With contributions from Josh Nye, Vivien Lee, Ana Ardila and Aaron Ma

August 1 tariff deadline

President Trump’s August 1 tariff deadline is rapidly approaching. Yet the magnitude of the threat associated with the date is steadily shrinking as key trading partners secure trade deals with the U.S., avoiding the large reciprocal tariff threats issued in early July. To be sure, many have acceded to higher tariffs than they are currently paying – so some pain still beckons – but in most cases this is substantially below the initial threat.

Among key trading partners, countries representing 30.6% of U.S. imports have already struck a deal with the U.S. Meanwhile China – worth another 13.4% – has tentatively secured a 90-day extension for its own negotiations with the U.S. (see next table). That sums to 44% of U.S. trade partners.

Present U.S. tariff landscape

As of 07/28/2025. Highlighted numbers indicate tariff set for Aug 1. Sources: International Monetary Fund (IMF), U.S. Census Bureau, Macrobond, RBC GAM

Canada and Mexico have not yet managed to strike deals with the U.S. and face material reciprocal tariff threats of 35% and 30% respectively. However, the scale of this threat is much smaller than it first appears. These rates only affect products not compliant with the USMCA (United States-Mexico-Canada Agreement)– a loophole of sorts discussed in more detail later. Including these countries in the calculation raises the fraction of U.S. imports without a giant August 1 tariff spike to 72.2% of the total.

Among major trading partners, defined as those responsible for 1.0% or more of U.S. imports, it is thus a fairly small list of countries theoretically exposed to the full reciprocal tariffs on August 1: South Korea, Taiwan, India, Thailand, Switzerland, Malaysia, Brazil and Singapore.

Of these, note that Taiwan, India, Switzerland and Singapore might not be subjected to their full threatened reciprocal tariff rate, as President Trump indicated that countries that have not received a reciprocal letter in July will face tariffs of just 15-20%.

The point is, again, that some tariff pain is absolutely coming in August, but on a smaller scale than feared a month ago.

-EL

Flurry of trade deals

Most countries likely hope to negotiate better deals later – ideally with the current administration but potentially with future ones. Yet there has been a recognition over the past month that a bad deal is better than no deal. As such, five new deals have been struck in addition to the earlier U.S.-UK accord.

It is worth observing that – at least in a game theory sense – the U.S. has “won” these negotiations in that it has compelled several of its trading partners to reduce their own tariffs on the U.S., while actively increasing its tariffs on those other countries. Of course, the definition of winning and losing is subject to debate, as the country imposing a tariff typically experiences more economic damage than the country being targeted by the tariff. So the U.S. has got its way, but will likely suffer the greater economic damage.

European Union deal

The EU-U.S. trade deal has just been struck, with a 15% blanket U.S. tariff rate on European products (with the exception of certain sectors subject to global sectoral tariffs such as steel and aluminum). This would have been considered a bad deal a month ago, but in light of a similar Japanese deal and even higher tariffs applied to developing countries, it is in line with the rest.

While the 15% rate is higher than the 10% baseline figure previously prevailing, it avoids the full force of the 30% rate threatened by the White House in its letter to the European Union. Although it is a disappointment that the European auto sector will pay a 15% tariff rate, that is actually down from the 25% rate that prevailed over the prior several months.

As with many of these deals, the EU will also commit to making certain purchases from the U.S., including American energy and weapons. Whether this spending would have occurred regardless is an open question.

A small silver lining for the EU is that it has not been forced to abandon its digital services taxes, nor to give up regulating U.S. tech giants on European soil. While the EU had put together a plan for counter-tariffs against the U.S. in the event a deal was not struck, this will no longer be necessary. In fact, the deal includes some small reduction in EU tariffs that were previously levied upon American products entering the common market.

In this light, the UK trade deal looks pretty good. It secured a mere 10% baseline tariff rate, plus tariff exemptions on a certain amount of steel and aluminum products. Of course, the UK runs a goods trade deficit with the U.S. and so constitutes much less of a threat to White House goals than do the EU and Japan.

Japanese deal

The Japanese trade deal with the U.S. predates the EU one and looks much the same. Indeed, it set the template for what a developed nation with a trade surplus and substantial auto exports can apparently expect to secure.

To summarize, Japan also faces a 15% tariff on its products – down from a threatened 25% rate – and failed to secure exemptions for autos, steel or aluminum. Japan will also allow more U.S. products into the county without a tariff, though Japan had already significantly opened up during the first Trump term.

Japan has also promised to lend and invest US$550 billion into the U.S. While the details remain murky, only a small fraction – just a few percent – is expected to be direct investments from Japan. The bulk of the rest will seemingly be loans from Japanese financial institutions that are backed by the government. How any of this will be deployed is unclear.

