00:00:06:03 - 00:00:22:17
Hello and welcome. My name is Eric Lascelles. I'm the chief economist for RBC Global Asset Management. And very pleased, as always to share with you our latest monthly economic webcast. This is for the month of February 2025. And you can see that title, I'm sure, right in front of you, tariff time with a question mark on the end.

00:00:22:17 - 00:00:41:23
And of course, this is a reference to the fact that US President Trump is now installed in office. There are a number of question marks and uncertainties around exactly what sort of policy emerges in the coming weeks and months, but certainly tariffs are subject to particular note and I would say concern. And so we'll spend quite a bit of time in this webcast talking about that.

00:00:41:23 - 00:00:58:22
And I guess the existence of a question mark there does acknowledge the fact that it's not quite a certainty that we will see substantial, enduring tariffs. At least one angle of these tariff threats is as a negotiating tool to extract concessions from other countries. And so I think it's useful to think about it in that light as well.

00:00:58:24 - 00:01:18:04
Okay. Let's jump in. And as we always do, we'll start with a report card of sorts. And we'll just talk through some of the key themes out there. I know it's tempting to think that the only thing that matters is tariffs, and certainly it's an important one. But I do believe, as a medium, long run investor, we should at least think about some of these other issues, that are likely to stick with us for an enduring period of time.

00:01:18:07 - 00:01:38:28
On the positive side of things, well, you know, US fiscal stimulus is plausibly ahead. We're hearing an awful lot about tax cuts and deregulation. And we similarly seen what I would describe as animal spirits, surging excitement, post the Trump election. And that's something that can boy the economy as well. Central banks are still in the business of cutting rates.

00:01:38:28 - 00:01:55:19
The Bank of Canada, did that just in the last week as I'm recording this, I should say, at the very, very tail end of January. And so we're still seeing rate cuts, though fewer as I'll get to in a moment. And if few were ahead, inflation pressures are no longer as acute, though, of course, there is still some work to be done.

00:01:55:21 - 00:02:17:14
We believe that economic growth is on track for a moderate rate of expansion. We think that's the soft landing story. In other words, a pretty good economic outcome is still in store. Consistent with that, the risk of recession, we think is still declining. It's only about a 15% chance in the US over the next year, and a fair fraction of that risk probably does revolve around tariffs, which we'll get to in a moment.

00:02:17:16 - 00:02:40:02
We've seen some solid economic data recently, and we do think there's more room for Chinese stimulus as well. So there are certainly positives. I'm going to put the negatives up now. And what you'll notice is that many of them rhyme with the positives, which sounds quite contradictory since one is good and one is bad. But the idea being that some of the good themes that have really helped us, over the last, let's say, year are maybe becoming a little bit less helpful in some regards.

00:02:40:04 - 00:02:58:11
We'll start, though, on the policy front. So again, U.S. fiscal stimulus sounds promising tax cuts and the like. However, tariffs are one of the more prominent policy items that I would describe as being on the the opposite side of the ledger, something that potentially could hurt growth and potentially add to inflation. And again, we'll talk about that in much more detail in a moment.

00:02:58:13 - 00:03:19:08
You know, rate cuts are happening, but they are slowing. In fact, the US Federal Reserve just paused. It's not clear if they're going to be any cuts over the first half of this year for the US, at least, because it's inflation is a bit hotter than elsewhere and its economy is a bit stronger. As well. Consistent with that, inflation is proving somewhat sticky recently, again, especially in the US where just the numbers are still 3% ish.

00:03:19:08 - 00:03:39:28
And that's not too, too bad. And I should say it's not inconsistent with rising prosperity or rising markets or economic growth. Whereas by the way, eight, nine, 10% inflation was just incompatible with that kind of thing. Nevertheless, it's higher than central banks have targeted. It's higher than is probably ideal long run for the economy. And so that is holding central banks back.

00:03:39:28 - 00:03:55:27
And so it's not ideal. As much as we think the risk of recession has declined to some extent, let's say over the last six months to a year, we think the risk of overheating has gone up somewhat. And so that's not the most likely outcome. That soft landing, moderate growth scenario was still most likely in our view.

00:03:55:27 - 00:04:18:12
But we can't completely rule out that overheating scenario, just given where inflation and growth are right now. And of course that would necessitate higher rates and maybe rate hikes. And then you would think economic weakness somewhere later down the road in response to that, Chinese, economic concerns, I would say, is still present. We did actually ultimately get a Chinese economy that grew at about 5% in 2024, which wasn't half bad.

00:04:18:12 - 00:04:44:17
And we think they can pull off a low 4% growth type figure in 2025. But there are certainly still concerns. And the housing market is weak, consumers are underwhelming. And of course, some tariff threats that we'll need to talk about in a China context as well. Still significant geopolitical risks out there, uncertainty as to how the Middle East and Ukraine and China, US relations revolve, resolve, pardon me, especially with a new American president with some different views from the prior administration.

00:04:44:20 - 00:05:02:23
And then just to throw a Canadian bone in there, I'll say that as we look over the next couple of quarters for Canada, we're actually seeing decent growth right now. So that's fairly promising. And I'll speak to that later. But it would be fair simultaneously to acknowledge that there is some pretty substantial uncertainty around Canada, the potential for some economic choppiness.

00:05:02:23 - 00:05:19:01
And so you can think of some negative forces that are brewing, including tariffs and a potential sharp decline in population growth. You can think of some positive forces brewing in terms of rate cuts, in terms of the possibility that productivity growth comes back. And it's just really hard to say exactly how these add together. And in what kind of time frame.

00:05:19:01 - 00:05:34:29
And so I wouldn't blow our minds if there was even a bit of weakness over the first half of the year. And then on the interesting side, and I suspect you know this, and probably if didn't know it, gleaned it based on my comments so far. But of course, President Trump in the US has now been installed in office.

00:05:35:01 - 00:05:52:29
I would say economically US exceptionalism is persisting is still the fastest growing of the major developed world economies. We think that persists this year, though it might be a little bit less acute by the end of the year. We are increasingly attuned to the US debt ceiling, which was recently struck, though they are now using extraordinary measures.

