's jump in, as we always do.

Report card: We'll start with that report card of sorts, and we'll talk about some of the good things going on, some of the bad things going on, some of the interesting things that defy easy categorization into either of the other two buckets. I'm afraid to say that we've actually put the negative first this time.

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It's been a while since we've done that. I guess that does speak to the scale of some of the challenges and issues out there. We do need to start with this. So, let's begin just with a statement that really primarily reflects the U.S. political environment, but extremely high policy uncertainty exists right now. And we have charts and metrics that demonstrate that.

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But I think even just anecdotally, thinking of the number of uncertainties right now, it is pretty remarkably high. And of course, that's consequential for economic activity. Tariffs, of course, front and center. U.S. tariffs have already to an extent been delivered, those steel and aluminum tariffs delivered in early to mid-March. Auto tariffs threatened quite recently, as I’m saying these words and seemingly set for fairly imminent delivery as well.

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And then potentially quite a range of things on April 2nd or thereabouts. It does appear that pretty large tariffs are on their way. I'll elaborate on all of these thoughts in a moment.

This constitutes quite a big economic threat to Canada and Mexico by virtue of their deep integration with the U.S. economy.

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It's, I would say, a moderate threat to the U.S. economy to the extent the U.S. also has a big domestic market and so is a bit less exposed than those other two countries, even though, of course, it's proposing tariffs on a lot of its trading partners, whereas the other countries are only really grappling with tariffs on the one big trading partner.

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In this light, we have been obliged to downgrade our growth forecasts and I'll talk a bit about that later. We've also been forced to upgrade our inflation forecasts. And those are both, centrally, not quite exclusively, but centrally motivated by tariffs, which of course subtract from growth and add to inflation.

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I'll just mention inflation. It’s still fairly sticky, particularly in the U.S., still operating in the realm of 3%, potentially set to go somewhat higher over the next year given the prospect of tariffs. I would say a similar story for Canada and some of the other particularly affected nations. And so the inflation story not quite fully solved. And it does present something of a quandary for central banks, who, of course, would like to cut rates due to weak activity, but feel compelled to raise rates due to high inflation.

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Normally the activity side slightly dominates if you're talking about the implications of tariffs, but it's not quite as easy a call as you might think when you see economic weakness, just given the inflation effect as well.

And then one last negative thing – I'm glad there's not more than that – the debt ceiling is approaching in the U.S.  And so that debt ceiling could strike as early as May.

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That is to say, we actually saw the debt ceiling strike in January. But they're now taking extraordinary measures, and they might run out of at least conventional extraordinary measures – if that is even something that you can conceive of. That could become problematic and the pressure could mount for some sort of solution by sometime in May or not too long thereafter.

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On the positive side, yes, there are some positive things going on, and let's not lose sight of that. So one would be that I see such a lot of talk about recession risk in the U.S. and recession, and I think it's at least a little bit overblown. Yes, we've been downgrading our U.S. growth forecast and indeed for other countries. By the way recession talk and fears for Canada are not overblown.

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Unfortunately, if we were to see big tariffs, that probably would be recessionary for Canada. So very legitimate concerns there.

In a U.S. context though, I would struggle to articulate or to expect tariffs large enough to thrust the U.S. outright into a recession. I'll show you some charts a bit later that would suggest that we're not quite seeing that as much as perhaps the U.S. economy isn't quite as strong as it was before.

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Let's emphasize that as much as Canada and Mexico are right in the crosshairs in terms of not just tariffs, but the impact of any tariffs that are applied, conversely, a lot of countries around the world – including countries that are being talked about a lot in a tariff context, including China and the European Union and a variety of other countries, they’re just not that exposed, in our view, to U.S. tariffs.

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The trade connection is fairly low in a way that suggests we think they may do better than people currently fear. We don't think that tariffs will ultimately be the dominant economic force for them in the year ahead.

Indeed, I would say that there are now some expectations in particular of a European economic revival.

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We're seeing big military and infrastructure spending commitments and optimism is rising. I don't want to push that too far and I think there's a risk of getting ahead of ourselves there. But nevertheless, it does represent something of a turn. And I'll show you some charts to that effect as well.

A quick word on China: China has announced a number of policy initiatives in its big meetings in March.

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I'll talk a bit about some of the efforts being made specifically to support consumers in consumer spending. And we think those are fairly important.

And then let's not lose sight of the fact that there are still some rate cuts underway. The Fed (Federal Reserve) doesn't seem to be cutting in the U.S., but the Bank of Canada did not long ago. And indeed many of the other of the world's major central banks are still in a position to do some rate cutting, which of course provides a bit of a buffer to some of those economic headwinds that presently are out there.

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And then on the interesting side, just one comment. We won't tackle it in any significant way in this particular webcast, but we have talked about it in prior ones, and I have no doubt we will get there again quite soon. It's just important to acknowledge that the global order is seemingly being refashioned right now.

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The U.S. is somewhat retreating from its traditional role as global policeman, you might say, and doesn't seem to want to embrace that role anymore, and not as keen to engage with NATO or to provide security guarantees. We're seeing the U.S. also pull back some of its commitments in a World Trade Organization, World Health Organization context and beyond.

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And so the world order is being refashioned, and we are already and we have been for some time seeing a shift from a hegemonic era to a multipolar era. We've already seen China ascend and Russia, of course, throw its weight around as well. I think one of the interesting questions is whether Europe becomes its own sphere of influence.