Other Asian deals

Vietnam, Indonesia and the Philippines also managed to secure deals, all looking roughly similar. Vietnamese products will be charged a 20% tariff rate, while products from the other two countries will pay a 19% rate. Transshipped products from China will incur a higher 40%.

Canadian tariff developments

The Canadian economy is already feeling some pain from earlier rounds of tariffs – mainly steel, aluminum and autos. Tariffs on Canadian softwood lumber were also just increased in recent days – though note that this is part of a longstanding trade remedy investigation rather than a sudden White House announcement. Threatened tariffs on copper starting on August 1 would also be significant for Canada.

The leaders of both the U.S. and Canada have publicly stated that it no longer appears likely that the two countries will reach a trade deal by August 1. It is unclear whether the existing tariff regime will be extended or whether the threatened August 1 tariff will instead apply. We assume the latter.

It is a fairly small fraction of Canadian exports that will experience the tariff increase from 25% to 35% on August 1. In turn, the economic damage shouldn’t be too devastating at the aggregate level.

Canada’s letter threatens a 35% tariff rate that – if applicable to all U.S.-bound Canadian exports – would surely trigger a profoundly deep recession. But the proposed tariff, as with Mexico, isn’t what it seems. Unlike with other countries, these reciprocal tariff rates only apply to products that do not qualify under the pre-existing USMCA trade framework.

It is often forgotten that Canada is already paying a 25% rate on such products. Happily, only about 5% of Canadian exports were subjected to the 25% duty in the month after the U.S. imposed it. As such, it is a fairly small fraction of Canadian exports that will experience the tariff increase from 25% to 35% on August 1. In turn, the economic damage shouldn’t be too devastating at the aggregate level, though certain sectors may be more substantially impacted.

Frustratingly, it remains difficult to sort out what products are paying the current 25% rate (and facing the 35% rate). In theory, only about 58% of Canadian exports to the U.S. were USMCA compliant as recently as May. Yet somehow the great majority of Canadian exports avoided paying a tariff.

Are customs officers overwhelmed by the many changes and unable to levy tariffs where they should? Are trade officials looking the other way in the interest of supporting the U.S. economy? Or are more esoteric considerations at play? There are apparently a variety of ways to mitigate duties such as when products are sent across the border for repair, via the use of bonded warehouses, and via de minimis rules that continue to allow non-Chinese foreign products into the U.S. without a tariff so long as the value is below US$800.

Let us not assume that any deal that might be struck in the next few weeks will lock in place the trading rules between the U.S. and Canada. The USMCA trade deal comes up for renewal on July 1, 2026.

Given the vagaries here, it would be irresponsible not to flag the risk that a larger fraction of Canadian products becomes susceptible to the 35% tariff over time, increasing the economic damage from its current relatively moderate level.

And let us not assume that any deal that might be struck in the next few weeks will lock in place the trading rules between the U.S. and Canada. The USMCA trade deal comes up for renewal on July 1, 2026, and President Trump might use that opportunity to pursue his various grievances, including Canada’s supply management system. That, in turn, could be quite difficult to resolve given recent legislation blocking Canadian concessions in this area.

Copper tariffs?

Copper tariffs are supposed to arrive on August 1 at a 50% rate.

The copper price differential between the U.S. and the London Metal Exchange has ballooned wider as the market begins to price in this threat (see next chart). Loosely, the gap has now grown to be about 25-30% higher than normal. In turn, one might argue that the market prices in just over half of the 50% tariff. Alternately, one could say it prices in the full likelihood that the tariff comes in at a lower 25% rate.

Copper price differential between the U.S. and London Metal Exchange has widened

As of 07/25/2025. Sources: Bloomberg, Commodity Exchange (COMEX), London Metal Exchange (LME), Macrobond, RBC GAM

What countries are set to be most adversely affected by copper tariffs? Chile is by far the largest exporter of copper to the U.S., followed by Canada (see next chart). Other countries, including Mexico and China, are much smaller.

Chile leads U.S. imports of copper articles, followed by Canada

Import share calculated based on value of total copper articles imports. Source: UN International Trade Statistics Database (UN COMTRADE), Macrobond, RBC GAM

To give a sense for Canada’s reliance on U.S. demand, the country consumes just under half of Canada’s copper exports (see next chart). But Canada exports notably less copper to the U.S. in a year (US$3.8 billion) than steel (US$7.1 billion) or aluminum (US$9.5 billion).

U.S. leads Canada’s exports of copper

Export share calculated based on value of total exports of copper ores and concentrates, and articles. Sources: United Nations International Trade Statistics Database (UN COMTRADE), Macrobond, RBC GAM

The new copper tariff will make American products more expensive – in particular buildings, machines, vehicles and electronics. While one might imagine U.S. copper production capacity rising over time as foreign products are disadvantaged, it takes many, many years to develop a new copper mine. This means that copper prices will be higher for the better part of a decade before domestic capacity can begin to catch up.