00:05:52:29 - 00:06:07:00
And there are some consequences to that I'll get into later. And of course, a Canadian election lies somewhere out there. Merkley ahead. We've been of the mind for a while that the spring was the most likely time, but actually the odds might be starting to tilt toward the fall. Or at a minimum, you can say either is in play.

00:06:07:04 - 00:06:24:26
I'll talk about that as well. So that's our our our summary, also our plan for the next several minutes. Let's jump in and I'll just start with this. And so this is precisely, what we've talked about in prior months, which is there are cascading set of economic and inflation and market implications that extend from a Trump presidency.

00:06:25:01 - 00:06:44:07
There is a degree of uncertainty around this. Let's not pretend we have it all nailed down. There is a presumption in particular, that some of the more negative, campaign items, such as tariffs, and curtailed immigration and government spending cuts that these come into, ultimately in a moderate form, as opposed to the maximalist forum that's been, threatened on the campaign trail.

00:06:44:07 - 00:07:10:22
That's an assumption that we're making and still quite comfortable with, based on what we're hearing from the white House so far, just a week or two into the presidency, we are again, simultaneously assuming that there is going to be some helpful deregulation, some favorable oil policy, some tax cuts, some favorable animal spirits in a way that we think that the US economy can still grow a little bit faster as opposed to a little bit slower under President Trump, at least in the short run, less convinced there's more growth in the medium run, more of a neutral impulse.

00:07:10:26 - 00:07:28:28
I assume there we do certainly expect inflation to be a little bit harder than otherwise, in part due to the extra growth, in part due to tariffs being inflationary. You've got some market implications as well. Stock market seems to like the Trump agenda. Bond market maybe a bit less so which is to say bond yields ultimately rise not shown here.

00:07:28:28 - 00:07:48:21
But the US dollar rises as well. And I suppose the other thought is just that this is all a US centric focus. If we were to talk about the rest of the world, the rest of the world growth is probably a little bit worse, not better, in part because of tariffs, in part because of, the potential for capital flows toward the US with a more favorable tax rate and regulatory regime there.

00:07:48:21 - 00:08:07:27
So that's the backdrop that has not changed our thinking has been steady since we knew that Trump won and it was a Republican sweep in Congress. So that's been knowledge we've had for several months now. Let's though talk about some of the interesting things that have been happening more recently. One of them is this, which is just when we look in particular at the level of U.S. small business confidence.

00:08:07:29 - 00:08:31:22
My goodness, it is enormously, varied or changed from a few months ago. We had a very high level of pessimism by American small businesses over much of 2024. That is now reversed. And I would describe it as a pretty high level of optimism. And you're whether it's fully rational and it can be fully justified by expected tax cuts and the like and policy changes or whether, there's just an element of psychology to it is an open question.

00:08:31:22 - 00:08:50:24
But either way, when businesses feel this good, it generally is a time when they're more willing to invest, more willing to hire. And so this is a source of potential economic strength for the US. Okay. So here's the main act. The title of this presentation, was tariff Time with a question mark. Let's spend some time here and talk about that.

00:08:50:24 - 00:09:09:24
And so I think it's maybe useful to begin, with some basic principles to think about how Trump thinks about tariffs and thinks about trade. And then we can work into precisely what we think might actually happen. And, I want to use you with this for too long. We are going to talk about five different tariff scenarios that we think are most likely, and we'll talk about their economic implications as well.

00:09:09:24 - 00:09:23:25
So I guess the first big thought is just that the threat of tariffs, should be viewed as a tool, that the US and Trump is using to secure international objectives. The United States has and so it's not just tariffs for their own sake, though. There's a bit of that as we'll get to in a moment.

00:09:23:25 - 00:09:51:20
But a big part is just using the threat as leverage, as negotiating leverage to achieve other aims as a result. The most important message to policymakers is listen very carefully to what Trump is demanding in exchange for avoiding tariffs. And so, as an example, in the Mexican Canadian context, it's been clearly identified as border security. And indeed, there's likely room for these countries to do a fair amount on that front and as a result, likely avoid, the worst of the tariffs.

00:09:51:22 - 00:10:09:26
We know that a focal point is reducing illegal immigration, reducing the flow of illegal drugs into the US. That's, again, border security, put in slightly different language. We know that, the threat of tariffs is met in part to seek more favorable, American trade balances. So the US does run deficits with a number of countries.

00:10:09:29 - 00:10:30:22
We can say that, your goal here is to shrink that I'm not completely sure that tariffs would, particularly since they are likely to be reciprocated, but nevertheless, that is an underlying objective and a friction, you might say the white House feels with the current trade environment, another objective is to reduce foreign protectionism. So there's a certain irony to threaten protectionism, to remove someone else's protectionism.

00:10:30:22 - 00:10:53:24
But to the extent that other countries, including Canada, perhaps in a supply management context, have industries that are sheltered from US competition, the US doesn't like that very much and would like those things to be lifted. And then lastly, we know that Trump is very keen for the rest of the world to, carry their own military burden and to defend themselves more fully to, in essence, spend more of their budget on, defense.

00:10:53:27 - 00:11:13:15
And so that's likely to be a key objective as well. And countries are well advised, to listen, in terms of terrorists for their own sake. Well, you know, so tariffs may primarily be a tool to get other things done. But, you know, Trump has talked about tariffs as a revenue generating tool. And then to use that money to fund tax cuts I don't know if there would be that much extra money.

00:11:13:15 - 00:11:36:28
At the end of the day, to the extent the economy gets weakened by the tariffs and there are other cascading implications, but nevertheless, even just from an accounting perspective, to get legislation passed in the US, it's very, very helpful if you can say that it's fully paid for or significantly paid for. And so whether the tariffs actually generate revenue that isn't compromised by losses elsewhere as a second order effect is, is almost beside the point, there will be some money collected.

00:11:37:02 - 00:11:52:15
That money can be used to fund tax cuts. And so, you know, you probably do want to take seriously the idea that there probably are going to be some tax cuts, another goal of tariffs to protect American businesses. Now there is to improve national security in terms of making sure the U.S. can, can produce, itself.