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The presumption was it would be under the U.S. umbrella and possibly not. Maybe there's a different sphere suddenly that exists as well and they carry on with the traditional global order. And I guess I should say, when you have the world fracturing like this and uncertainty and geopolitical risk that arises from much of that, you do tend to see a bit less economic growth, and a little bit more inflation.

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But again, that's a story for the next decade, not necessarily for the next month or the next six months.

In terms of government spending, well, of course, the U.S. government has expressed a great deal of aspiration of outright spending cuts, reducing the size of government. We'll take a look at how historically successful such efforts have been internationally.

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The short answer is it's pretty hard to do. But we'll get to that later.

We'll talk a little bit about boycotts. A number of countries entirely casually, and not in a coordinated way, but nevertheless consumers boycotting the U.S. in protest for various reasons, the tariffs among them. And so we can talk a bit about how historical boycotts have gone and what fraction of trade has been curtailed and so on.

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Lastly, we will talk about the Canadian election. Again, I'm recording in late March. In late April, the election will be held. It'll happen before the next time we can have one of these webcasts. So I'll do my best to give you a preview, both of likelihoods and possible policy directions. And having said all that, I'm quite concerned about the amount of time it's going to take to get through all this.

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So I better just keep rushing ahead.

U.S. public policy is driving maximum uncertainty: So let's jump in and we'll circle back to the top and say, there is an awful lot of uncertainty right now. This is trade policy uncertainty in particular. It's extremely high, the highest we've seen in the history of the series, much higher than it was during the first Trump term.

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And I suppose when you talk about uncertainty, you talk then about the unwillingness of consumers to make big purchasing decisions, whether it's buying a car or a house or something else; the unwillingness of businesses to make similarly large decisions. The point being, there is some damage that arises just from the uncertainty itself. And so we have a lot of that and we do see a bit of evidence of some wobbling economic numbers as a result.

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Fears of Trump trade war stoked stock market sell-off:  I can say the stock market's not loving this uncertainty, or for that matter the prospect of significant tariffs. And so this is the S&P 500, and indeed we've seen a little bit of a bounce on hopes that perhaps we won't see quite as large a set of tariffs as once envisioned.

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But I would still say the stock market is still down about 7% from its prior highs. That significantly reflects policy concerns in a U.S.-facing direction. Certainly, if you want to temper the impact, you can say, well, stock markets are still about the same level as back in October. And so it's hardly that bad given that October was a record high at the time.

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Nevertheless, there are real concerns here in the market. It is very much embracing that. And the one thing to think about, and as we've revised our forecasts, a big part of it is just saying tariffs could be bigger and therefore more growth negative. A secondary component, though, is that we've seen a significant decline in animal spirits, that enthusiasm that we initially saw so visibly in financial markets and business confidence and so on.

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And as that's come off, we can't expect that extra special additional bounce from growth. And so we've had to subtract a bit from growth forecasts on that basis as well. So this chart does fit directly into that thinking – as does this one.

U.S. businesses are worried about tariffs: So this is a metric that shows the number of times the word ‘tariff’ was used in different corporate investor calls, capital market days and so on for S&P 500 companies.

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You can see we've gone from a pretty low level of thinking on that subject to it being quite an overwhelming focus. And I should say, in this particular case, it’s in line with the sort of talk back in the first Trump term.

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So not necessarily beyond, but I guess there's only so many times you can talk about tariffs, even if the danger itself seems to be somewhat bigger this time. The point is, tariffs are on the corporate mind right now.

And then what do corporations think about those tariffs? Well, you can get a sense for it right here.

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Corporate confidence plummets as Trump tariffs threaten growth outlook: So this is the U.S. CEO Confidence Index. And you know that drop doesn't look that big, I suppose, because we can look at 2007, 2008, 2009 and say, well, it's a much bigger drop then, which is certainly fair.

Nevertheless, this has been a large decline in confidence. The decline we've seen recently is bigger than the decline, for instance, that struck in 2022 as we saw rate hikes and as we saw inflation spiking and these sorts of things.

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So it is quite a significant drop. It is now the lowest level of confidence that we've seen really since the early 2010s – you could say since coming out of the Global Financial Crisis. And there was always a big question mark and really an unanswered one as to just how consequential movements and confidence are. Often you see big swings and only fairly small adjustments in actual business investment or hiring or other spending decisions.

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So I wouldn't say it's a foregone conclusion that the economy is going to soften a great deal. But I would say that companies are at least spooked and the risk does exist in that direction. I suppose that's why we now have concerns about things like recessions.

I will say that for the moment, and recognizing we haven't even seen all that many tariffs applied yet, but for the moment, actually, the economic data – despite that drop in confidence – is holding together okay.

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Jobless claims say labour market is still fine: Here is weekly initial jobless claims for the U.S. It’s who's applying for unemployment insurance. And the answer is it's a pretty steady number right now. In fact, this chart doesn't do justice because, when you have jobless claims that are in the 200-250,000 per week range, that's extremely low by historical standards. You've had economic booms where it was up in the three hundreds.

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So this is a healthy spot. And so I would say we're not seeing signs of a sudden collapse, though I suppose it's not impossible. We could see some weakness in future weeks to the extent tariffs come on. But for the moment, holding together.

Dallas Fed’s Weekly Economic Index still looks normal: And then a very similar story here. So this is another high frequency indicator.

