(en anglais seulement)

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Hello and welcome to our latest video #MacroMemo. As always, there's a lot to cover, but this particular edition is going to be very much focused in on tariffs. We've just had major tariff announcements of relevance to Canada, Mexico and the U.S. I'm going to dig into those to some extent and give you a sense for some of the implications that may result from that.

00:00:25:17 - 00:00:47:14

And I'll just mention to the extent that things are moving quickly on the ground, I'm recording this early afternoon, March 4th, hoping this information remains relevant for some period of time. But it's frankly hard to say given how many policy ideas are currently swirling. Let's start just by stepping back for a moment and recognizing that we now have more than a month of President Trump and his second term.

00:00:47:14 - 00:01:08:09

And I think it's very fair to say that Trump administration 2.0 is acting more boldly than in the first term, and also arguably a little bit less favorably, maybe a bit more than a little bit less favorably toward economic growth. And that's true in a sequencing sense. So during a President Trump's first term, there were tax cuts first, which was helpful for growth.

00:01:08:09 - 00:01:27:14

And then later there were smaller tariffs which provided a small headwind. This time we've seen the tariffs front loaded. They've come first. So the growth negative element is first. The tax cuts to the extent they arrive at all are a little bit later. The tariffs have proven quite large this time. So the headwind is quite large.

00:01:27:16 - 00:01:55:19

To the extent the tax cuts are delivered, it might be a smaller tailwind because actually much of what we're talking about in the context of tax cuts right now, are actually just an extension of the preexisting tax cuts. The avoidance of a tax hike is really what's being counted as a tax cut. And so, net net certainly not as favorable until yesterday, we had, the net effect on the short term economy or the short term economic economic outlook of a Trump administration is being slightly supportive.

00:01:55:19 - 00:02:18:03

And the logic behind that was the combination of tax cuts and deregulation and rising animal spirits would be enough to offset the drag that would emerge from tariffs and from less, immigration. And, that's no longer the case. Two things have happened really since then. And one is, of course, the imposition of large tariffs, which I'm going to get to in a moment and speak at some length.

00:02:18:03 - 00:02:39:10

On, the other, though, is the loss of animal spirits. And so for those who don't know, that's just the idea that people got pretty excited, when President Trump won and we had consumer confidence that rose visibly, small business confidence skyrocketed higher. And the bottom line was we had this extra potential boost of people being excited and keen to spend and keen to invest and so on.

00:02:39:12 - 00:02:59:21

And that also has been eroding, not just in the last 24 hours. So I don't doubt that's been considerable over that time frame as well. And the stock market isn't a bad proxy for these sorts of things. And the stock market, of course, has fallen in response to recent tariff news. But we've also seen over the last six weeks or so a notable retreat in consumer confidence and small business confidence and so on.

00:02:59:21 - 00:03:24:08

And so with tariffs set to be a bigger negative and animal spirits set to be a smaller positive than previously imagined, we now have the Trump presidency as a small economic negative for US growth as opposed to a positive from an inflation standpoint. A Trump presidency was always expected to be a positive, meaning higher inflation. But it looks like it could be even a bit more positive to the extent that, of course, tariffs are also themselves inflationary.

00:03:24:10 - 00:03:45:19

Okay. That's the backdrop. Let's jump into the tariffs specifically now. And so as of today March 4th as I'm recording this the US did apply a larger tariff on China. Another 10% after a 10% tariff was levied, back a month ago. And indeed, there had been a 19% average tariff rate on China even before all of that, pre-dating, the second Trump term.

00:03:45:21 - 00:04:14:15

Canada and Mexico now have also been caught up in the mix and so have been targeted with 25% tariffs. Canadian Energy is hit at a 10% rate, but otherwise it's 25% tariffs across the board. And it looks like those countries are set to reciprocate Mexico by this weekend. Canada did so immediately. Not proportional not with a tit for tat response, but something a bit smaller and more targeted at politically sensitive sectors, demand elastic sectors and sectors for which there are Canadian substitutes.