00:11:52:15 - 00:12:10:15
What it needs to make, in the event of war isn't too reliant on, on countries it could be at war with, I suppose. And then do recognize just from a trade theory perspective, Trump does view trade deficits as bad, full stop. He also views them as seemingly being the fault of other countries. So of course, in reality it takes two to tango.

00:12:10:17 - 00:12:30:25
With trade. Do keep in mind all parties and trade are perfectly willing, and every dollar that's exchanged for a foreign good is done in a willing way. And with the perception that each party is winning, in some context. Note as well that, you know, if you were going to try to balance out the US trade deficit, you know, you would need to increase the US national savings rate.

00:12:30:27 - 00:12:53:04
You know, the US is borrowing from the rest of the world by giving money to the rest of the world in exchange for things, the US would need to just make the choice to save more domestically, to be in a position, to stop having to borrow effectively from the rest of the world. And then, of course, just in terms of general economic principles or seems not to be particular regarding the white House for ideas like gains from trade or or comparative advantage.

00:12:53:04 - 00:13:12:19
I know it's tempting to think that if one country or one person is better at everything than another person or country, that there's no purpose in those two parties, you know, exchanging services or exchanging goods, that's not actually true. That would be absolute advantage. Comparative advantage is the key here, which is to say, you know, you as an adult might be better at doing any possible chore than your child.

00:13:12:24 - 00:13:26:29
And yet it would still make sense for your child to do some chores. And you might pick a chore that they're not too, too bad at. Or maybe the gap between your competence and theirs isn't as bad. And it's exactly the same in trade. One country could be better at every single thing. That doesn't mean it has no need to trade with other countries.

00:13:27:01 - 00:13:43:24
As long as sort of the ratio of how good you are at one thing to another is different, there is an opportunity for all parties to gain from trade. And that's again, just not something, the white House is thinking much about right now. And then just in terms of, okay, so that's the Trump, perspective on trade and tariffs, what is the scope for action?

00:13:43:24 - 00:14:02:24
And so, let's, let's think about this. And so I think the scope for action is considerable to begin with with tariffs this time, just because of course the Trump administration has learned a lot from the first term in terms of how much they can get away with in terms of threats, in terms of how to push things like tariffs through just where the levers are, in government, essentially.

00:14:02:29 - 00:14:19:15
Similarly, I think it would be absolutely fair to say that the partners that surround President Trump in the context of Congress, which is Republican, in the context of a white House, which is more ideologically aligned with him in the context of the court system, are all, again, more aligned with Trump in a way that the scope for action is greater.

00:14:19:15 - 00:14:35:27
So we do need to take, tariffs. Pardon me? Seriously, the scope for them to be lasting, or to be significant is greater, I think, than it was in the 2017 to 2020 period. Do keep in mind, though, there is a governor on this, there are some restrictions as to how much Trump would presumably want to do.

00:14:35:27 - 00:14:56:24
And so, Trump doesn't want to do things that badly hurt the economy. Tariffs generally aren't great for the economy. And so, you know, note that Trump famously, and this is right from the Art of the deal, his book, from, I think, the 1980s, you begins negotiations with maximum threats. And when you make a big threat, it normalizes less extreme positions later that are still favorable for you.

00:14:56:24 - 00:15:12:21
And so the other party thinks they've done well and they've talked you down from the extreme outcome. And yet you still won, with a more moderate but nevertheless favorable position. And so I think that's really how one thinks about tariffs, which is are we actually going to get 25% tariffs forever on some of these countries on everything?

00:15:12:23 - 00:15:29:11
Probably not. But maybe, maybe countries feel like it's a win if they only have a 5% tariff later or if they make a certain number of concessions on other fronts and avoid tariffs altogether. And so keep keep that in mind. Trump does care about the stock market. And so stock market generally isn't a big fan of tariffs.

00:15:29:18 - 00:15:46:19
Trump has a lot of investment and business leaders surrounding him who again, generally don't want a weak economy, don't want weak businesses. He is as just shown in a chart supported by small businesses, it would appear. And so again, they're counting on him not to damage the economy too much. And of course, we know Trump also doesn't want higher inflation.

00:15:46:19 - 00:16:03:28
In fact, he's talking about lowering inflation. Tariffs famously raise inflation. So on a number of fronts I would say you wouldn't think that you'd get, maximum tariffs in place for long. And indeed that's the conclusion we reach. And so, we're likely to continue hearing threats of big tariffs. I should warn as well I'm recording this late January.

00:16:04:01 - 00:16:20:26
You're likely listening to this perhaps early February. Meanwhile, awkwardly February 1st has been a date that's been flagged as perhaps when tariffs get put on in the US. We're not totally convinced that's when it actually happens. But there's of course a risk that it does. And so do note that we may be slightly off in some of the assessments here.

00:16:20:26 - 00:16:34:12
I do still think that there is a through line, which is, you know, we may see some deviation. We could see big tariffs even possibly put on for a brief period of time, as we'll talk about in a moment. Ultimately, though, we think this analysis will hold. And if we fast forward a year and say where are we now?

00:16:34:13 - 00:16:52:04
What sort of negotiations happened, what kind of tariffs are still lingering in place? I think it's fair to say, you know, we're likely to hear a lot about big tariff threats. Were less likely to see the delivery of big tariffs, at least not for long. Ultimately, we think smaller and potentially targeted tariffs are the most likely enduring outcome.

00:16:52:04 - 00:17:10:07
You might say okay. And so that takes us to the scenario. So lots of numbers here. We don't need to talk about all of them. But I'll just flag first of all we have five tariff scenarios. These are your big buckets. Could be variations on this obviously. But stylistically we think these are broadly the scenarios. I'm going to just be a bit confusing here.

00:17:10:07 - 00:17:25:10
Let me start at the bottom for a moment and just say, well, one of the scenarios is no tariffs. It is possible just we hear a whole lot of threats and ultimately no tariffs stick around and not too many tariffs significant are applied even temporarily. We don't assign a high probability to that. We say it's a 10% chance.