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We've been digging up a lot of the metrics we looked at during the pandemic, when of course we needed to know what was happening in the economy one week to the next because the changes were so radical at the time. I don't think it's going to be quite as radical this time. But nevertheless,  the extent that we're seeing concern about tariffs – we could see tariffs come on fairly soon –

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the scope for abrupt shifts in activity is there again. And so we're back to looking at these kind of metrics. The Dallas Fed very conveniently has a weekly economic index here. And you can see for the moment it looks unperturbed. It appears to be trending gradually higher, as it has been doing over the last several years.

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And so, again, we would push back against the idea that there's some sort of recession brewing right now and against the idea that even tariffs should do that, because theoretically the damage shouldn't be that large in a U.S. context.

Okay. So let's talk about tariffs a bit more directly and all the economic concerns around it.

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Divining Trump tariff intentions – big or small? So are we getting big or small tariffs? Of course the arguments for some time now have been, well, the concern and the risk of big tariffs or more tariffs. President Trump wields greater clout this time and perhaps knows how to use it better this time than his first term. He doesn't have to worry about another election, and so he can do what he thinks is right, as opposed to what is necessarily politically popular.

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He wants revenue explicitly to fund tax cuts. And from an accounting standpoint, at least, you can say when you're collecting tariff revenue, that is revenue that you can then use to deploy for priorities like tax cuts. He does seem to genuinely want to protect American businesses from foreign competition, genuinely to lower the trade deficit, to increase U.S. self-sufficiency.

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Those are things that probably don't maximize GDP growth, but they are aims in and of themselves. And so these are arguments that we could see pretty substantial tariffs come on. I would say as well that punishing disliked countries may be part of the equation. You would arguably struggle to think why Canada is so much in the crosshairs if that wasn't part of the thought process as well.

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The takeaway is,  there is a very real potential for large tariffs. Now tempering those fears a little bit, let's say that, keep in mind during the first Trump term, other than China we really didn't have very many tariffs at all that persisted even through the first Trump term, let alone beyond.

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The steel and aluminum tariffs were removed and so on. And so it's not impossible that we follow a similar, track this time. Do keep in mind that tariff threats are transactional and a negotiating tactic, and we see maximal threats and probably some sort of moderation over time. So let's keep that in mind. Let's recognize that tariffs have been repeatedly delayed.

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There was some thinking big tariffs would come on January 20th and then February 1st and February 4th and March 4th, and the list goes on. And they have been repeatedly delayed. They could just keep being delayed. At a minimum, they signal that the White House doesn't think that tariffs are a complete ‘miracle sauce’ in the sense that if they were going to boost the economy, you'd do them on the first day.

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So they recognize there is some cost to them, which is useful. And then in general, you would say as well that presidents like strong economies and strong markets, and President Trump in his first term was perhaps particularly oriented toward those things. I would note, though, as the little aside mentions on the screen, seemingly though, far greater willingness to tolerate pain than last time, right?

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The stock market is down. The economy is sputtering a little bit here and there, at least raising concerns to that effect. And we have not seen the White House waver at this point. So maybe willing to tolerate more. I don't think that that indulgence is infinite, though. I think there are limitations there. So where does that bring us?

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Well, the bottom line then is that certainly big tariffs being threatened. That's a fact. There is a range of possible outcomes. I do not want to pretend we have it all sewn up and figured out here. We've been surprised. And there have been changes of direction on a number of occasions already in recent months. But the odds are tilting toward bigger tariffs, clearly.

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Some we think and hope may be unwound later. We think after 3 or 6 months, there may be fruitful negotiations that can reduce, although they'll probably not eliminate, tariffs. So that's in our base case forecast as well. But I guess the initial point of relevance in particular to early April is there's a pretty high probability of significant tariffs being applied at that point or not long thereafter.

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Okay. So let's go through our tariff blotter here.

Tariff proposals and implementation – tilting toward large, problematic tariffs: Again the big message is tilting toward larger problematic tariffs. Of course the Canada/Mexico tariffs were implemented for two days in March (March 4^th to 6^th) and then lifted, partially at least, on March 6th. And so those are supposed to come back in early April. And of course, there have been carve-outs.

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Potash is a 10% rate, not 25%. Energy and oil and so on is a 10% rate, not 25%. It wouldn't shock me, perhaps, if there were some other carve-outs as well. So the cumulative damage might be a bit less. But these are still set to be big, problematic tariffs on Canada and Mexico if implemented anywhere near those sorts of levels.

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China, of course, has been hit by two rounds of tariffs totaling to a 20% tariff hit since Trump came into office on January 20th. China's responded, by the way, and so that is ongoing.

Steel and aluminum tariffs were implemented on March 12th. Do note that these tariffs were temporary during the first Trump term.

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They lasted 14 months for Canada and Mexico. And so I would say these are more likely to stick around and at a minimum not likely to be fully removed in the near term. I do think there's a chance the aluminum side could be lightened to match how things went during the first Trump term, just because the U.S. is so reliant on importers and it does so directly feed into car prices and so on.

Nevertheless, we’re presuming that some form of steel and aluminum tariffs do stick for some time and those are again already in place.

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Then the reciprocal tariffs, and that's sort of the description being used for a lot of the April 2nd tariffs that are being threatened. Of course the initial idea was when countries hit the U.S. with tariffs, the U.S. would respond. And so, sort of a tit-for-tat response to long-standing foreign tariffs. It's certainly broadened beyond that.

