It has been a whirlwind couple weeks, with early indications pointing to U.S. policy making continuing to create uncertainty for the foreseeable future.
In this week’s economic update, we are speaking to the outcome of the U.S. elections and the impact that has had on the U.S. equity market. Specifically, we're examining the factors that led to a post-election boost, the relationship between the impact of a new government and investing, as well as more details on third-quarter earnings.
RBC Global Asset Management has published a video from Managing Director & Chief Economist Eric Lascelles, who has provided a deep dive into the recent tariff announcements, the potential scenarios resulting from these policies if enacted, and the implications this could have on the economy. This is a great resource if you are looking for a more detailed analysis of the tariff situation.
We are also sharing an article from RBC Economics, which discusses the five key learnings from the trade shocks of recent weeks. Although the specter of trade tariffs was avoided (at least for 30 days), uncertainty remains. This article unpacks some of the lessons learned and what a trade shock could look like for the Canadian economy.
Economic Update
Global equity markets have been grappling with the threat of U.S. tariffs in recent days. Markets have digested the news reasonably well as the selloff has been unremarkable. That may be partly attributable to uncertainty as to the timing of when tariffs will take effect given recent postponements, as well as the persistent belief that broad-based indiscriminate tariffs may ultimately not be a lasting feature of North American trade relationships.
The Canadian equity market has not fared any worse than other major developed markets, and the Canadian dollar has rebounded following some initial weakness, though it remains depressed in the grand scheme of things. Meanwhile, Canadian government bond yields are lower (prices higher) and the difference relative to U.S. government bond yields has modestly widened. This situation remains unpredictable and very fluid, but we offer some high-level perspectives below.
Proposed tariff overview
The U.S. was expected to apply a 25% tariff to all Canadian imports with the exception of energy-related imports, which will face a 10% tariff. The Canadian government had unveiled retaliatory tariffs on a range of products in response, some of which were expected to take effect whenever U.S. tariffs were implemented, and others phased in at a later date.
The potential impact of these tariffs, as proposed
The team at RBC Economics produced an update that is worth reading - they discuss their framework for assessing how U.S. tariffs would flow through Canada’s economy. They mention the difficulty in trying to pinpoint the exact economic impact given a number of variables that are hard to predict, including retaliatory measures, the Bank of Canada response, and fiscal support provided by government to businesses and households, among other things. They acknowledge that tariffs of this magnitude, should they be sustained, pose recessionary risks for Canada. While goods-producing industries like the automotive sector are most directly exposed, there could be ripple effects that affect other industries as well.
Meanwhile, U.S. inflation and growth will also be impacted via retaliatory tariffs and the disruption of integrated North American supply chains. Nevertheless, the U.S. economy is starting from a place of relative strength and is less dependent on trade, and the impact to growth should therefore be less pronounced than in Canada.
Duration of any tariffs is a key factor
There is much uncertainty as to whether tariffs get implemented or not, and whether they are broad in nature or more specific and targeted. The other question that will determine how impactful this will be, is the duration of the tariffs. Should they extend for a period of three months or more, the risk of a recession in Canada becomes more significant. Moreover, the longer the duration, the higher the potential for more permanent damage to the economy due to lower business investment and a reduction in longer-term economic potential.
The Canadian dollar may remain vulnerable though we acknowledge it is already sitting near a five-year low. Should the tariff situation prove to be short-lived, there is potential for the Canadian dollar to recover somewhat. Meanwhile, the Canadian equity market is also vulnerable despite the fact it has behaved reasonably well in the face of the tariff threat. As explained in this recent piece produced by our firm’s investment team, it may weather some challenges better than some investors may expect.
Summary
While it is hard to know precisely what the future has in store, we believe maintaining a disciplined investment strategy focused on the long-term while avoiding knee-jerk reactions to near-term headlines is the most prudent approach. We have been proactive in preparing for the strong possibility of tariffs and how they could impact our clients’ portfolios – as well as preparing for any investment opportunities that market conditions present.
Tariff Primer 2025, with Eric Lascelles – a deep dive on tariffs
There has been a lot of discussion about tariffs, how they work, and what they really mean for Canadians.
In this deep-dive video, RBC Global Asset Management Chief Economist Eric Lascelles goes into detail about how tariffs work, what some of the actions taken so far have been, and the economic implications and impacts of some scenarios in the future. He also discusses the Canadian economy and some ideas about the markets as well. You can find the 30-minute video by clicking here.
Five things we learned this week about U.S.-Canada trade
In this online article, the team at RBC Economics unpacks the five things we can learn from the past couple weeks of tariff talks, threats, and reprieves. In the light of what could be one of the most meaningful trade shocks in recent history, these five points are great things to keep in mind as the specter of tariffs continues to be a discussion point moving forward.
You can learn more by clicking here.
Mask Off Guelph was back for 2025
We are proud to be presenting sponsors for this year’s Mask Off event, hosted on Saturday February 8th at the Italian Canadian Club in Guelph.
Mask Off returned this year, after many years of tireless work and support from the group of volunteers led by Charmaine Collins, to be the annual fundraising event for The Grove Youth Wellness Hubs – raising funds and awareness for mental health initiatives throughout Wellington County. This event is special for us – the importance of mental health and wellness, particularly for youth and young adults, resonates strongly with our team
We are proud to be long-time supporters for both Mask Off and The Grove – thank you to all of the volunteers, staff, and generous donors who helped make the night such a great success. .
As always, we are available to connect with you personally. Please don’t hesitate to contact us at 519-822-2024 or elineskyschuett@rbc.com.