00:17:25:10 - 00:17:42:19
But of course that would be the best case tariff scenario. You wouldn't see any economic damage at all as you can see. So that's that bottom scenario. Again not two to likely four scenarios. Pardon me remain two quite negative and red. Two but more modestly negative in yellow. And so let's talk about the two big negative ones.

00:17:42:21 - 00:18:05:07

Essentially they're just different things that Trump has said. So the original tariff plan, was a 60% tariff on China, 10% blanket tariff on the rest of the world. That is still possible. We think, the other bad tariff scenario is what I would describe as the North America focused tariffs. And so that would be, of course, the famous 25% tariff on Canada and Mexico, 10% tariff on China.

00:18:05:07 - 00:18:22:10
You can see we don't think either of these outcomes are two to likely. We have a 10% chance to each of those as well. I do want to emphasize this. This would be if these tariffs were applied permanently, or at least for a multi-year period. And so that's maybe the twist here. But nevertheless, we don't expect to see big giant tariffs in place, forever.

00:18:22:17 - 00:18:37:05
If you were to get this, we don't think it's too likely. But if you were to get this there would be real economic damage. You can see those GDP impacts. That's how that's how much less growth countries would manage. So they wouldn't necessarily be shrinking, but they'd be growing less than normal. That impact would be spread over a couple of years.

00:18:37:05 - 00:18:56:04
And so I don't think I'd quite say it would be recessionary with the original tariff plan, but you'd feel it. There would be, you know, half as much growth as normal. In the, in Canada, there might be only two thirds as much growth as normal in the US per year over the next few years. It would be a palpable hit with the original tariff plan if it was the North American focused tariffs.

00:18:56:04 - 00:19:14:09
Well, North America does particularly badly, as you might guess. And so that would be we think the full recession Canada, Mexico, outcome. So Canada we think would lose four and a half percentage points of output. Mexico about four percentage points, the US considerably less one and a half. But nevertheless there would be some some pretty serious visible damage there.

00:19:14:09 - 00:19:31:24
That would be the recession scenario, at least for Canada and Mexico. So certainly that's the one to be avoided. Most of all, it's also the one we've heard the most talk of, ominously recently. We think, though, that the modestly negative scenarios are the most likely, in fact, between the two of them, we think there's a 70% chance that's where we end up.

00:19:31:24 - 00:19:50:06
And so the first of these two modestly negative, would be substantial but temporary tariffs. So it's actually we get one of the two bad outcomes just discussed. But it only lasts for a few months to a few quarters as opposed to for years or forever. And so the economic damage just isn't nearly as great. And so it would be visible would be palpable.

00:19:50:06 - 00:20:08:15
Canada would be a percentage point, lower output than otherwise, which is certainly something to avoid. But it wouldn't be full on recessionary. The other modestly negative scenario is what we call partial tariffs, which is really been, our base case assumption from the start. We also think it's the most likely now, though awkwardly it's a 45% chance.

00:20:08:15 - 00:20:30:00
So we can't quite say it's it's more likely than not, but it's more likely than anything else I guess is the way to think about it. And so this would be smaller tariffs, more targeted tariffs. Not not 10% and 25% that are applied in a blanket fashion. Still economic damage because it is still tariffs. But again manageable but probably rhyming more with the experience that actually happened in 2018 and 2019.

00:20:30:00 - 00:20:48:18
And again, that's one of the reasons we think it's pretty likely just because that is what happened last last go round. So again, a high level of uncertainty there is collectively maybe a 20% chance of a pretty bad hit. There's a 10% chance that Canada Mexico gets slammed really hard. But, you know, there is a 70% chance that we end up with more modest damage.

00:20:48:23 - 00:21:06:00
There's a 10% chance we don't get any damages at all, which would be quite an upside surprise. So, a range of outcomes, I guess, is what exists. And I fully expect we'll be tweaking these numbers. And again, the tweets come out with such frequency that I doubt these numbers will stay exactly here for long. But that's not a bad framework for thinking about the different paths this could go.

00:21:06:03 - 00:21:22:14
This is our best guess. As of late January. Just to flag, you might have noticed that the Chinese economic damage didn't seem that big, and that might surprise you. After all, the first scenario had a 60% tariff on China. You would have thought that would be just a complete killer blow to a country that famously sells a lot to the US.

00:21:22:16 - 00:21:40:28
The answer there is the Chinese economy is so big, that it sails to the US into North America actually aren't that big a share of exports or GDP. And so, you know, first of all, before we get to this pie chart, I can say that about 82% of what China makes is consumed, domestically. So most of what China, produces is bought domestically.

00:21:40:28 - 00:22:02:08
Tariffs have no direct impact there. It's only the 18% that gets exported that's affected within that 18%. You can see almost half here in this pie chart, is exported to the rest of Asia. So that's the big customer for China. The next biggest trading partner is Europe. It's a 21% share of Chinese exports. North America's only 16% of Chinese exports.

00:22:02:08 - 00:22:18:28
As I said, trade is only 18% of Chinese GDP. You can do a bit of back of the envelope math to get where I'm going here, but essentially only about 3% of what China makes gets sold to North America. Only about 2.5% of what China makes gets sold specifically to the US. Not to say that tariffs don't matter.

00:22:18:28 - 00:22:35:26
Not to say there couldn't be other trade frictions of consequence, whether it's access to chips or other things like that which which could be somewhat consequential. But China's a little bit more buffered than a lot of people seem to think when it comes to tariffs. And so really, the places to fret about our Canada, US, Mexico, more than the rest.

00:22:35:28 - 00:22:54:28
Okay. I will not speak to all these words. You're not compelled to read all these words either, though I suppose you could pause if you really felt like being a sucker for punishment and and really getting a sense for some of the elasticities and some of the thinking beneath the surface. The main point here, though, is really just that when we talk about a tariff, of course it increases the cost of a product.

00:22:55:01 - 00:23:12:05
And so the question is, well, who bears that burden? And is it the end consumer? Is it the foreign supplier? Is it the exchange rate? You know, keep in mind you put a 10% tariff on and you put it in the currency. Perhaps it shifts, by 10%. And actually the foreign producer can get the same amount of money they always got in their currency.