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It's being called ‘the big one.’ And so this is likely that big shot that the U.S. takes. They've described a ‘dirty 15’ set of countries. We don't know the exact countries that are in that group, but you can imagine it's the big trading partners and the countries with big trade surpluses with the U.S. and so on.

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And so seemingly they will all come in for some measure of tariff. I guess we don't quite know if it's going to be a 10% tariff or a 25% tariff or something a bit different than that, but nevertheless pretty significant tariffs. And of course, everyone will then get to work negotiating as hard as they can.

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But there are sort of two questions there. One is whether you can have 15 plus countries all fruitfully negotiating at the same moment. It's just a logistical exercise and challenging to pull off. And keep in mind, the time frame was more than a year, really, for fruitful negotiations during the first Trump term. So it may not be practical to think much of this can be fixed in short order.

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The other side is just some of the U.S. demands may be difficult to oblige. It's one thing to say spend more on the military. I think a lot of countries would like to do that, whether or not the U.S. wants them to or not, given the uncertainties geopolitically right now. Border control is probably not too difficult of an ask for Mexico and Canada right now.

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But some of the asks are more challenging. I'll talk about some of the Canadian possible requests and just how realistic some of them are. But the final conclusion is, to the extent that foreign countries probably are not able to comply with all U.S. demands, certainly tariffs probably don't completely go away. There's a risk fairly big tariffs stick around for a while.

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And then I'll just mention – and these are just really quick one offs:

Sector specific tariffs: of course we've heard specific threats on metals. So steel and aluminum applied, copper in play. The auto sector got mentioned recently, in theory some auto tariffs are coming on in and around early April. Pharmaceuticals and computer chips. We've heard oil and gas here or there.

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I'm a bit of a skeptic, but I guess it's worth mentioning, though, that Venezuela has sort of been targeted with tariffs. In fact, it's quite unusual. Countries that buy oil from Venezuela are being threatened with 25% tariffs right now. Not actually the country producing the oil, but rather countries trading with that country.

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So that's in play as well. And I gather China, India and Spain are among the more prominent countries that buy a fair amount of Venezuelan oil.

Auto tariffs, again, specifically threatened for the near term. Parts delayed a little bit and in theory, parts to comply with the USMCA (United States-Mexico-Canada Agreement) deal. Not affected initially, but perhaps that changes later.

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Country specific tariffs: I think that's been folded into the reciprocal tariffs mostly. Do recall the whole (U.S. presidential) campaign had a 10% global tariff, 60% on China. And it doesn't seem like that's the focus right now. It's more on country-by-country approaches, though wouldn't surprise us if at the end of the day we did have something like 10% average tariffs on a lot of countries.

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So not the plan, but it might end up not that dissimilar all the same. Okay.

Growth forecasts downgraded: And so given all these tariffs, given the potential for significant damage, even with the presumption that the tariffs become smaller, let's say six months later, we have had to significantly downgrade our growth forecasts. You can see it’s sort of a moderate downgrade for the U.S. instead of a nice robust 2.5% type number it’s sub-2%.

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For Canada it's a big chop. Instead of nearly 2% growth it's less than 1% growth. That's a big hit. And that presumes that the economy bounces back significantly in the fall as tariffs are lightened. And, it sort of conceals, but it's in the number, that you could have an economy that's actively shrinking in April, May, June, July for a number of months after any large tariffs are applied.

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That is a very real possibility, indeed. It is part of our forecast right now. You can see broadly smaller downgrades in some of the other markets. I would say loosely consistent with the idea that the economic damage in other markets is probably less from tariffs. And so Canadian businesses very concerned.

Canadian small businesses extremely worried about Trump threats: You saw that CEO confidence metric in the U.S. had gone down, but it didn't look anything like this.

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So small business confidence in Canada has absolutely plummeted to a record low. And we will see whether this proves justified or an overreaction or not. But it does speak to the pretty massive threat to Canada. You know, nearly a quarter of what Canada makes – certainly over 20% of what Canada makes – is sold to the U.S. And no one is talking about all of that going away by any means.

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But nevertheless, a significant hit to that is a very significant hit to the Canadian economy. And we need to recognize that risk recession is elevated. If you get a big tariff and it doesn't go away, it's very likely a recession. If you get a big tariff and it does go away 3 or 6 months later, you might just dodge it, but it would be a period of very real weakness.

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Obviously, there are scenarios in which the tariffs are smaller and it's just less weakness, and it's still growth for Canada and we certainly hope that's what happens. But it's more likely that there are some big tariffs, we think, at least initially, albeit with a lot of uncertainty.

Potential Canadian tariff responses: Let's talk about Canadian possible tariff responses. And so just briefly, I think this is well understood.

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One would be of course Canada has been retaliating more than many countries with tariffs directly against the U.S. Not quite tit-for-tat. So not dollar for dollar, but nevertheless significant with $60 billion CAD applied so far and likely to rise as U.S. tariffs rise. We're seeing strategic targeting on politically sensitive sectors and sectors where demand is elastic . . .

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So people don't technically need the product, or for which there are domestic substitutes.

We're also seeing some boycotts, and I'll speak to that. And that's just sort of a different channel and it's not government coordinated. But it does impact, in this case, the U.S. economy somewhat as well.

We're seeing also the Bank of Canada has cut rates, and may be in a position to cut further.