-EL

Who is absorbing tariff costs?

The U.S. has now collected $125 billion in customs duties year-to-date, already exceeding 2022’s record haul. Who is footing the bill?

U.S. customs duty receipts are significantly higher so far in 2025

As of 07/24/2025. The dominant tariff payment method is the Periodic Monthly Statement system through which importers pay designated Entry Summaries for a given month all in one statement on the 15th business day of the month following the imports. Sources: U.S. Department of Treasury, Macrobond, RBC GAM

The literature suggests tariffs imposed during President Trump’s first term were largely passed onto U.S. consumers. We assume that will generally be the case this time around as well. But evidence of tariff effects in the U.S. Consumer Price Index (CPI) has been slow to emerge. A recent U.S. Federal Reserve (Fed) study found only half of the predicted effect of a 20% tariff on Chinese imports showed up in U.S. inflation data between January and March 2025.

Tariff costs don’t have to fall entirely on consumers – they could be distributed throughout the supply chain. Foreign producers might lower pre-tariff selling prices while domestic manufacturers, wholesalers and retailers could reduce their margins to avoid fully passing higher tariff costs onto their customers. Typically, the currency of the country imposing a tariff appreciates, offsetting some of the additional cost for importers.

This time around, U.S. dollar depreciation means the currency channel isn’t offsetting tariffs – in fact, a 7% year-to-date decline in the broad trade-weighted dollar is adding to tariff costs. U.S. imports that are priced in foreign currencies will see their U.S. dollar cost rise unless foreign exporters share the burden and lower foreign currency prices. If imports are priced in U.S. dollars, foreign exporters that haven’t hedged their exposure might need to raise prices to maintain home currency profit margins.

Indeed, as the chart below shows, U.S. dollar depreciation tends to result in faster import price growth (note the right axis is inverted so a rising yellow line indicates USD depreciation). But recently, import prices haven’t increased in response to a weaker U.S. dollar. That suggests foreign exporters are absorbing some of the tariff and/or FX cost.

Soft import prices hint foreign producers absorbing some tariff damage

Import Price Index as of June 2025, effective exchange rates as of June 2025. Sources: U.S. Bureau of Labor Statistics (BLS), Federal Reserve, Macrobond, RBC GAM

Looking at import prices for products subject to significant tariff hikes, we also see some evidence of foreign exporters absorbing tariff costs. The chart below shows 10 product groups for which effective tariff rates have increased the most since Trump took office. For about half of those products, import prices are falling relative to export prices – and in some cases substantially – after controlling for general changes in a product’s price. Declining relative import prices seem to have offset half of the tariff hike on toys, games and sporting goods, and nearly 40% of incremental tariffs on steel and aluminum.

U.S. import prices are falling for products subject to large tariff increases

As of 07/23/2025. Relative import price change is the change in U.S. import prices relative to export prices of the same product. Sources: U.S. Census Bureau, BLS, RBC GAM

That said, there are just as many examples of relative import prices not declining in response to higher tariffs, and the pattern is weaker for goods that have seen a more moderate increase in tariffs. That might suggest foreign exporters are only willing to shoulder some of the burden when tariffs would otherwise drive prices substantially higher.

Wholesale and retail margins (the difference between selling prices and cost of goods sold) measured by the U.S. Producer Price Index don’t appear to be compressing. As the chart below shows, margins were up nearly 3% year-over-year in June – and rose even faster on an annualized basis year-to-date – which is on the firm side of pre-pandemic trends. This suggests wholesalers and retailers are generally passing higher costs onto their customers. That said, there is evidence of margin compression within several industries impacted by tariffs. Technology products, furniture and sporting goods retailers are all seeing margins decline in 2025.

There is little evidence of margin compression among U.S. wholesalers and retailers

As of June 2025. Sources: BLS, Macrobond, RBC GAM

So, while there is some evidence of foreign exporters and U.S. importers absorbing tariff costs, there should still be notable passthrough to U.S. consumer prices. June’s CPI report finally showed clear signs of tariff pressure. As the chart below shows, the price of goods –excluding food, energy and autos – posted its largest month-over-month increase since the pandemic inflation shock.

U.S. core goods inflation has risen sharply

As of June 2025. Shaded area represents recession. Sources: BLS, Macrobond, RBC GAM

Looking at individual core goods components, most import-intensive products saw growing price pressure in June (see the table below). Appliances, household furnishings and sporting goods all saw substantial monthly price gains. Tech products are also becoming more expensive and apparel prices started rising more substantially in June after previously holding steady.