00:23:12:05 - 00:23:35:25
The domestic, importer pays the same amount of money they always pay in their currency. And the exchange rate, in theory, could absorb the whole thing. We're not expecting that. But I'm just sort of trying to explain that ultimately, the tariff gets spread across or can be spread across a number of different places in the supply chain. And so theoretically, it could be anywhere in practice, though, and it's a function of marginal elasticity of demand and supply and concepts like that.

00:23:35:27 - 00:24:06:24
And it varies very much by sector, by product and so on, short term, long term, even in 2018, 2019, the prior round of tariffs, we didn't see that much of a price effect downloaded to the foreign suppliers of foreign suppliers, Russia ultimately able to charge their usual price. The extra payment, ended up being very much skewed to the opposite extreme end of the supply chain, which it was the US consumer and just end consumers in general, who are the ones who bore the brunt of the price burden, who saw the price increase almost fully, in response to the tariff.

00:24:06:24 - 00:24:29:02
And so, you might expect that again. I don't know if it'll be quite that extreme or not. As time passes, if tariffs are permanent, usually some of the burden then shifts away from the consumer. But initially it could be consumer oriented. You would think it then shows up in inflation to some extent. And indeed when we do some of the inflation math, you know, the modestly negative scenarios, we have a couple extra tenths of inflation accruing to a variety of countries.

00:24:29:04 - 00:24:47:00
If it was an extreme negative scenario, though, you are talking potentially up to a couple of percentage points, of extra price increase. And it's a one time thing and it's not forever. And central banks more likely to cut than hike just because, the economic damage is probably the more acute issue. But nevertheless, some price increase shows up on the consumer side.

00:24:47:03 - 00:25:10:08
Okay, let's talk geopolitics for a moment. And so I'm tying this in just in the context of, well, you know, it's been an uncertain geopolitical environment for some time. And war in Ukraine and wars and conflicts in the Middle East and of course, China West frictions as well. But of course, this new US administration, which is pretty brand new right now, and tariffs and foreign policy are some pretty big, question marks right now.

00:25:10:08 - 00:25:29:22
And so, you know, the potential for extra inflation coming from those things does exist both from tariffs and from foreign policy that maybe could send oil prices higher. Not a certainty, by the way. In fact, there are scenarios in which, a ceasefire is reached in the Ukraine that those odds are up, not down. I would say, scenarios in which there is peace reached in the Middle East and maybe oil prices go down, not up.

00:25:29:22 - 00:25:48:13
So it's not a one way street, but nevertheless source of price uncertainty at least. And then I want to flag just in that bottom left corner of the gradual fracturing, of the international order. And so the idea here is just, okay, you know, there was an election in the US. It's an unconventional, president in place. And so there are consequences geopolitically that emerge from that.

00:25:48:16 - 00:26:05:04
But, we can also say some, some more specific things in terms of the world has been changing for the last decade plus, and we should acknowledge this is just part of that story, as opposed to being, a brand new story in and of itself. And so when we think about the fracturing international order, we can see examples of it everywhere.

00:26:05:04 - 00:26:21:11
Sorry. Another busy text heavy slide here. Press pause if you want all the details. You know, we've seen the great powers of the world pushing a little bit for more territory. We kind of think of geographic borders as being fixed, and indeed they've mostly been fixed, more or less, perhaps even since World War two or since the Iron Curtain.

00:26:21:13 - 00:26:42:15
In any event, but, you know, Russia, of course, has captured parts of the Ukraine, captured part of Georgia earlier in the late 2000, China, not really so much actively capturing land, but has very much pushed its maritime boundaries in the South China Sea and it's building islands to to validate those claims, has been more aggressive in its pursuit and talk about Taiwan.

00:26:42:18 - 00:26:58:22
And in the U.S here we have President Trump talking about manifest Destiny, which is, of course, the vision that the US was destined to to to rule North America from sea to sea. And so there's been talk about acquiring Greenland and Panama and Canada as a possible 51st state. I think those are all pretty unlikely things.

00:26:58:22 - 00:27:20:15
Truthfully, though, there may be opportunities to to tighten connections and increase access to resources and things like that. But let's let's appreciate that it's not actually quite a completely static, map of the world right now. We very much seen international bodies undermined. And so I'm thinking the World Trade Organization, which has been weakened and in fact, the dispute mechanism system is almost nonfunctional right now.

00:27:20:15 - 00:27:41:02
Successive US governments just have having appointed judges, who, who, who run that dispute mechanism. And so disputes are somewhat toothless. United Nations has seen a lot of deadlock recently. The Security Council in particular, us is withholding, some funding. Emerging market nations aren't pleased with their role in the UN or the world Bank or the IMF.

00:27:41:02 - 00:27:59:20
They're creating substitutes, including that BRICs organization. And, the US is questioning NATO. The US withdrew from the World Health Organization, withdrew from the Paris Accord. So this is not a time of strength for international bodies. We're seeing some fracturing there. And the kind of the rules based order is diminishing to some extent. It's the high seas in a sense.

00:27:59:23 - 00:28:18:21
And then, of course, we are seeing rising protectionism, as well. And so it used to be this neat and tidy hegemonic world with the US as the clear leader. It's now somewhat more chaotic. It's a multipolar world. China at a minimum, is there, at the, at the frontier as well. And smaller countries have to pick their orbit or, their orbit is picked for them in some cases.

00:28:18:24 - 00:28:39:05
And we're seeing some regionalization as opposed to globalization. And so you see tariffs go up and friend shoring and offshoring. And I mean, in Europe's case we're talking about carbon border tax, which would just make countries pay or companies pay if they haven't paid a carbon tax in their own country first, which sounds logical, but it's, you know, an extra barrier to trade, you might say all the same.

00:28:39:08 - 00:29:00:14
You know, we seeing economic coercion used, right. The US is threatening tariffs to force other countries to do certain things. China is very much done, that sort of thing. Not specifically tariffs, but on that sort of thing. With Australia, South Korea, Japan, Canada, others, as well. We're even seeing undersea cables and pipelines severed. And it seems as though there may be some political actors that are involved in that.