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We think certainly if you were to get big tariffs, we think there could be quite a considerable amount of further cutting, and some fiscal stimulus being lined up in terms of rebates for companies that are buying things from the U.S. where there's no substitute, and they would be rebated for the tariff charged by Canada. And liquidity measures just meant to ensure that businesses have the money they need to survive what could be a difficult period.

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Some more generous employment insurance programs as well. So, that's a big part of it.

Certainly negotiating with the U.S. is a big part. I'll save that for later. I have a more detailed slide in a moment. And then, of course, there are other potential actions, and we've seen some flirtation with that as well, like export taxes, export restrictions, import restrictions . . .

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Of course, you try to deepen ties with other regions. That's proving challenging with China as China just hit Canada with some agricultural tariffs recently. Perhaps Europe is an option. But of course, there is already a free trade deal there. And it's just when you're very far away from a region, there's just not that much trade that naturally happens.

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But maybe there's room for more. There are some unconventional options too. Okay.

Boycott considerations: So let's talk boycotts first. Again, we're seeing lots of talk about boycotts. And I would say some evidence that some boycotts are happening. Canadians are boycotting U.S. products – not government coordinated, entirely voluntary, of course. Boycotts do in theory inflict economic damage on the opponent on the U.S. in this case, just like tariffs, essentially.

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And so that we think is happening. I would note there can be some damage to the country doing the boycotting. They're not getting the products they would normally get. And some of the boycott isn't just shifting to domestic brands. Some of it is just foregoing consumption. And that's a weaker domestic economy. So there are domestic consequences too.

The historical research on boycotts is that they tend to be fairly porous.

00:25:48:02 - 00:26:07:24

So it's not like trade goes to zero. It’s fairly temporary. People sort of lose their passion over time. Highly variable. You have historical instances where – and you can see this on the next line – from 2% of the trade with a country being boycotted was affected or up to 18%. But again, porous in the sense that the other 82% generally is not affected.

00:26:07:26 - 00:26:26:07

And so a significant effect but not comprehensive. Again, passions do tend historically to fade with time. Often you have 2 to 3 months of peak activity and then it starts to fade. This could be different. I would flag, in fact, on both counts we could see a bigger effect here just because Canadians are feeling quite upset.

00:26:26:09 - 00:26:45:10

And this friction, this source of pain is unlikely to go away. As a result, the boycotts could persist, but nevertheless they're not comprehensive. And that's about the scale that we should be thinking, perhaps, toward the mid to higher range. There's scope for larger boycotts in some realms, such as  tourism, consumer packaged goods and so on.

00:26:45:13 - 00:27:01:14

But there is scope for smaller boycotts in other realms: and so entertainment, electronics, software, necessities. Obviously, as well, in some cases there just isn't all that many other options than U.S. made-up products. And so that's where we are right now. But it's just worth making that clear, the tariffs are one thing, the boycotts are another.

00:27:01:14 - 00:27:22:02

They are actually both doing some work. And we need to factor in both. Normally people only think about the tariffs side. We can see the boycotts a little bit here.

Canadian boycott of U.S. becomes visible: So here is cross-border driving traffic of people, of passengers. And so this is the flow into the U.S.  And so we can't say it's Canadians, it might be Americans returning, but nevertheless, cross-border traffic is down.

00:27:22:02 - 00:27:39:06

Of course, there had been this huge growth, a couple of years ago as the pandemic ended. There has generally in fact, there has – up until the latest month – always been growth. This is year over year, so I guess from the month in one year to the same month in the next year. We haven't had a negative number since, and we just got a negative number in February 2025.

00:27:39:09 - 00:28:00:15

Those cross-border trips down 16% from the prior February. And then of course, that's just February. You might think that gains force in March and beyond. So there is a real effect taking place here. And conceivably, as much as historically boycotts are, again, 2 to 18% of total trade, I would think that this is an area where we could see a bigger than average effect.

00:28:00:15 - 00:28:17:08

And seemingly we're starting to get that.

Potential U.S. demands of Canada: And then in terms of what could the U.S. ask of Canada – and some of these, they might ask of other countries as well – but we'll keep Canada in focus as one of the two most potentially affected countries. And so I'm going to bore you here, it's a big long list, but I'll just go fast.

00:28:17:10 - 00:28:55:00

Increasing border security: I think, you know, Canada already has complied essentially with extra spending and probably willing to spend more, whether or not it's actually money well spent.

Increased military spending: Canada already wants to do that. It's not unreasonable. And so I think likely you could find some sort of agreement there.

Toughen labor standards in the USMCA trade pact: That's mostly about Mexican labor costs. Canada doesn't much mind. It actually helps Canada compete with Mexico. So probably not a problem.

Remove the digital services tax: We'll see, I have no inside information here. I would just say that this is something the U.S. is asking a lot of countries. This only came on, I believe, last fall in Canada. It seems to me it is something that you could perhaps concede if it means avoiding large tariffs elsewhere.

00:28:55:02 - 00:29:13:05

Perhaps limiting Chinese imports: Canada did already, as an example, put a 100% tariff on Chinese cars and has historically followed along with the U.S. on certain other fronts.

Even within the USMCA, the through-putting of goods, there are restrictions in place. Those could be strengthened. I would think Canada probably in a position to comply there as well.