Price pressures grew in June

As of June 2025. Sources: BLS, Federal Reserve Bank of Boston, RBC GAM

New vehicle prices are an outlier with modest declines continuing through June, despite the sector’s import intensity and with auto tariffs having been in place since April. Significant front-running of auto sales before tariffs took effect could be dampening the price response, and dealers might still be working through pre-tariff inventory.

It also appears automakers are absorbing some of the tariff impact. GM’s Q2 results showed a 35% year-over-year decline in profits with about three quarters of that hit coming from a US$1.1 billion net tariff impact. GM’s Q2 margin was 6.1% but would have been 9% excluding tariffs.

It’s worth noting that we’re still in the early stages of this tariff shock, with significant uncertainty surrounding the level at which tariff rates will ultimately settle. How tariff costs are distributed through the supply chain could shift as firms get greater clarity. Foreign exporters and U.S. manufacturers, wholesalers and retailers might initially be willing to absorb some costs to maintain market share in case tariff rates are eventually lowered. But they may lack the margin capacity to do so on a sustained basis.

We continue to think significant tariff pass-through to U.S. consumers, exacerbated by currency depreciation, will cause U.S. inflation to accelerate to around 3.5% over the next year.

-JN

U.S. economy holds together

The latest U.S. economic activity data remains largely fine. This is notable because we continue to watch for evidence of significant tariff damage, but it simply hasn’t appeared yet.  While the Weekly Economic Index of the Federal Reserve Bank of Dallas has dipped slightly, it remains in a fairly normal range (see next chart). Another high-frequency indicator – initial weekly jobless claims – has actually improved substantially over the past several weeks. We suspect there is a seasonal component at work as there have also been late-summer improvements over the past few years, but the bigger observation is that there is clearly no sudden deterioration from tariff damage (see subsequent chart).

Dallas Fed’s Weekly Economic Index remains fairly normal

As of the week ended 07/19/2025. The Weekly Economic Index is an index of 10 indicators of real economic activity scaled to align with the four-quarter gross domestic product (GDP) growth rate. Sources: Federal Reserve Bank of Dallas, Macrobond, RBC GAM

U.S. jobless claims declined lately

As of the week ending 07/19/2025. Sources: U.S. Department of Labor, Macrobond, RBC GAM

U.S. retail sales remained strong in the month of June, and the Federal Reserve Bank of Atlanta’s GDP tracker is a benign +2.4% annualized for the second quarter of the year. The Fed’s biquarterly Beige Book – a pulse check of American businesses – made a slight improvement in the latest period, even if there remains significant grumbling in the details (see next chart).

Beige Book Sentiment Indicator improved slightly

As of July 2025. The indicator quantifies the sentiment of local contacts by assigning different weights to a spectrum of positive and negative words used to describe overall economic conditions in the Fed Beige Book. Sources: U.S. Federal Reserve, RBC GAM

More pressure on Powell

The U.S. Federal Reserve is quite likely to leave its policy rate unchanged this Wednesday July 30. The market assigns a mere 2% probability of a rate cut. Without new dot plots of a formally revised growth forecast, there isn’t scope for major easing. Tariff-related inflation pressure is starting to appear, as discussed shortly.

There also remains substantial uncertainty over both the direction of U.S. trade policy and its potential impact. Furthermore, tariffs famously send mixed signals to central banks given their tendency to reduce growth and increase inflation.

We expect moderate easing over the next few quarters, but it is difficult to pin down the precise starting point at this juncture.

Still, the statement and press conference may be an opportunity to start signaling about the subsequent September meeting, for which markets already price a greater than 50% chance of a rate cut. We expect moderate easing over the next few quarters, but it is difficult to pin down the precise starting point at this juncture.

Against this backdrop, President Trump is once again toying with the idea of firing Fed Chair Powell before his term ends in May 2026. He backed away from similar threats earlier this year after the bond market cried foul.

Trump has been highly critical of Powell and the Fed’s “wait and see” approach to resuming rate cuts in the face of expected stagflationary pressure from tariffs. The President is calling for a 3-percentage point rate cut to boost the economy and reduce the government’s growing debt servicing costs.

Our large-scale econometric model suggests lowering the fed funds rate by that magnitude would temporarily boost the level of U.S. GDP by about 0.8%, while consumer prices would rise by around 0.6% and remain persistently higher. However, the model doesn’t capture damage to the Fed’s credibility and independence, which could put upward pressure on inflation expectations and long-term bond yields. As the chart below shows, Treasury term premiums and long-term inflation expectations were on the rise in the first half of July as Trump dialed up pressure on Powell.

U.S. Treasury term premium and long-term inflation expectations are rising

As of 07/25/2025. Sources: Bloomberg, Macrobond, RBC GAM

In any case, Trump likely can’t fire Powell over policy differences. In a recent preliminary decision that upheld the President’s ability to fire other independent agency members without cause, the Supreme Court explicitly said the ruling doesn’t apply to the Fed, which is a “uniquely structured, quasi-private entity.”