00:29:00:14 - 00:29:20:12
So, you know, it's a time of fracturing international order is, again, the main point. Yes, there are counter points. NATO did expand recently. Free trade deals are still being struck here and there. But on the aggregate, we can say that when you've got this multi-polar fracturing era tends to be associated with a bit less growth, with a bit more inflation as well, and maybe a bit of extra uncertainty, too.

00:29:20:12 - 00:29:37:04
And so that's, that's the world we're in. And it's not new this year. And it's not going to end next year either. Okay. I'm going to step away from tariffs and geopolitics for a moment. I am going to come back at the end on Canada though if you want some more Canadian thoughts. But until then, let's just give you the run of the land economically.

00:29:37:04 - 00:29:58:10
So, economic surprises actually ticked back higher. We're back into, I would say, modestly positive territory, which is really just a roundabout way of saying we're we're still getting pretty good economic growth out there. No signs of recession. If anything, economies are picking up a little bit. Just looking through some US specific data. The beige Book, it's sort of a qualitative measure that we then stubbornly insist on quantifying.

00:29:58:10 - 00:30:16:07
So this is our effort to quantify it. But nevertheless, you know, it would suggest that businesses are feeling a bit better, not a bit worse. And it certainly wouldn't question the idea that economic growth is ongoing. There was some weakness earlier, but that weakness now seems to be gone. Just a quick nod to currencies. And so the US dollar, this is a very long term chart.

00:30:16:07 - 00:30:35:21
You can see the US dollar has been through these fascinating historical periods of extreme strength, and they give back that strength. And so, we've been in a period of strength and indeed, you know, quite recently squinting your eyes to the right side, the US dollar has strengthened again. And so, and we're presuming for the moment that sticks and tariffs should strengthen the dollar, not weaken the dollar.

00:30:35:24 - 00:30:52:07
As an example, I think there will be a moment, whether in the next few months or the next year or beyond, where we start to talk about that dollar reversing course. And we acknowledge that it is actually quite expensive, by historical standards. And there is room for some depreciation as a result. But as it stands right now, it has been strong.

00:30:52:07 - 00:31:09:23
It could remain strong in the near term. And just keep in mind there are economic functions to that. The strength is in part a reflection of the fact that the US economy is seemingly healthier than everyone else. It is a means of adjusting to the possibility of tariffs. It it actually helps to compensate foreign countries for tariffs on the products that they are exporting to the US.

00:31:09:23 - 00:31:29:09
So there is some value to this strong US dollar. Also, in theory, helps to prevent US inflation from getting too hot, both by limiting the economy and actually, making imports cheaper. And so across all of those things, I would say this dollar's strength is actually probably more helpful than not from a macroeconomic standpoint. Let's talk debt ceiling for a moment.

00:31:29:09 - 00:31:49:18
So, so again, the debt ceiling is this idea that the US government has to pass a law to allow the government to borrow more money. So you can see all those historical horizontal dark blue lines. And, so the debt ceiling just says you can't borrow more than this. And the problem is, of course, elsewhere politicians are saying, sure, let's cut taxes and sure, let's increase spending.

00:31:49:21 - 00:32:03:14
And those two things are in conflict with each other. And so what happens is you bump into the debt ceiling, and then there's a bit of a mini crisis. And eventually the debt ceiling gets lifted. That's always been the solution. Before we haven't had that default. Unless you want to go back. Go back a couple hundred years.

00:32:03:16 - 00:32:25:03
And so, that's very likely to be what happens here. Again. We would. Thanks. In the next several months, we will see that debt ceiling lifted. Shouldn't be that hard. Trump has said he doesn't like the debt ceiling. It's a Republican sweep. And so politicians are in principle somewhat aligned on the matter. But I do want to make one point, which is just the debt ceiling got hit, in the last couple of weeks, there are extraordinary measures.

00:32:25:03 - 00:32:41:21
The Treasury Department can take to prevent the government from defaulting right away. They kind of dig under the couch cushions, and in this case, they have this Treasury general account. It's kind of like a checking account. And normally you'd like to carry a significant balance in your checking account just because you've got expenses that are lumpy, and the credit card bill and other things come in and out.

00:32:41:21 - 00:32:59:00
And so you do need to keep a bit of a buffer. No different with government. They normally keep you know, I think it's a couple hundred billion dollar buffer, in there. And it helps to pay salaries and deals with bond issuance and this sort of thing. And so essentially, now that they cannot borrow in the bond market and they're still running a deficit, they're draining this account.

00:32:59:02 - 00:33:18:10
And so they're fine for now. And I think they'll find a resolution before they stop being fine for now, once. Fascinating eating. So I'd point, is that essentially that's money that's normally idle. It's normally dead money that is not circulating in the economy. Suddenly this money is being unlocked and you have a checking account is being drained and it's being sent into the economy.

00:33:18:14 - 00:33:35:29
It actually is an injection of liquidity. It's almost like a rate cut. And so it's sort of funny. The fed is not cutting rates right now, but you have this other theoretically stimulatory, stimulatory, action taking place. That could help to push the US economy forward over the next few months. The twist though, of course, is that then the debt ceiling gets lifted.

00:33:36:04 - 00:33:51:25
Then the Treasury Department wants to rebuild this, this, this liquidity, and pull it out of the economy. And you would see the opposite happen. You'd actually have the economy with a bit less help than normal. So there's an interesting sort of flow and then ebb that could take place over, you know, loosely, the first half of this year.

00:33:51:27 - 00:34:10:15
Okay. Back to tariffs in a Canadian context with some Canadian slides following as well. So let's just talk about this again. Lots of tax. But it's just lots are happening. And I want to make sure all the thoughts are shared with you. So first of all, again, we are somewhat dubious that a sustained blanket 25% tariff is coming to Canada again.

00:34:10:16 - 00:34:28:04
Trump famously starts with over-the-top demands and then normalizes less extreme positions. I think that's fair to assume. The threat of tariffs is explicitly being tied to achieving other aims. Border security. So Canada is very well advised to listen and throw a lot of money at that and do as much as it can on that front right now.