00:29:13:05 - 00:29:30:25

So those are the likely items. In terms of the possibles, I'm not quite sure it's not impossible, but it's not certain, to further open supply management industries. So during the first Trump term, Canada's dairy sector was opened a little bit to foreign competition.

00:29:30:25 - 00:29:51:19

I wouldn't be surprised if there was a little bit more opening again. Do note that the sector then gets amply compensated. That was at least the experience last time.

Perhaps support efforts to weaken the U.S. dollar: So the U.S. does want a weaker dollar, Mar-A-Lago accord and so on. And so we'll see whether that happens. But we could see that. The Canadian dollar is quite soft.

00:29:51:19 - 00:30:08:11

I think that over time there is probably a preference that the Canadian dollar is a little bit stronger. So maybe that's something Canada could do.

Alter softwood lumber rules again: We'll see. I'm not certain about that. But it's long been a source of friction. And some sort of resolution is needed, whether it's a stumpage rate or something else.

00:30:08:11 - 00:30:24:15

I'm not really an expert, but nevertheless, in play, at a minimum.

Commit to buy additional U.S. goods: That's something China did during the first Trump term. And so you say, yes, we'll go buy more of this product. And whether you do or don't is maybe another question, but nevertheless, there could be some commitments on that front.

00:30:24:18 - 00:30:41:21

Strengthen intellectual property rights: Canada's intellectual property rights are weaker, I gather, than the U.S.  So, to the extent a lot of that intellectual property is owned by American firms, they'd like it to be stronger, to last for longer. And so maybe Canada can do something about that.

Perhaps weaken the dispute resolution system in the USMCA.

00:30:41:21 - 00:31:03:12

We've already seen it somewhat, it’s somewhat fangless and all sorts of things are violating the USMCA already. But it wouldn't shock me if that was in play as well.

And then things that are unlikely. So, you know, granting Canadian water access to the U.S.: I think that's unlikely. You could see some renegotiation of terms. I gather, on the West coast, that there is some dam management of water flows that help to prevent flooding in the U.S.

00:31:03:12 - 00:31:46:04

Canada’s paid money for that and wouldn't shock me if that amount of money went down. But nevertheless, in terms of supplying water in a major way to the U.S., I think that’s pretty unlikely, despite inquiries to that effect.

Eliminating Canadian content rules: I think unlikely. Not impossible, but unlikely.

Reducing sales taxes: This is something the U.S. objects to, thinks it's receiving a bad deal, having to face foreign sales taxes when it sells products into foreign countries. I think unlikely that Canada would make a change there.

Open protected service sectors: And so thinking about transportation and perhaps telecom and some others. Financial services aren't really that protected. Nevertheless, those sorts of sectors, I would say unlikely just because the U.S. has very similar protections on its side and likely is not in a mood to lift those.

00:31:46:04 - 00:32:00:28

And so I'd be surprised if those changes would happen. If they did, it would be pretty darn consequential for those sectors. But I think that's unlikely. So that's where we stand right now.

And then the question is, you know, is it enough to comply, or to make concessions on the likely side and perhaps throw a few possibles in?

00:32:01:00 - 00:32:42:07

If not, then we have a problem and tariffs stay quite big. If yes, that's a path toward lower tariffs. We think that there will be a way to strike a deal, but it's probably not a solution struck in the next few weeks.

Okay. I mentioned before, you know, the U.S. government aspires to cut spending outright. They're looking to do that to provide funding for tax cuts and this sort of thing.

In context of U.S. fiscal aspirations: net government spending cuts are historically quite rare: I would just say when we look historically at nominal government spending over a pretty long sweep of history back to 1980 across G7 countries, plus, and so you would say there's not too many moments in those lines where the lines are going down. They are going up 95% plus of the time, and you have a few small exceptions here or there.

00:32:42:07 - 00:33:21:23

Most of the exceptions, actually, are coming out of the pandemic when spending was just temporarily incredibly high and it was just natural for it to come back down thereafter. The great majority of the time, government spending is rising, even during periods of austerity. You can see as an example, Canada, which is one of the gold lines in the 1990s and doing significant austerity for quite a period of time.

And, you know, nominal spending was still rising. It was rising less quickly. It was rising less quickly than GDP, which was sort of the key crux of the issue, which was a helpful thing. But it's really, really rare and really hard to outright cut government spending. And so not to say the U.S. won't do it, it's doing a lot of very unorthodox things right now.

00:33:21:25 -00:34:00:03

But I would say I'll believe it when I see it. I think it's more likely that we do see perhaps some spending restraint. But I wonder whether they won't quite get to the point of managing significant government spending cuts. And in turn, maybe that limits tax cuts a little bit. But also, you can frame that as it's maybe not a huge drag on the U.S. economy if they're not actually cutting that much.

U.S. short-term economic exceptionalism in retreat: And then just to talk about international comparisons, this is quite an interesting chart, though I should emphasize it is all expectations. It may slightly overstate the divergence that is happening here. I would just say the dark blue line is economic expectations for the U.S. And so that's gone down quite a bit recently, on tariff concerns and policy concerns and a bit of slowing growth.

00:34:00:06 - 00:34:39:08

Conversely, you look at the euro area or you look at Germany and my goodness, those are absolutely spiking right now. And so you've gone from sort of similar levels of expectations a couple of quarters ago, to quite divergent ones. And I would say stylistically we agree, we think that Europe is looking up to some extent.