Powell could still be dismissed for cause, and the White House and some congressional Republicans have suggested cost overruns on renovations to the Fed’s Washington headquarters – and Powell’s congressional testimony on the issue – could qualify. However, without evidence of fraud, legal experts say Powell’s dismissal wouldn’t hold up in court.

Trump’s musings on firing Powell have ebbed and flowed – for the moment he appears to be following Treasury Secretary Bessent’s advice to let Powell serve out the remainder of his term. According to betting site Polymarket, the odds that Trump tries to fire Powell in 2025 have receded to 21% from around one-third in mid-July, while odds Powell will be out by year end are at 17%.

More likely, a growing group of dovish Trump appointees could cause policy to drift toward the more accommodative end of current FOMC views, but in a way that isn’t divorced from economic fundamentals.

Keeping “too late” Powell in his seat allows Trump to scapegoat the Fed for any economic slowdown caused by higher tariffs. Rather than firing Powell, the White House has also discussed naming the next Fed chair early to undermine Powell’s authority.

Still, the incoming chair will have their work cut out to shift the Federal Open Market Committee’s (FOMC) views. The latest dot plot showed most committee members expected 50-100 bps of rate cuts by the end of 2026, while the market is already priced for more than that. 

As a reminder, the chair is only one of 12 voters on the FOMC – another six members of the Board of Governors and five rotating regional presidents also have their say. But the chair carries additional influence by setting the agenda and leading policy discussions (including who talks and for how long), overseeing staff members that prepare economic forecasts, and acting as the main spokesperson for the committee, including through post-meeting press conferences and congressional testimony.

Trump can also expand his influence over the Fed. He already appointed two governors during his first term, and both Waller and Bowman have tacked dovish lately, with the former in particular advocating for a rate cut in July. Another Board seat will be vacated in January, allowing Trump to install his preferred candidate for chair (Waller is also in the running). Conventionally, the outgoing chair also resigns their seat on the Board of Governors – Powell’s term as chair ends next year but his term as governor extends until January 2028 – though Powell hasn’t committed to doing so. If he leaves, another vacancy will put Trump appointees in the majority on the Board of Governors.

Ultimately, if respect for the Fed’s independence and concerns about a policy error don’t keep a reshaped Fed in line, the bond market is likely to impose its own discipline.

That still leaves regional presidents who are appointed by their banks’ boards of directors and tend to be more freewheeling in their views – in the past 30 years, they accounted for 95% of dissenting votes at FOMC meetings. But importantly, regional presidents can be removed by a majority vote of the Board of Governors. While such a move would unprecedented, the threat to do so could be enough to force dissenters into line.

President Trump exerting such influence over the Fed is an extreme scenario. More likely, a growing group of dovish Trump appointees could cause policy to drift toward the more accommodative end of current FOMC views, but in a way that isn’t divorced from economic fundamentals. Ultimately, if respect for the Fed’s independence and concerns about a policy error don’t keep a reshaped Fed in line, the bond market is likely to impose its own discipline.

The perils of a politicized central bank

Developing markets offer plenty of cautionary tales regarding the loss of central bank independence – most recently Turkey’s unorthodox monetary policy, which contributed to a sharp increase in inflation and collapse of the lira. One must go a bit further back, but the Fed has its own examples of damaging politicization.

President Nixon picked Arthur Burns – a respected economist and Republican loyalist – to lead the Fed in 1970. With both unemployment and inflation remaining stubbornly high ahead of the 1972 presidential election, the White House pressured Burns to make monetary policy more stimulative.

It consistently leaked negative stories about Burns to the media, including false claims that he was demanding a 50% pay raise even as he publicly advocated for wage and price controls. The White House also threatened to undermine Burns by expanding the size of the board and packing it with Nixon appointees, or giving the executive branch more power over the Fed.

Burns eventually relented, perhaps in the belief that wage and price controls would free up monetary policy to address high unemployment. The decision to ease monetary policy was unanimous but several FOMC members expressed doubts and voted reluctantly.

Lower policy rates and faster money supply growth contributed to an economic boom that helped Nixon get re-elected in 1972. But even with some subsequent tightening, unemployment continued to decline and the removal of wage and price controls in 1973, combined with the 1973-74 oil price shock, resulted in a sharp increase in inflation during Nixon’s second term.

Inflation averaged 6.5% over the course of Burns’ 8-year tenure as Fed chair. It wasn’t until Paul Volcker took the reins in 1979 and imposed a punishing period of high interest rates that inflation was finally brought under control.

-JN

Our new demographic model

The United Nations publishes the most comprehensive and widely cited long-term demographic forecast for the world and at the national level.

Outputs from the exercise – in particular, overall population growth and the working-age share of the population – are themselves critical inputs for forecasting economic growth, assessing the fiscal outlook, and even modelling interest rates.