00:04:14:15 - 00:04:44:22

So that has been, the strategy so far. And the Canadian response will grow in three weeks time. And there may be some non-tariff barriers as well. And so the trade war is now underway. These latest, white House actions clearly raise the risk of further tariff actions. They just spell out how how real these threats are. And so as we look forward and steel and aluminum tariffs are scheduled to come on in about a week, we've been assuming for some time, even when there was uncertainty around the Canada Mexico ones, that those particular tariffs would come on.

00:04:44:22 - 00:05:12:16

So 25% tariffs on steel and aluminum likely in short order. That's for the world, not just for North America. I can say that in theory these are additive, meaning a 25% steel and aluminum tariffs are on top of the 25% tariff already applied. So effectively, I believe a 50% tariff then for those affected sectors. And then in theory, as Trump has called them, the big one, is the reciprocal tariffs that are tentatively planned for April 2nd.

00:05:12:18 - 00:05:37:23

And those would be set to apply to quite a wide range of countries. And so I guess before getting into the weeds and all of this, I would say certainly all of this is very problematic from a growth perspective. It's it's extremely problematic for a small number of countries, I would say Canada, Mexico, maybe Vietnam as well, if that sounds like a country drawn randomly out of a hat to Vietnam, is the other country in the world for which more than 20% of its production is sold to the US.

00:05:37:23 - 00:05:55:19

It's just Canada, Mexico, Vietnam, Vietnam not in focus right now, so maybe we'll avoid the worst of that. But there's a degree of vulnerability there as well. But those are the countries that really get hammered by these tariffs, just given their strong trade linkage to the US. Certainly tariffs are moderately problematic for the US as well. It's being hurt by these tariffs too.

00:05:55:19 - 00:06:10:14

But it's not as trade oriented. Whereas reliant on trade as Canada and Mexico. And then I would say and this is maybe being a bit too broad, but I would say, for the rest of the world, the tariffs aren't that problematic. They're not great. They're not welcome. They are a drag on growth. They are a boost to inflation.

00:06:10:19 - 00:06:30:12

But when we look at China, the EU, the UK, Japan, etc., they just don't do that much trade with the US, or at least not that much trade as a share of their economic output. I mean, China, famously only 2.5% of what the country makes is sold directly to the US. And so you can put a giant tariff on that, but there's still a 97.5% that's unaffected by that.

00:06:30:12 - 00:06:52:02

And China will be arguably okay. And so we can conclude again, Canada, Mexico, maybe Vietnam very much adversely affected the US, notably so other countries. Not a relevant but it's it's a manageable blow in our view. The big question as it exists right now is will these tariffs endure. And so it's one thing to have a big tariff or something else for that big tariff to stick around.

00:06:52:02 - 00:07:14:08

And it's just really hard to say. I don't have a conclusive answer. I think it's close to 5050. I think maybe it might be a little more than a 50% chance that these big tariffs don't endure, that they are removed. But I can't say that with really much precision. It's a tricky situation. In Canada's case, the negotiations so far have seemingly been in bad faith, with no real ask and no real opportunity to address U.S concerns.

00:07:14:08 - 00:07:31:16

And the concerns themselves aren't entirely, valid. And so it's just not clear how you come to a solution in that kind of environment. Mexico might have a better chance just because there are real problems and it's possible to address, real problems. Steel and aluminum tariffs seem designed essentially to give us, makers, steel and aluminum makers an advantage.

00:07:31:16 - 00:07:49:00

And so it's not clear there is negotiating out of that. In the case of reciprocal tariffs, the original idea was to hit countries with tariffs that have hit the US with tariffs. And that sounds reasonable. And maybe in a best case scenario, you would actually see everybody agree to lift their tariffs. The problem is these reciprocal tariffs have broadened so much in scope.

00:07:49:00 - 00:08:11:07

They seem to include, obliging countries to revalue their exchange rate if it's too favorable versus the dollar, to eliminate their sales taxes, which is a bit of a puzzler. Probably a no go, to eliminate barriers to trade, including in certain service sectors, like, like transportation, like telecom and so on that have historically been protected and that the US protects in its own country, as well.