00:34:21:14 - 00:34:57:27

And as I'll talk about on the next chart, there are some exciting things happening in Germany and elsewhere that could unlock some additional growth.

There are some challenges in the U.S. This probably does overstate the gap. In fact, the way I would think about it is that the U.S. has been this exceptional economy in recent years. It easily just trounced every other major developed country’s growth rate.

I still think the U.S. economy will grow the fastest of those peer countries in 2025 and perhaps even 2026, but the divide is shrinking, so the gap is shrinking. There's some convergence going on. Europe and the UK and others are looking up. The U.S. is looking down, but it is still the U.S. economy growing actually a little bit faster, for what it's worth.

00:34:58:00 - 00:35:44:09

Now, of course, the market fully values that and other markets are cheaper, and there are all sorts of interesting opportunities that may arise from that. But nevertheless, I think that's the way to think about it. But it has been a significant shift in thinking about both markets.

European/German “paradigm shift”: And then just to expand for a moment on this European/ German thought, this paradigm shift of sorts that we've seen just in the last month.

The German government has passed a number of pretty important things. And other governments are making moves in this direction, too, and it sort of amounts to more fiscal spending, in particular infrastructure, a lot more defense spending, just given that the U.S. security guarantee seems not to be there, and the U.S. is pulling back seemingly from Ukraine and so on, and, maybe a bit of faster economic growth as a result of that, just to the extent that all the spending can boost growth.

00:35:44:09 - 00:36:01:17

And it's been a bit of a kick in the pants, I think, for Europe and Germany and others. And so they, hopefully will move a little bit more quickly going forward.

You can see, by the way, that this chart is a bit of a non sequitur. It's yields, government yields, for Germany. And so of course there was a big increase a few years ago with all the rate hikes that many countries went through.

00:36:01:18 - 00:36:48:26

But take a look just at the far-right side. And we did see a notable increase in borrowing costs in Germany recently. And so I don't think that's a statement about, oh, the government's going to have more debt because it's doing all this extra military spending, though maybe a little bit of that. I think it's more markets budgeting for faster growth and thinking that maybe Germany is restructuring its economy in a useful way.

And so just to summarize some of the new European initiatives:

• There is €150 billion now being put together for an EU defense fund.
• Germany has committed €500 billion for an infrastructure and defense fund for itself. So these are quite big sums of money.
• Many, many nations, I would say almost all nations are ramping up their militaries right now, prominently Poland, Sweden, Germany, but also France, the UK, Finland, the Baltic states and others.

00:36:48:29 - 00:37:07:05

And as I mentioned on the prior slide, the U.S. growth advantage is going to shrink, we think in part, because of this, though maybe not gone altogether. The U.S. still has the better demographics, though with less immigration that advantage is shrinking. It still has better productivity growth, though we're hoping some of these other countries do manage to make some gains there too.

00:37:07:07 - 00:37:24:01

Okay. Getting a little closer to the finish line. So let's talk China for a quick moment.

Chinese State Council announced significant consumer push at March meetings: So China had these big policy meetings, and I would say that we saw some pretty interesting things – in particular with regard to the consumer and a push to get consumer spending going. And the Chinese consumer is supposed to be going. The middle class has grown quite a bit.

00:37:24:09 - 00:37:48:05

The household savings rate is incredibly high. There's a lot of potential room for spending growth. And as China becomes a little bit less competitive on the manufacturing side, that's where modern wealthy economies generate their growth from. So it's important to get that consumer going. And China is doing quite a bit.

It's increasing its minimum wage. It's making further efforts I think, succeeding in stabilizing its property market, maybe stabilizing its stock markets.

00:37:48:05 - 00:38:09:08

Household wealth is significantly in the property market, so people weren't spending when it was weak. They might be in a position to spend if it's a bit stronger.

Boosting the birth rate, so they're offering fairly generous baby bonuses and other measures. There actually has been, in theory, more than in theory according to the official numbers, there has been a slight increase in the Chinese birth rate in early 2025 versus the year before.

00:38:09:08 - 00:38:26:10

Still very low. We'll see if that sticks, nevertheless. Strengthening the social safety net, that might be the big one. People are saving in China because the pensions are not that generous, and the health care benefits are fairly meager. And so increasing pension and health care payments is very useful for convincing people to spend money.

00:38:26:13 - 00:38:45:14

Supporting key service-oriented sector, really trying to build out childcare and eldercare and restaurants and tourism and entertainment. And so not just the good side, but the service side. Right now, China already has a goods trade-in program, sort of just upgrading goods and allowing manufacturers to make more. And they've extended that for 2025.

00:38:45:16 - 00:39:05:01

And then also this is maybe not totally intuitive to begin, but they're encouraging workers to take their holidays, not to work excessive overtime. Of course, that's part of the creation of a consumer culture, is to have a leisure culture, have the opportunity to rest and enjoy yourself and perhaps to spend money as well. And so I would say, to me this seems like a fairly credible set of policies.

00:39:05:03 - 00:39:24:20

We think there is room for the Chinese consumer to be a little stronger going forward. As I've shared before, we are, I would say, slight optimists when it comes to the Chinese economy over the next few years.

Okay, over to Canada now. Canadian election approaches – Liberals now leading in polls: So first of all, the Canadian election is approaching, April 28^th. The Liberals are now leading. So this is one remarkable swing.