We have for years argued that the UN population growth forecasts are too optimistic. One might even say that the UN tentatively concurs with our assessment, as its own biennial revisions have tracked in a downward direction over the past several updates.

Still, we continue to believe that even these downwardly revised UN forecasts are too high. Fortunately, thanks to the efforts of RBC GAM’s new generalist, Ana Ardila, we now have a model that can generate our own long-term demographic forecasts and so quantify this impression (see next chart).

Global population forecast trending downward

As of 07/25/2025. Sources: United Nations, RBC GAM

The three key levers in demographic forecasting are the fertility rate, the mortality rate by age, and immigration.

Immigration

Immigration is an important variable at the national level but doesn’t matter for global forecasts as there are no immigrants to or from planet Earth. As such, it is not relevant to this global-focused discussion. It is nevertheless worth mentioning that it is very difficult to make a good long-term immigration forecast between countries at the moment. Not only is it inherently a political decision, but the demand for immigrants is currently falling as developed countries tighten their borders.

Meanwhile, the prospective supply of immigrants would seem naturally inclined to increase as a rising fraction of the developing world reaches a level of wealth that permits international travel, and as factors such as overcrowding and climate change increase the incentive to flee certain heavily-populated regions of the world. How that dynamic will play out five years from now is hard enough to predict, let alone speculating what immigration might look like in the year 2100.

Mortality rate

We have no particular qualms about the UN mortality rate assumptions – that longevity continues to incrementally rise, driven by a particular decline in the child mortality rate, and a material drop in senior yearly mortality rates as well. The risks are fairly balanced around this forecast: true, longevity could rise more rapidly than assumed if the diffusion of best practices accelerates from the developed to developing world, and/or health care innovation accelerates (as per promising new technologies such as GLP-1 drugs and mRNA therapies, and new health-relevant tools such as gene editing, quantum computing and artificial intelligence models). But alternately, it could prove increasingly difficult to lift life expectancy in developed countries beyond certain fundamental limits, and mounting fiscal constraints could prevent countries from allocating enough resources to health care to maintain the same forward progress.

Fertility rate

That leaves the final key variable: the fertility rate. This is our main area of disagreement with the UN forecasts. The global fertility rate has been declining almost without interruption since the mid-1960s. The UN assumes that this trend continues, but at a substantially slower rate in the future. We believe the rate of decline may be somewhat faster than the UN assumes.

What is going on beneath the surface? The UN is essentially assuming that the fertility rates of developing countries continue to decline until they reach just over 2.0 children per woman, at which point the fertility rate stabilizes in each country. Conveniently, that happens to be the replacement rate, meaning that these countries’ populations should stabilize over the long run with that assumption.

But this isn’t what actually happened in countries that have already reached the replacement rate. In those countries, the replacement rate exerted no special magnetic pull. Instead, the fertility rate continued to decline, and in some cases – in particular across much of developed Asia – it is now less than half the replacement rate.

This is the basis for our disagreement with the UN forecasts. Our own forecasts imagine that the global fertility rate declines more substantially than the UN has assumed. There is already tentative evidence of this trend playing out in high-fertility regions like Africa. Nigeria’s fertility rate fell by a large amount – from 5.8 to 4.6 – over a mere five-year span recently.

When our tweak is mapped onto population forecasts out to the year 2100, it argues that the global population could peak much earlier – in 2066 rather than 2084 – and that the peak population could be a remarkable 683 million fewer humans than the UN forecast – 9.6 billion rather than 10.3 billion people.

It is worth knowing if economic growth might be skewed slightly slower over the long run, or if governments may have more difficulty than they imagine affording entitlements, or if a normal bond yield might be something like 15-20 basis points lower than otherwise.

To put this into context, population growth maps roughly one-for-one onto economic growth. Thus, a population that is 12% smaller by the end of the century argues for global economic output that is also about 12% smaller. To be sure, the difference isn’t huge in any one year – the population grows on average just 0.16% less quickly annually in our forecast versus the UN consensus, meaning that growth forecasts, fiscal prospects and bond yield fair values aren’t radically altered by our assumptions.

But it does add up (see next chart), and it is still important to try to get these things right. It is worth knowing if economic growth might be skewed slightly slower over the long run, or if governments may have more difficulty than they imagine affording entitlements, or if a normal bond yield might be something like 15-20 basis points lower than otherwise. We are in the camp that believes aging populations and slowing population growth reduce inflation, so perhaps inflation will be slightly lower than otherwise as well.