00:34:28:04 - 00:34:45:21
So if you do that, you don't get the tariffs perhaps. I mean, you think back to, the experience in Colombia just over the last weekend as I'm recording this. And so Colombia didn't want to take, flight loads of undocumented immigrants who are being deported. And Trump said 25% tariff. And then they capitulated and accepted them.

00:34:45:21 - 00:35:07:01
And the 25% tariff is gone. So we've seen this this strategy, demonstrated in practice this election cycle already. Now, you know, reciprocal tariffs would be damaging to the US economy. Hard to think that Trump would want to apply a 25% tariff on Canadian oil and energy to the extent that 4 million barrels a day of Canadian oil is going to the US, that is a huge fraction.

00:35:07:01 - 00:35:23:07
It's loosely a third of the oil, that the US consumes and they don't want to pay more. They want to pay less for oil. It would be hard for the US auto sector to, to function as well, given it's so integrated across North America. I've seen estimates suggesting that the average U.S car would be $3,000 US more expensive.

00:35:23:10 - 00:35:42:03
If, if those 25% tariffs were put on. So we are we're skeptical. That's where things ultimately land for those reasons. Just looking back at the 2018 to 2020 tariff experience, I think there are some interesting lessons to be gleaned. And so one would be, tariffs were used as a threat to force a renegotiation of NAFTA.

00:35:42:05 - 00:36:02:07
Trump also threatened to 25% tariff on autos were never applied. Trump threatened Mexico with a 5% blanket tariff. Back then it would go up five percentage points a month until it got to 25%. That never happened. So again, threats tend to be greater than the reality. Trump did put tariffs on steel and aluminum. Those were implemented for about a year.

00:36:02:09 - 00:36:20:16
Canada and Mexico did respond roughly, proportionally tit for tat. And, you know, targeting politically sensitive sectors like bourbon and ketchup and steel and, and foods and so on. The dispute was ultimately resolved. It was resolved with the signing of the Usmca trade deal in the spring of 2019. All the tariffs by all parties went away.

00:36:20:16 - 00:36:36:29
At that point. Trump did apply for a small tariff for a month on Canada in 2020, but that was that was short lived. And so I think that's, you know, there are some lessons to be gleaned there. The biggest tariff doesn't get applied. There are threats of escalating tariffs. Recently, the Treasury secretary was talking about a 2.5% tariff that might rise to 20%.

00:36:36:29 - 00:36:59:16
This is sounding familiar. I would view those with at least a little bit of skepticism. That's classic, you know, bargaining tactic. I think real tariffs, though, may be applied. They may be targeted. There is the opportunity to negotiate those away over time, maybe a little bit less opportunity to to negotiate them away this time. Just in part because Trump does seem to be counting on some revenue from tariffs to help fund tax cuts.

00:36:59:16 - 00:37:17:22
So maybe some of it sticks. But ultimately we're skeptical the full amount does. And then in terms of the probable Canadian tariff response, and maybe this is already happening by the time you're watching this. I hope not. But, you really two pronged. And so one would be that tit for tat response, which is loosely, approximately equally sized tariffs on the US, targeting sectors.

00:37:17:22 - 00:37:35:15
You would think this would be the optimal strategy, at least politically sensitive product sectors, regions to Trump, where Canadian demand is highly elastic, meaning Canadians just say, I'm not going to buy it, then they don't need it. Or and as a result, the price effect, the tariff effect gets carried by the foreign producer, not by the Canadian consumer.

00:37:35:17 - 00:37:55:09
And where there are viable non-U.S. substitutes, where Canadians can keep buying what they like to buy, but just maybe changing products or brands. So that's the first step. Number two, though, realistically, is negotiating probably making concessions on a number of fronts. So areas you would think will be in discussion. Border security is the big one. I think there's room for Canada to spend more, defense spending.

00:37:55:09 - 00:38:11:26
Canada spends not much more than half as much as NATO asks. And, Trump is now asking for even more. I think that's going to be a real source of pressure. The digital services tax, which is on international tech giants but disproportionately American ones, is very unpopular in the US. There will certainly be pressure to remove that tax.

00:38:11:28 - 00:38:28:23
Canadian sectors that are themselves protectionist, blocking access from US markets like the dairy and egg sector are, I would think, going to be part of the discussion. Again, softwood lumber always gets dragged in. It's not completely fair to the extent that softwood lumber already has some big tariffs, but nevertheless, you'd think that would be in the fray as well.

00:38:28:25 - 00:38:42:14
Do note that last go around, China did commit to just buying more U.S. goods. If one of the complaints is that U.S. deficit the the you can promise to buy more of X in practice. I'm not sure China actually did buy those things. And so you can ask whether this is sort of a logical thing to be promising.

00:38:42:14 - 00:38:58:21
And who exactly is doing the buying and how do you enforce this. But nevertheless, I wouldn't be surprised if there was some talk to that effect. And then, of course, reopening the Usmca, trade agreement and that that seems almost certain. And whether it's immediately or in 2026, when it's naturally set to be reviewed, isn't quite clear.

00:38:58:24 - 00:39:21:04
There is a scenario in which Mexico gets sacrificed in this. You know, a lot of the Trump concerns are really border security with Mexico, illegal drug flows with Mexico, cheap manufacturing costs in Mexico, trans shipment of Chinese goods through Mexico, and being, completed in Mexico. And so, a lot of it is Mexico focused. I think there's room for some tweaks to the agreement, perhaps to satisfy all three parties equally.

00:39:21:04 - 00:39:46:15
It wouldn't shock me if if suddenly there were just bilateral trade deals as opposed to one big, trilateral one. And then I guess, lastly, in terms of the negotiate negotiations, really there's an opportunity for Canada to focus on Fortress American, which is just the idea that if Trump is very keen on having this regional sphere of influence and having access to North American resources, be it Greenland or Canada, or elsewhere, really what you're asking to do is to integrate more, not integrate less.