00:08:11:07 - 00:08:38:16

And so I guess the comment here is that take those reciprocal tariff, threats seriously, but also it's just not clear how many concessions countries are willing to make. And so as a result, there's a very real chance, those tariffs ultimately stick around. And so there's a real risk. The tariffs do stick. I would say the most obvious path toward eliminating tariffs or avoiding additional tariffs is really just if the US economy is sufficiently bloodied that it becomes an unpalatable proposition.

00:08:38:16 - 00:09:02:05

And so that's a real possibility. We do see some genuine damage happening, but I wouldn't say it's a certainty. And so unfortunately, we're left in this very unsatisfying mode of having multiple scenarios. And, one is it big tariffs endure and the other big tariffs, are only temporary. Of course, a scenario in which there aren't any big tariffs is just been taken more or less off the table, because here we have some very real tariffs that have now, been applied.

00:09:02:07 - 00:09:20:04

If we were to get the big tariffs stick around. You know, loosely speaking, and this is based on modeling and no, two, no two scenarios are ever quite the same in terms of realized experiences. But we figure that instead of the US economy growing at about 2.5% a year, over the next two years, it would grow more like 1.75% a year.

00:09:20:04 - 00:09:44:07

Over the next few years. So it's a serious it, you know, somewhat unsatisfying growth, but not a recession, not a, a disaster, U.S inflation, instead of maybe being around 3% this year, might be more like 3.5% next year. Instead of settling down into the low twos, it might settle down into the mid twos. And so again, not not 10% inflation, not a disaster, but nevertheless unwelcome, particularly at a time, when inflation is already too high in the US.

00:09:44:09 - 00:10:01:19

And then, of course, the damage is greater for the likes of Mexico and Canada. And so focusing on Canada, our base case assumption had been economic growth of about 2% a year for this year. And next. You know, we think that the damage could be quite extraordinary and we're assuming almost no growth in Canada in 2025 and 2026.

00:10:01:19 - 00:10:17:17

If these tariffs are permanent, which is not certain. But if they were, I don't think it's unreasonable to talk about recession and to think that the Canadian economy probably would be shrinking, in the second quarter of this year and perhaps the third quarter, as well. And there would be an extended period of softness even after that.

00:10:17:17 - 00:10:44:05

And so this is a very real and quite large threat, to the Canadian, economy. Conversely, if the big tariffs prove temporary, the damage is much less obviously. And so instead of the US economy moving, losing a cumulative 1.5 percentage points from its growth over the next two years, it might lose point for instead of Canada losing about 4.5%, from its growth over the next few years, Canada might lose 1%, of growth and so significantly less, more manageable.

00:10:44:07 - 00:11:03:10

Not a formal recession, though, I should say. Of course, there's no real difference between those two scenarios in the short run. Initially, it's not clear if temporary tariffs or temporary or not. And so there would still presumably be some frontloaded. Economic pain and inflation pain. And the reason the cumulative economic damage is less is because there would, of course, then just be a bounce back effect later.

00:11:03:10 - 00:11:20:06

So it's still a very serious thing and could well have the Canadian economy in particular shrinking in the months of March and April and May or for however long. This continues. And so that's quite concerning. Central banks obviously are alert to this. It's it's always a tricky call for central banks with tariffs because of course growth weakens which argues for cuts.

00:11:20:10 - 00:11:36:18

Inflation goes up which argues for hikes. And you can't do both at the same time. I feel pretty confident saying that rate cuts are more likely than hikes in that context. It's just the inflation shock is a one time price level shift. The economic hit is a more enduring source of damage. And so you could probably get rate cuts, not hikes.

00:11:36:18 - 00:11:50:13

And I would say I think the market's pricing in a little bit too little Bank of Canada rate cutting on that basis. So again the debate is just whether these tariffs stick around or not. Because if they don't then you don't need to do nearly as much work I would think as well there'd be room for some fiscal stimulus.

00:11:50:15 - 00:12:10:10

And so it's tricky, particularly in Canada, given that there isn't a, a sitting parliament right now, and there could well be an election called very shortly thereafter. But I do think that there would be scope, to deliver some fiscal support. And one hopes it would be of a targeted nature and not quite as as broad and long lasting as the stimulus delivered during the pandemic that did, in the end, proved to be significantly, too much.