Total population difference grows over time between RBC GAM and UN models

As at 07/25/2025. Source: United Nations, RBC GAM

The demographic outlook, as uncertain as it can be, is one of the more solid inputs upon which to anchor a forecast. At a minimum, we can be confident that most of the infants today will be turning 50 years old in 50 years. In comparison, think of the enormous uncertainty and year-to-year variability surrounding efforts to forecast what the other key driver of economic growth – productivity – might do 50 years from now: what technologies might or might not exist, how well artificial intelligence is integrated into the working world, and so on.

-EL

Critical technology advantage

The world is changing in many ways, several of which are to the disadvantage of the U.S.

The American economy appears set to be somewhat less exceptional than in the past, for several reasons as:

• China rises.

• Tariffs threaten to undermine U.S. growth.

• The domestic political schism grows.

• The rest of the world loses confidence in the country.

• Fiscal obligations and concerns mount.

Perhaps monetary policy will even become less optimal, as discussed in an earlier section of this note. Reflecting this, RBC GAM’s own asset allocation is now somewhat less oriented toward the U.S., with the overvalued dollar a further motivator.

But we must not write the U.S. off altogether. It remains a dynamic place, and more capable than most of enjoying rapid productivity growth in the decades ahead. The U.S. retains many of the world’s most innovative companies, and recent tax changes arguably render it even more attractive than before.

Consistent with this view, new research from Harvard’s Kennedy School makes the argument that the U.S. remains well positioned to lead from a technological standpoint into the future. Rising productivity is the key determinant of financial well-being, and there is every reason to believe the U.S. will remain a force on this front.

The Critical Technologies Index examines five fundamental technologies that may drive prosperity gains in the decades ahead: artificial intelligence, computer chips, biotechnology, space technologies, and quantum computing (see next table). Incredibly, the U.S. holds the lead in all five technologies. This lead is particularly large in AI and space, is substantial in computer chips and quantum computing, and is conversely only marginal in biotechnology.

U.S. leads across all components of the Critical Technologies Index

*Europe includes Britain, France, Germany, Italy, Netherlands and Spain. Based on data from 2023 or, where unavailable, the most recent publicly available data. Sources: Harvard Kennedy School – Belfer Center for Science and International Affairs, RBC GAM

Yes, China is in second, but not exactly nipping at American heels. Europe, Japan and others are much further back (see next chart).

U.S. also leads Critical Technologies Index overall

*Europe includes Britain, France, Germany, Italy, Netherlands and Spain. Based on data from 2023 or, where unavailable, the most recent publicly available data. Sources: Harvard Kennedy School – Belfer Center for Science and International Affairs, RBC GAM

How is the index constructed? It uses quite a range of fairly sophisticated considerations that are curated to the specific technology. For instance, the U.S. lead in artificial intelligence (see next chart) is evaluated via variables that include the economic resources allocated toward the undertaking, the quality and quantity of human capital, the regulatory environment, the amount of computing power available, the amount of data available, the quality of the algorithms, and so on.

To add to this, and based on our own research, the U.S. AI advantage is not just because it has superior algorithms, but also based on the country’s access to the top computer chips (another critical technology – they do overlap somewhat), to cheap electricity, and even its proximity to clients – in this case, not just major technological firms but also the many American corporations looking to harness AI.

U.S. maintains strong AI advantage over China

*Europe includes Britain, France, Germany, Italy, Netherlands and Spain. Based on data from 2023 or, where unavailable, the most recent publicly available data. Sources: Harvard Kennedy School – Belfer Center for Science and International Affairs, RBC GAM

-EL

Quick Canadian update

The Bank of Canada delivers its own next verdict on Wednesday July 30. The market assigns a small 5% chance of a rate cut, which makes sense as Canadian monetary policy has already been eased considerably, and recent data has been mixed.

On the dovish side:

• While the timeframe is rather dated, May GDP is tracking a 0.1% decline, the same as April.

• The Business Outlook Survey dipped slightly and remains quite weak (see next chart), even if hiring and business investment intentions became slightly less depressed (see subsequent chart).

Business Outlook Survey indicator remains low

As of Q2 2025. Sources: Bank of Canada Business Outlook Survey, Macrobond, RBC GAM

Canadian firms’ investment intentions and hiring plans improve slightly

As of Q2 2025. Sources: Bank of Canada Business Outlook Survey, Macrobond, RBC GAM

On the hawkish side:

• Canadian employment in June was surprisingly strong, with a big 83,000 jobs added and the unemployment rate reversing from 7.0% to 6.9%.

• While Canadian retail sales for May were soft (-1.1% month-over-month), this had been known in advance of the formal release. In contrast, the “new” information – a flash estimate for June – was quite strong (+1.6% QoQ).

More information is needed to justify a rate cut, but given the outstanding output gap and the theoretical damage from tariffs, additional easing may become appropriate in the coming months.

