The month of April has come and gone, and so too has some of the drama and market volatility resulting from the threat of a global trade war. While not all of the volatility has disappeared (and it’s impossible to predict what political actions in the weeks to come could impact this), it does feels like we’re able to take a breath and take stock of the past number of weeks.
Being an investor in these somewhat turbulent times has required removing emotion from decision making, often demonstrating restraint, and maintaining a focus on the long-term –an approach investors will need to continue to lean on in the coming months.
In this week’s economic update, we discuss the important lessons for investors reinforced by the last several weeks, we briefly unpack the results of the Canadian federal election, and address the on-going developments with respect to tariffs.
We are also sharing a couple pieces of content from RBC Economics: an analysis by Claire Fan which points to a softening but potentially resilient Canadian economic in the face of tariffs, and the May Economic Webcast featuring RBC Chief Economist Eric Lascelles as he examines the recent trade developments and what implications this could have for the Canadian economy moving forward.
Economic Update
Combatting volatility with discipline
Global stock markets finished the month close to where they started. That is an impressive feat given what transpired in the interim. More specifically, the global stock market fell nearly 10% during the first week of April as the U.S. unveiled its initial reciprocal tariff plan. The global market subsequently recovered those losses, finishing the month marginally higher in constant currency terms (i.e. ignoring the effect of the Canadian dollar, which itself moved higher). Moreover, bond yields and currencies also saw relatively large moves.
Uncertainty remains elevated, but the past month should serve as a reminder that while periods of heightened volatility can be unnerving, it is best to resist the urge to react to the noise and avoid straying too far from targets in investment plans.
Canadian election results, but impacts remain to be seen
Canada has elected a minority Liberal government. While it is a bit premature to discuss the implications for the short and long-term, there are a few takeaways worth sharing.
First, there is an expectation that this Liberal government will shift towards the centre and be more focused on economic than social policy. Beyond tariffs, the objectives at a high-level are expected to include lower immigration, the reduction of inter-provincial barriers, and increased spending in areas like infrastructure, housing, resources and defense. Given its minority position, the Liberals are expected to negotiate with the Bloc Québécois and New Democrats, both of whom lost a number of seats in the election, to get policy pushed through.
Near-term, Prime Minister Carney is meeting with U.S. President Trump today (May 6th) to discuss trade and evaluate a range of potential concessions that could lay the groundwork for a new potential trade agreement between the U.S., Canada, and Mexico next year.
A de-escalation taking hold
The U.S. administration has been scaling back some of its trade demands recently. For example, many of the reciprocal tariffs announced on “Liberation Day” have been temporarily reduced, exceptions have been granted for key electronic components, and certain accommodations have been made for the automotive sector.
Moreover, the U.S. administration is showing more willingness to negotiate than it did just a few weeks ago. In other words, it would appear there is a de-escalation of the aggressive approach to trade undertaken by the U.S. earlier this year. This trend has moved us further away from a worst-case scenario that would have been marked by elevated blanket tariffs across all sectors and countries for an extended period.
Summary - improved sentiment but caution still warranted
Despite some improved market sentiment, many questions remain unanswered. Most importantly, how much damage will the U.S. approach on tariffs cause to the U.S. economy?
The recent first quarter U.S. GDP figure revealed a significant uptick in imports, suggesting consumers and businesses were front-loading their purchases of goods ahead of the arrival of tariffs. This indicates that tariff threats have already had an impact. Whether they continue to have an impact will depend on how long the tariffs remain in place and whether the levels of trade hostility from the past month can subside more meaningfully. Given the heightened level of uncertainty and overall market valuations, we continue to approach the management of our client portfolios with caution.
Canadian economy softened ahead of tariffs
The marginal decline of real Canadian GDP in February reflected of a combination of factors including volatility in mining and oil and gas, bad weather, and softer consumer and business sentiment due to escalating trade uncertainty. March's preliminary estimates showed a partial rebound - while perhaps not enough to offset February's decline, it was still better than previously feared given the tariffs and counter tariffs levied during that period.
In this analysis from RBC Economics, Claire Fan goes into the details of Canada's GDP metrics, the specific factors influencing these outcomes, and what this could mean moving forward. You can read the full analysis by clicking here.
Tariff Ebb and Flow - A recap and looking forward
Tariffs have been a central feature of most economic updates from the last couple months. On one hand, tariffs have been threatened, threatened to be reciprocated, and in some cases implemented. They have also been pulled back through exclusions, delays, or outright rollbacks on policy. In this webcast, RBC's Chief Economist will breakdown the ever-present challenges of this tariff-rich environment, the potential damage and threat to the Canadian economy, and what this could mean moving forward. You can listen to the full episode by clicking here.
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.