What will be the impact of tariffs and policy uncertainty on global economic growth?

With the caveat that we still don't know exactly where tariffs will land, we can at least say something about some of the main channels by which tariffs are interacting with the economy, and there are some upfront effects. We can say that the uncertainty itself is causing businesses to sit on their hands and not hire and not engage in spending, and households to avoid big ticket purchases like buying homes.

So some of that damage is already happening. Conversely, we've seen some front loading in which you have businesses loading up on inventories, trying to beat those tariffs. And so it's actually flatter the economy artificially for a period of time. You then have the direct effect of the tariffs themselves. And so that's just prices go up and things cost more.

And people buy less and people are poorer than they would have been. And then there are long term effects. And one of them may be that there's been some reputational damage to the U.S. as the main antagonist in all of these tariffs, and that could result in a higher cost of capital for the U.S. and an aversion to U.S. goods.

And so there might be some long term damage as well. As we look at the current tariff landscape, we're expecting, I would say, a middling level of tariffs ultimately to prevail, an average U.S. tariff rate of about 15%. And so not the triple digit numbers that we saw occasionally leveled on some countries, not zero though, either. The tariffs probably aren't going to go away, and we are starting to see just a glimpse of some economic damage.

And so some of the high frequency indicators are beginning to weaken in a way that suggests we could see clearer damage being done over the span of the summer and likely into the fall as well. And our modeling, as imperfect as it is, would say that the U.S. economy could find itself about 1.3 percentage points smaller than otherwise.

So growing but growing maybe at half speed for this year. Prices that are running a little more than a percentage point higher than they would have been. The damage to the rest of the world is less than that. Maybe a 0.8% hit to the economy, maybe a couple of tenths of higher prices. But we do anticipate some genuine economic damage.

And I suppose as we look to the future, we don't expect a recession. We think a recession can be avoided, but it's likely to be a period of weakness. It is or would have been avoidable. It is a policy decision that's taking us here. And if those tariffs remain, then that damage is enduring and we can expect economies that will grow, but that will be perpetually somewhat smaller than they might otherwise have been.

Will growing tensions between the U.S. and China stifle global growth?

Well, it certainly isn't ideal that the world's two largest economies are at odds with one another, and there were moments in recent months in which there were truly gigantic tariffs being leveled by each country on the other, and that would have been a pretty substantial problem. The good news is we have seen some reduction in the intensity of the antagonism since then, and some reduction in the level of the tariffs since then, such that we're down to, I guess, more moderate economic drags, you might say for both countries.

The negotiations are continuing and ongoing, and we are conceivably seeing some concessions in terms of China providing more critical minerals to the U.S. and the rest of the world. And the U.S. lightning some of its metrics on China as well. When we look at those negotiations, China probably has the stronger bargaining position, just to the extent they sell a lot of things into the U.S., that's hard for the U.S. to get from anyone else.

And that's less true going in the opposite direction. But nevertheless, there is some pain that extends in both directions. I will say we are slight optimists when it comes to the Chinese economy, at least within the context of some of these challenges that exist. And so, you know, one of those reasons is just that China actually doesn't lean that much on U.S. demand.

Only 2 or 3% of what the country makes is bought by Americans. We can say that China seems genuinely to be innovating now, and is even at the forefront of some key technologies, like in the auto sector and solar panels and so on. They seem to be making friendlier relations between China's government and the private sector, which is critical.

We have a housing market that seems to be perhaps stabilizing in China, finally, and we see some stimulus for the Chinese consumer. So we're feeling a bit better about China in general. They're able to weather this perhaps bit better than the U.S. might. But the fact remains it's not an ideal situation, and it really reflects something of a shift in the global order.

And so this is just another example of going into a multipolar era. And cliques of countries are forming. And there's a team USA and there's a team China and other countries are going to have to pick to some extent. And generally in that kind of environment, it does translate into a bit less economic growth and a bit more inflation.

And perhaps slightly higher risk premiums and more military spending as well. And it's not ideal for trade. And that's just where we are right now.

What is your outlook for interest rates and inflation?

Well, inflation should rise as tariffs are implemented. And that's most obviously true in the U.S. because it is the main country applying tariffs. And so as import prices start to rise we should see consumer prices start to rise. And we're watching for that over the summer and into the fall of this year. And so we think we'll likely see that.

We haven't seen it much in the data. The record should show. But we have some real time metrics that suggest it's probably not too, too far away. And so that's the story, though I should emphasize, this is unlikely to be an inflation shock like we suffered through in 2021, 2022, 2023. That was on the order of 8%, 9%, 10% inflation, the highest levels since the 1970s or the early 80s.

This time we're talking about inflation, that instead of maybe being 2.5% or 3%, it might be 3.5%, it might be 4%. And so undesirable, but not quite as problematic, if that makes sense. For the rest of the world, it's actually a much more muted inflation story. And so of course, you might think inflation should rise and perhaps it will rise a little bit more than otherwise.

But keep in mind the main inflation impact is when you as a country are imposing tariffs. And we're actually seeing surprisingly light retaliation by countries. And so there's less of an inflation pop likely for these other countries. They may even see a little bit of a deflationary effect as other countries like China dump surplus products t hey can't get into the U.S. market onto their shores.

We're seeing currencies rise outside of the U.S., which is deflationary. So not expecting that much more inflation outside of the U.S.. That brings us to interest rates. And so of course, the idea that inflation may be somewhat higher would all else equal say that central banks have a tricky situation and might struggle to cut. The thing about tariffs is they push in opposite directions.