00:39:24:20 - 00:39:43:02

If we went back to the start of 2025, that blue line was dominant. The Conservatives had a conservatively a 20-point lead in the polls. And actually, I think as much as a 27-point lead in the polls, which is enormous. And it has now been fully bridged and then some. And so, at least as of late March, the Liberals are technically ahead.

00:39:43:02 - 00:40:01:17

There's no certainty they stay ahead. Obviously, there's still nearly a full campaign to be run. And you have a new prime minister and there's a honeymoon and a tariff threat. So perhaps creating a feeling of nationalism, supporting the incumbent government and some of these things could change dramatically over the next month. But as it stands right now, the Liberals are now in the lead.

00:40:01:23 - 00:40:27:07

And it's worth flagging the fact that the Liberal vote, famously, is an efficient vote. You get a lot of seats in exchange for a fairly limited number of votes. In fact, if you recall the Liberal party formed a government, had the most seats in each of the last two elections, without winning the popular vote. And so if you believe these polls, recognizing they can be pretty choppy and people don't answer the phone so much and so on, but nevertheless, it would appear that Liberals are now the favorites, though certainly it could go either way.

00:40:27:09 - 00:41:08:06

It's tempting to say, well, it would surely be a minority government, in the context of it being a fairly close race. But actually, if you look at some of the CBC poll trackers, they map this via a probability prediction onto the likelihood of the number of seats – because I think of that efficient Liberal vote and the way it's distributed across the country, and right now the polls are pointing to a modest Liberal majority.

So that actually is the default assumption right now. We'll see whether that holds or not. But as it stands now, more likely a Liberal win than a Conservative win, but both in play.

Canadian election preview: And then in terms of policies, and this is where you've got to get your reading glasses on, I guess, and maybe even press pause, because I'm not going to spend a lot of time here.

00:41:08:09 - 00:41:28:24

But I will just say again, we know the election date, tilting toward a Liberal win, but not done. What does that mean from an economic policy perspective?

And so my preamble is these are not endorsements. This ignores all sorts of non-economically relevant policies that are relevant to actual people. And furthermore, these pluses and minuses and neutrals, they're just a statement: would the economy move a little faster or a little slower in the short term?

00:41:28:24 - 00:41:44:03

And faster growth often is better. But of course, to the extent that a tax cut is funded by a deficit or to the extent that, for that matter running a deficit makes the economy go faster, but you've ended up with more debt.

00:41:44:03 - 00:42:04:16

You can say, well, there are tradeoffs here. So I just want to flag all that nuance. But I will say just from the perspective of would the economy move faster or would the economy move slower? Well, and I think the big Liberal side summary would be, of course, you've had a government in place for about a decade, and I would say in general it has had a history of some anti-growth policies and higher taxes and more regulation and, and so on.

00:42:04:16 - 00:42:23:21

And so that's arguably hurt growth somewhat over time. But now we've seen this pivot and arguably a pivot from the left to the center, you might say, with somewhat more growth-friendly ideas being presented.

And so the gap, the wedge between Liberal and Conservative economic policy has actually shrunk an awful lot. And actually, there are some significant similarities.

00:42:23:21 - 00:42:44:12

You see on both sides, eliminating the consumer facing portion of the carbon tax. And on both sides, the bottom personal income tax bracket gets cut. And on both sides, that capital gains tax hike that was planned doesn't go through. I would say, in at least those three cases the Conservatives are planning to do a bit more.

00:42:44:12 - 00:43:05:25

And so it's a bit of a bigger personal income tax cut, and it's a bigger carbon tax cut, and so on. But nevertheless sort of moving in the same direction, I guess, would be the point to put it.

And I should summarize the Conservatives here as well. We do think we're seeing scope for more growth-friendly policies, likely positive policies for the business sector in particular, which of course is relevant to us as investors.

00:43:05:28 - 00:43:27:17

Without getting into all the weeds, then, we have the Conservatives as being growth-supportive from a tax perspective and a regulatory perspective. We have the Liberals a bit more neutral for taxes, a positive but less of a positive in terms of the regulatory changes that might be made. We think on both fronts just the situation of tariff threats means that the trade environment is quite challenging for both, and we don't have a big difference there.

00:43:27:19 - 00:43:42:29

We think the Conservatives might curtail immigration a bit more, which is technically a small growth negative. They've talked more about balanced budgets, which is also a small growth negative although it does avoid a bigger debt, which is nice, but just not relevant to short-term growth. We think both have policies that could help housing to some extent.

00:43:42:29 - 00:44:00:03

And the list goes on. I guess push comes to shove, the gap again has diminished significantly. We think both are set actually to be more growth-friendly policies than we've seen over the last decade. Arguably, maybe when you net up the Conservative policies, it would be a little bit more growth- friendly than the Liberal policies. But again, that gap has shrunk by quite a bit.

00:44:00:03 - 00:44:17:29

And so hopefully useful. I'm sure we'll be surprised by what actually happens. That's inevitably how things go. And politicians of course, campaign in poetry and govern in prose. So this will not be exactly what it looks like, but hopefully a useful starting point at a minimum.

Okay, I'll stop there. Thanks so much for your time. I hope you found this both interesting and useful, ideally. And so if you find this of value, please do consider following along online either on X or on LinkedIn or of course the best of all, rbcgam.com. That Insights tab has a lot of work, not just by my team, but by some of our other thought leaders.

And I'll say again, thank you for your time and I wish you well with your investing. Please tune in again next month.