What is your outlook for the global economy?

Eric Lascelles

We think the global economy may move fairly sluggishly over the next few quarters but will be in a position to start to accelerate into 2026 and beyond. And really, the main theme and the main headwind for the moment is tariffs, as they are a drag on growth. Tariffs are a source of additional Inflation as well. And that probably does dominate over the next several quarters. But when, we look further out, we do see fiscal stimulus in a U.S. context. We actually see quite a number of developed countries delivering some form of fiscal stimulus of their own. So, there is room for some acceleration on that basis we think. Central banks are still broadly in rate cutting mode, as that should help growth in 2026 as well. And of course, we shouldn't forget that global oil prices are down as well.

And so, while tariffs are the dominant theme, there are a few helping ends here that could help to stabilize and ultimately allow economies to move a little bit more quickly going forward. When I think about the U.S. specifically, maybe the other factor to consider is that there's a remarkable amount of CapEx coming from the technological leaders, in particular. And so that is providing an important helping hand at a time when there are some real headwinds elsewhere.

When we think about Canada, we certainly think about tariffs front and centre. But the real question is what happens when the USMCA trade deal is negotiated at some point over the next year. It's likely to remain in some form, but there is some real downside risk to Canada that comes from that.

When we think about China, we certainly see some challenges in the demographics, in the debt, in a weak housing market, and so on. Tariffs, of course. But equally, China seems to be diversifying its trade quite well, somewhat away from the U.S. And so that's very helpful. China is delivering stimulus of its own, which helps as well. And maybe critically, China seems to be innovating, actually generating new technologies and new products in a way that can, we think, keep them moving forward fairly well despite a relatively challenging global environment.

And not to lump every other country of the world into a single box because you can't do that, but I would say that one theme to think of is that the damage from tariffs is set, we think, to be fairly slight for most of the world's countries. And so, as a result, they may be able to weather this a little bit better than many people might imagine.

What are the economic impacts of current U.S. tariff policies?

Eric Lascelles

Tariffs are still the dominant economic theme. And indeed public policy more generally is still very relevant to the outlook into what's going on in economies today. The U.S. tariff rates are running a little bit higher than we had been budgeting for. We're estimating about a 19% average tariff rate right now. We'd figured it could settle a few percentage points below. And so, there is some extra prospective damage that comes from that. And of course, the tariffs are really significantly in two forms. One is just at the country level. And some countries struck deals and some didn't in early August. But either way, countries are being hit by rather significant tariffs on that front. The other angle is sector-oriented tariffs.

And so the steel, the aluminum, the autos, the copper primarily, with a few others seemingly coming. But these do add up quite significantly. And they are set to do some economic damage and to add something to inflation. And we think on both fronts that we're starting to see some of that already. Now, before we go too far, we should acknowledge there are some significant legal challenges to a subset of those tariffs related to the tariffs that are applied in a blanket nature to particular countries. And, it is really, honestly, anyone's guess as to whether the Supreme Court strikes those down or not. I have been looking at betting markets. They are 50/50 right now. So it's hard to say with any kind of confidence. I would just say in a scenario in which the Supreme Court does strike down those tariffs, I would not assume that is the end of the story on tariffs. There are enough other tariff tools in the White House toolkit that we think they can probably get more or less where they'd like to go, let's say within six months or a year after that. And so there could well be some uncertainty if those were to be struck down.

But the bottom line is significant tariffs likely persist over a longer period of time. And when we talk about the economic damage that's coming from these, they have interestingly come a little lighter than initially feared. Now there's a debate whether that's just a lag or whether it is just less damage. We think it's a bit of both. We are very much budgeting for a few fairly meager quarters of economic growth as the tariff damage does become more visible. But all the same, it does seem as though some foreign manufacturers are absorbing some of the tariff cost. So that's avoiding the full hit to the American consumer. We have seen a few other forces that have come in simply helping growth be they fed rate cuts or additional IT spend on AI type technologies. And so that's helping to buffer the blow. But we do still believe some weakness is on its way.

What is your outlook for inflation?

Eric Lascelles

One of the consequences of tariffs is higher prices. And so we think we're starting to see some of that. But I think maybe the first comment is that we don't expect inflation to look anything like it did in 2021 and 2022 or 2023. That was 8 or 9% inflation, depending on the country. We think we're talking about inflation that might have run at 2.5% and instead runs briefly at about 3.5%. And so, higher than desired complicating the life of the central bank, eroding purchasing power certainly to some extent.