So higher inflation says hike. Lower growth says cut. Usually the growth considerations dominate. And so central banks probably can still cut just not a lot. And so we think at the short end of the bond market of the interest rate curve, we can see rates falling to some extent. I think the trickier debate and the trickier situation is for longer dated bonds and longer dated interest rates.

And so all else equal, you would think that rate cuts equals lower yields there too. But it may not quite be the case just because that's where the bond market gets to express its discontent with a few things in a particular relevance to the U.S., where there are some pretty notable fiscal excesses right now, where the economic exceptionalism seems a little bit less exceptional going forward in terms of that, U.S. growth advantage, where the rest of the world is a little bit grumpy with the U.S. for that matter, and U.S. political decisions, we may see a bigger term premium and bigger risk premiums in particular in the U.S. longer end.

And so it argues for a steeper yield curve. It argues it longer dated bond yields might not actually get to come down very much.

What does the “One Big Beautiful Bill Act” mean for the U.S. debt burden?

The U.S. budget bill is wending its way through Congress, and is reasonably likely to be implemented over this summer, and it does contain some pretty major components. And so it does envision some large tax cuts, which are theoretically growth supportive for the U.S. economy. It does, though, include some other components. And some of that is additional spending on the military and on border control.

It also includes, somewhat controversially, some spending cuts, which include some cuts to Medicaid and to food stamps as well. And when we tally that up, if I put on my economists hat, I can say that it might be somewhat stimulative, and we might expect somewhat faster U.S. economic growth in 2026 and perhaps beyond.

On that basis, if I change hats and put on my fiscal hat, of course, it equally translates into a bigger deficit. And so some of the costing for this budget would say that you would think over the next decade, the U.S. might have to borrow an extra 2 to $5 trillion to make this happen. And so that is, of course, a tricky development at a time when the U.S. is already running quite large deficits, when it already has a fairly high debt load.

And so this would add to that, and we have a fiscal health index that tries to look at different countries and evaluate who's in the best shape and who's in the worst shape. And having just run an update, the U.S. is perhaps the most challenged of the bunch right now, and that doesn't mean that anything absolutely dire happens here, but it does mean the U.S. is in a tight situation, and one in which it is likely going to have to pay somewhat more to borrow those bigger risk premiums and term premiums, and therefore spend more money servicing debt and therefore have less money to do other productive things.

And at some point, you would think there will have to be some fiscal austerity in the U.S. that slows the economy down. Doesn't seem to be the plan for the next few years. It's hard, frankly, to say exactly when that does come into play. But as the bond market grows more sensitive, we could see the fiscal nimbleness of the U.S. diminish in a way that does force some more difficult decisions later.

What is the outlook for the Canadian economy amidst tariff uncertainty? (Canada video only)

Well, tariffs are certainly issue one, two and three for Canada at this exact moment. And so of course, access to the world's largest economy and the country's largest trading partner is pretty mission critical for this Canadian economy. So that’s the thing we're paying most attention to for Canada right now. The good news is Canada has actually dodged a few blows and presently has one of the lower tariff burdens from the U.S. in the world.

Much of the world is paying a baseline 10% rate plus various sector tariffs. Canada just has those sector tariffs and certainly not to diminish the rather substantial pain being felt by the sectors that are affected. So that would be steel, aluminum and the auto sector right now, all of which are quite adversely affected. Overall, the hit isn't quite as bad as feared.

Now we will have to see where this goes. And our base case assumption is we are going to see some additional sector tariffs leveled in a way that perhaps increases the pain a bit further. But there are a number of ways this could go. There is some uncertainty here. And if you want to be an optimist, there are murmurs or deals and murmurs of perhaps greater military commitments in Fortress North America, kind of of ideas, ultimately culminating in very few tariffs remaining on Canada.

Conversely, it may be that when it comes time for that USMCA renegotiation that Canada and Mexico were thrown in with a 10% tariff just like everybody else and in a more difficult position. So it's hard to say with precision. But based on our assumptions of a 5% to 10% tariff rate, we think that is a real hit to the Canadian economy.

Perhaps not a recessionary hit, though. And I will say that as we look at the economic data right now, we are seeing genuine weakness. In fact, I would say more than in a lot of countries. And it's a little bit perplexing, just because the tariff hit itself has been a bit smaller than many countries. But I think the idea just is that, this relationship with the U.S. is so existential, that even the threat of losing access to that market has really changed how businesses and households are behaving.

And so there is some upfront pain for sure for Canada. We're assuming it is pretty slow going over the next few quarters for the country, but perhaps not quite to a full on, recessionary degree. If we can look beyond tariffs, and that's a big challenge these days, but if we do look beyond perhaps to the medium term, there are a couple of things going Canada's way and may help the economy start to rebound in 2026 and beyond.

Add one of those would just be we've seen significant rate cuts in Canada. There are perhaps a few more coming. And so, that is a tailwind and one that hits with a lag and should prove quite beneficial to the economy over the next few years. Perhaps the other one is on the fiscal side of things. And so Canada has a new government, and there seems to be very much a pro-growth and a growth focused mindset here.

And if we see some of those promises delivered in terms of, additional fiscal spending in general and some modest tax cuts and some additional infrastructure and maybe most importantly, some deregulation, including easing the approval of resource projects, I think you can talk about an economy that it's in a position to move somewhat more quickly, and perhaps with rising instead of falling productivity growth over the coming years.