00:12:10:13 - 00:12:29:22

Again, hard to say which scenario plays out. I think we need to acknowledge both scenarios, unfortunately exist right now, just in terms of what else is happening and spending a moment on other subjects. Well, you know, it's fair to say that prior to the implementation of these latest tariffs, the US economy was slowing somewhat. We were observing a deceleration, not a collapse, or a few numbers suggested great weakness.

00:12:29:22 - 00:12:45:16

And we're skeptical of those. In fact, we think they were missing, some import effects or related to stockpiling before tariffs. And so we're not too, too concerned. But there was certainly a deceleration in the US. And I think you can say in a sense, a bit of US exceptionalism is fading, at least in a short term context.

00:12:45:16 - 00:13:09:20

The economy isn't quite as strong as it was. Simultaneously, we had been seeing the rest of the world's developed economies at least accelerate. And so Europe, the UK, Japan, Canada all with positive surprise indices, the European economy in particular, doing somewhat better. We've seen US markets underperform some of its international peers, most obviously the European market. And so a bit of that exceptionalism fading in the short run.

00:13:09:22 - 00:13:29:15

The question is and more structurally, are we seeing the US exceptionalism fade, in a broader context as well. So it does seem as though the US is opting to abdicate at least part of its role as global policeman, part of its role as leader of the free world as it steps back from entities like the World Health Organization, the World Trade Organization, NATO and so on.

00:13:29:17 - 00:13:52:03

It's hard to say exactly where this ends up. But there potentially where the US economy that is less engaged in the world, and an economy and markets that are potentially a little bit less special, with a currency that is the world's reserve currency and will be, I think, for quite some time. But that was beginning to shed, little bits and pieces of that status and I think could shed that a little bit more quickly now as a result of recent actions.

00:13:52:03 - 00:14:12:23

And so, certainly a changing of the guard of sorts. There. For all of that, I would say from a purely economic standpoint, long term, I would still bet on US growth, outpacing most of the rest of the developed world by a smaller margin than before. But I would still bet on that outcome. And then just from a foreign policy standpoint, of course, Europe is scrambling to fill the void left by the US.

00:14:13:03 - 00:14:34:09

In Ukraine, the risk of war and conflict is higher, at least temporarily, as that process occurs. And it's worth thinking as well that, you know, in this multipolar era, we, of course, have the US and China as big spheres of influence. Perhaps you could argue Russia is one as well. We're now in a mode in which potentially Europe is going to have to step up here, and there may be a fourth large sphere of influence.

00:14:34:09 - 00:15:03:02

And just again, the risk of conflict across four parties is greater than the risk of conflict across three. Let me finish just with a quick word on China, which is to say that we still think the Chinese outlook, is reasonably, positive. And we think the tariff damage won't be, too bad. Similarly, we think that China is showing again that it is at the the knowledge and technological frontier as per deep seek, but also as per, battery technology, U train technology, electric cars, drones, solar panels, and the like.

00:15:03:02 - 00:15:25:22

It is innovating and that's necessary for prosperity going forward. We've seen a warming of relations between China's government and the private sector, which was very chilly for a long period of time and is also growth positive. We see Chinese housing stabilizing and perhaps even some small green shoots, which is certainly positive. And we think China's probably going to announce more stimulus at its annual meetings, that are held later in March.

00:15:25:22 - 00:15:42:14

And we've already seen a plan to recapitalize the banks. And so certainly a lot going on here. I guess the net is and this is focused back on the trade and tariff side more than anything else, the net is a bit less growth, a bit more inflation, maybe considerably less growth and considerably more inflation in some particularly affected markets.

00:15:42:19 - 00:15:57:00

I'm still a lot of uncertainty though as to whether tariffs stick, and we just don't have a clear sense for that. They might they might not I'm inclined to think. Perhaps they won't, but not with a high level of conviction. And of course, the other question is just how many additional tariffs are applied in the coming weeks.

00:15:57:00 - 00:16:06:22

And I would think steel and aluminum are likely, I would think there's a fair chance of those reciprocal tariffs as well. And with that, I'll say thanks very much for your time. I hope you found this useful. And please tune in again next time.