But it is important to put that into context, I think, in terms of the amount of damage that might occur. Prices are higher simply because a significant portion of tariffs are generally passed on to the consumer. And so, it's just a higher cost. I will note that, interestingly, we are seeing foreign manufacturers seemingly absorb some of the tariff blow. In a few industries, prominently the auto industry, we've seen domestic manufacturers also eat a little bit of that. So it's not fully accumulating to the consumer. And so, it's not all in consumer prices, but we are starting to see some of it. What has been lucky, though, is that there have been a few other forces providing something of an offsetting influence. So just by happenstance, oil prices are down. By happenstance, housing costs, at least shelter inflation in CPI, is somewhat softer as well. And so, you're not seeing the kind of inflation pick up on the aggregate level that was feared. We still budget for some, but there are some helpful offsetting forces.

When we step back from the U.S. and think about the rest of the world, the honest answer is tariffs probably aren't that inflationary because the inflation that you would theoretically expect is usually, countries retaliate against the country hitting them with tariffs. And we've seen very little retaliation really. Only China, Canada did briefly. Canada has significantly walked that back. Normally if you're being hit by tariffs your exchange rate goes down. That hasn't happened. In fact, exchange rates have gone up outside of the U.S. And so, at this point, it doesn't look like inflation has to be much higher in the rest of the world.

Will political pressure on the Fed result in rate cuts?

Eric Lacelles

The Fed is in play right now and expected to cut rates in the near term. And I think that's largely justified from a fundamental economic perspective. It's reasonable to think the U.S. economy will be somewhat weaker in the short term. It's reasonable to think the extra inflation from tariffs will be temporary. But it's undeniable there is this additional element, which is there is real political pressure on the Fed right now to cut by more than it might otherwise be inclined to do. And if you, look forward over the next year, it's more than plausible there will be a number of additional votes on the FOMC that could be aligned perhaps politically with the White House. And so, this is creating some measure of concern. I think the way that I would frame it is we do not think that monetary policy will diverge completely from fundamentals. We do think, though, this additional pressure could result in a bit more cutting, in slightly lower interest rates, at least the short end, than otherwise.

And the way I would think of it is really just that there is always a debate as to what the appropriate Fed funds rate is. The current rate is probably in the middle to the upper end of what you might say is justifiable given current circumstances. We will probably find ourselves toward the lower end of that appropriate range. And so not detached completely from fundamentals, but pushing our luck a little bit with rates that are somewhat lower. And so, it appears that a fair amount of rate cutting is on its way. I would frame this more broadly to the extent there is some small amount of politicization of the Fed, it argues for slightly lower short-term rates of course. But equally, it probably argues for slightly higher long-term rates as there's a little bit of trust lost, perhaps, in U.S. public policy. So a steeper yield curve might be on the offing. A slightly weaker dollar might be appropriate. And of course, when you cut interest rates more than you would otherwise, inflation should run a bit hotter than otherwise. And the economy should run temporarily a little bit faster as well because economies like low interest rates. But if it's not completely appropriate, then perhaps you suffer a bit later. So short-term growth, a bit quicker, long-term growth perhaps a bit slower as a result of that.

Is U.S. exceptionalism on the decline?

Eric Lascelles

Well, the U.S. economy has been pretty exceptional for a long time. It's been the country with the world's reserve currency. It's been able to borrow more cheaply than it might otherwise have been as a result of that. It's been the broadly fastest growing of the developed countries. And it's had the strongest stock market over the last 15 years or so. And, of course, host to any number of dynamic, unique companies. And so it has been a truly exceptional economy. And all the same, it does seem as though some of that exceptionalism might be starting to corrode a little bit. And so you can make comments on the policy side and reference some suboptimal economic policy recently deployed, perhaps tariffs among them. It's fair to say that the fiscal position now has grown somewhat precarious in the U.S. Big deficits, big debts, not really a plan to resolve that. Polarization is rising within the U.S. International trust of the U.S. has gone down to some extent, as well.

And, we've simultaneously seen other countries rise to some extent. China, with a fairly rapidly growing economy. Even places like Europe perhaps snapped awake by recent events and in a position to move a little bit more quickly. And so, it does seem credible to say that U.S. economic exceptionalism is diminishing to some extent. The U.S. growth advantage over others probably will be somewhat smaller. We are budgeting for a dollar that weakens somewhat over time. We're budgeting for long-term borrowing costs that are probably a little more expensive than they would otherwise be.

For all of that, I do want to say that the U.S. is likely to remain somewhat exceptional in a very important way. When we look at critical technologies, the likely technologies that may drive productivity and innovation and ultimately economic growth over the next few decades, it is pretty remarkable the way the U.S. is at the forefront of those technologies. And so, whether it's AI, or quantum computing, or space or pharmaceuticals, the U.S. is objectively number one in all of those regards. I certainly wouldn't want to suggest that the U.S. economy is about to stop being special. It is pretty special, but it might become a bit less exceptional and have a little bit less of an advantage than it has had in decades past.