00:39:46:15 - 00:40:08:15
And so maybe we should be pulling down trade borders, trade barriers, pardon me, and allowing even greater investment flows and that sort of thing. And then the backup plan, which I don't think would be implemented straight away. But if suddenly you found yourself, a month or two in and the big tariffs aren't, being resolved and the negotiations aren't going well, I would think a backup plan would be some things we've heard some discussion of so far in the news, which is export taxes and restrictions.

00:40:08:15 - 00:40:32:17
You'd limit certain critical Canadian products, to hurt the U.S to put some pressure on, you would presumably flirt more with the likes of Asia and Europe in terms of demonstrating that there are other friends and trading partners. You could trade with, though practically you can't really change trade flows all that quickly. Not in the timeline of a single presidency, or let alone the negotiations over tariffs and then I suppose there are unconventional options, and this list is almost endless.

00:40:32:17 - 00:40:56:29
And this is rather incomplete. But, you know, airspace restrictions, would be one. You don't let U.S. planes fly in Canadian airspace. Normally they do on the way to Europe and Asia, as an example, maybe you don't let US goods tran ship through Canadian ports. Maybe you put non-tariff barriers that are at a tariff. But if you don't have the right label or you don't have the right, you know, requirement, I suppose, in terms of ingredients, then the product can't come in.

00:40:56:29 - 00:41:15:12
So we'll see. I suspect those are less likely. Those are probably less desirable on a number of fronts, but that that possibility exists, as well, as I said, at the end of the day, though, we think that, there will be some targeted tariffs. There will be certainly concessions from Canada. We think it's less likely it's going to be a big, permanent, 25% tariff.

00:41:15:14 - 00:41:34:08
And then just a couple other Canadian things here for you. One would be this, federal election will be held this year. The liberals are having a leadership race right now. The conservatives are waiting in the wings leading in the polls. As you can see right now, pretty substantial lead. You would assume a conservative majority of these even come close to holding up, whenever the election occurs.

00:41:34:08 - 00:41:53:01
My title says likely in the spring. I still think there's a fair chance it's in the spring. I would flag, though, just based on recent evidence that the NDP might opt to support, the Liberal Party again. Based on what could be the need for fiscal stimulus. If there are significant tariffs applied, it wouldn't be a shock if the election actually shifted to the fall.

00:41:53:01 - 00:42:12:03
At this point in time. We'll see who gets the Liberal leadership. There are a few prominent candidates at play right now. It's possible that revitalizes the Liberal Party. I think at this point, it's pretty unlikely that would be enough, to reverse the election outcome. So you're still thinking most likely would be a conservative win. But, you know, far be it for me to judge that we'll see how the Liberal leadership race goes.

00:42:12:03 - 00:42:31:21
We'll see how any kind of election race goes after that. We've said before that we do think that there's a fighting chance there could be more economically friendly policy coming post-election, but that's a story for another day. Couple other Canadian things. One is just Canadian population growth. Of course, it was, us astonishingly, almost unprecedentedly fast. In recent years.

00:42:31:21 - 00:42:54:24
We've seen those big changes in immigration rules, though. And so it's slowing. Just wanted to flag we have the latest quarterly data in place. You can see the rate of population growth is decelerating pretty rapidly at this point in time. Still positive though still positive and a pretty big number actually. So not to say that we are in outright reverse at this point, but the expectation is this continues to tail off, particularly over the first half of 2025.

00:42:54:24 - 00:43:12:14
And so we're not quite in the camp of thinking the population is going to be steadily falling on a year to year basis. Government thinks that. We think it'll be just just slight growth. But nevertheless, it's likely to be much slower. And of course, maybe resolving some societal frictions, resolving some, some housing shortages, or at least making them less acute going forward.

00:43:12:21 - 00:43:37:09
But equally, of course, economic growth is a function of more workers plus more productivity. And so you're losing the more workers part. And so that is actually potentially a drag on economic growth. We see wage pressures fading. So of course for workers, workers like wages going up quickly. But if you're thinking just more broadly about economic stability and economic targets, well, it's not the worst thing in the world because of course, we are still looking to lock in that lower Canadian inflation rate.

00:43:37:09 - 00:44:01:05
It's sitting very tightly at 1.8% right now. Flattered slightly by that sales tax. That's temporary and a few other temporary things. But still, inflation is looking pretty good in Canada. But I would say wage growth had been, despite that unusually fast as we look at these forward looking wage intention metrics and wage expectation metrics, it looks like they are tailing off in a way that would support the idea that wage growth can still be very, very reasonable and very moderate.

00:44:01:08 - 00:44:20:06
Probably not quite as robust as it was. And I'll finish with this in terms of slides, at least, if memory serves. And so business outlook, for Canada is actually continuing to get better or at least get less bad. You can say it was a fairly grim time in recent years for Canadian businesses. There are, of course, still major challenges and productivity questions.

00:44:20:06 - 00:44:40:07
And here the US may cut taxes. Can Canada keep pace with that open? Questions galore. But nevertheless, we are seeing businesses feel a bit better. And I think that makes sense just because, of course, the Bank of Canada has been in the rate cutting business, with greater enthusiasm than just about any other central bank, appropriately so, given just the burden of high rates, to a heavily indebted, housing oriented economy like Canada.

00:44:40:14 - 00:44:55:13
But it's nice to see that as those rates are coming off, we are starting to see slightly better sentiment. We're also seeing consumers feeling a little bit better as well. And that was an open question. We know there are these mortgages that are rolling still higher over the next few years, and it was unclear just how problematic that would be.

00:44:55:13 - 00:45:13:04
We still don't know with certainty. But so far, actually, consumers are feeling a bit better, feeling a bit less worried about their finances as opposed to more, which is certainly a positive thing. And with that, I'll say thanks very much. I hope you got some value out of that. That that tariff discussion in particular, if you found this useful, if you're looking for the latest thoughts.

00:45:13:04 - 00:45:29:27
And of course, it's a fast moving situation, please do consider following along on formerly Twitter, on LinkedIn, or maybe best yet, visiting our own research website, which is RBC gam com slash insights. And so thanks again for your time. Wish you well with your investing. Please tune in again next month.