-EL

EU policy efforts

In addition to negotiating a trade deal of sorts with the U.S., the EU and its member states have also taken action to boost economic growth and competitiveness. Earlier this year, the bloc’s Readiness 2030 initiative offered member states greater flexibility to increase defense spending over the next four years – a measure that could add 0.5% to GDP according to the European Commission (EC).

Germany has been particularly active, relaxing its famous debt brake to establish a 12-year, €500B infrastructure fund. It is also increasing defense spending and easing borrowing restrictions on state governments. The EC estimates those measures could boost German GDP by 2.5% over the next decade and EU GDP by 0.75%.

Adding to this public sector investment, the private sector is also stepping up with a “Made for Germany” initiative in which 61 German and international companies plan to invest €631B by 2028. The funding commitment includes already-planned investment, but new projects are expected to account for at least €100B, which represents 0.8% of German GDP annually over the next three years – quite a sizeable sum.

The sum of these measures – if spending plans are followed through – is a powerful offset to the economic drag that would result from an intensifying trade conflict with the U.S. However, the benefits will accrue over several years, whereas the hit from tariffs could be more immediate.

-JN

UK fiscal folly

Fixed income investors are increasingly scrutinizing government finances and demanding additional yield compensation from those in more challenging fiscal positions. The term premium baked into U.S. Treasury yields is the highest in more than a decade according to one estimate, while Japanese 30-year yields are at the loftiest levels since the government started issuing ultra-long bonds in 1999.

But the highest borrowing costs in the G7 belong to the UK government. That seems appropriate, as it sits second place in our fiscal health scorecard – recall, higher rankings and index values indicate worse fiscal health. Unfortunately, it doesn’t enjoy the exorbitant privilege of top-ranked U.S.: lower borrowing costs associated with providing the world’s reserve currency.

Fiscal health scorecard

2024 data for all indicators, except interest payments (2023) and GDP growth. IMF forecast for 2030 used as proxy for “normal.” Fiscal adjustment refers to the necessary reduction in fiscal deficit to stabilize debt-to-GDP ratio. Sources: IMF, Macrobond, RBC GAM

UK yields aren’t just high relative to major economy peers – they are also more prone to swings in investor sentiment. The UK’s large current account deficit – one of the “very poor” data points in our fiscal health scorecard – leaves it reliant on the “kindness of strangers,” as former Bank of England (BoE) Governor Carney once quipped.

The government has been its own worst enemy at times – most famously in 2022 when Gilt investors delivered a sharp rebuke of then-PM Liz Truss’s proposed deficit-financed tax cuts. 30-year yields spiked by 150 bps in a matter of weeks – exacerbated by market positioning and liquidity issues – before the BoE was forced to intervene.

A far less dramatic but still disconcerting episode occurred in early July when the Labour government was forced to abandon some of the more unpopular aspects of its Welfare Reform Bill due to dissent from within its own party. Concerns about party discipline and the future of Chancellor Reeves – whose revised fiscal rules are intended to enforce debt sustainability – sent Gilt yields 15-20 bps higher on July 2. The market calmed down after PM Starmer belatedly backed the Chancellor, but yields remain elevated. Reeves has suggested tax increases could be needed to fill the fiscal hole left by scrapped welfare savings.

The UK’s high borrowing costs also reflect a challenging inflation environment. The country’s inflation rate is the highest in the G7. Unexpected inflation can be a debtor’s friend – by eroding purchasing power, it reduces the “real” burden of debt – but expected or entrenched inflation is ultimately reflected in higher borrowing costs. The UK government also has a relatively high share of inflation-linked debt, and elevated inflation increases the cost of programs that are indexed to CPI.

UK has the highest inflation and interest rates in the G7

Latest values as of 07/23/2025. Sources: Bloomberg, RBC GAM

Sticky inflation has also limited the BoE’s scope to unwind past interest rate hikes. Like the Fed, BoE has lowered its policy rate by just 100 bps over the past year and the current 4.25% bank rate remains clearly in restrictive territory.

Another 25 bp rate cut is expected in August but the BoE continues to advocate a “gradual” (once-a-quarter) pace of easing, even as the UK’s labour market shows clear signs of softening. Declining payrolls and a half percentage point increase in the jobless rate over the past year have done little to cool wage growth, which remains uncomfortably high at 5% year-over-year. Services inflation, which typically reflects domestic labour costs, is also running close to 5%.

UK wage growth remains firm despite a rising unemployment rate

As of April 2025. Sources: UK Office for National Statistics (ONS), Macrobond, RBC GAM

The UK’s framework agreement with the U.S. – in which it agreed to a 10% baseline tariff and secured some relief from sectoral levies – is now the envy of other trading partners that are being threatened with or have agreed to higher rates. That trims the risk of higher inflation and slower growth associated with tariffs, yet the UK economy still looks more stagflationary than its peers – an environment that only makes the government’s fiscal situation more challenging.

-JN