Canada
The economy showed better than expected strength over the final months of the first quarter and into the early part of the second, with many businesses front-loading their purchases ahead of what was expected to be the implementation of severe “retaliatory tariffs” from the Trump White House. While many of the initial tariff threats have been suspended (but, notably, not eliminated), the uncertainty created by President Trump’s mercurial trade decisions has cast a chill over companies’ abilities to forecast purchases, sales and even economic conditions in the months ahead. This is likely to mean that Canada will continue to post below-trend GDP growth in 2025 (our estimate: 1.2%), and even lower growth of only 1% over 2026. The unemployment rate continues to inch higher as companies implement layoffs either in response to tariffs or in anticipation of them and their impacts. However, the election of Prime Minister Mark Carney and the Liberal government in April has spurred optimism in the country’s longer term growth prospects, as the government has set to work at breakneck speed to implement pro-growth legislation and projects. Canadian markets, buoyed by the Resources, Materials (especially gold), Financial, and Utility sectors, has substantially outperformed the S&P 500 over the last year. Markets in Canada are also expected to benefit in the months ahead from the more dovish approach to interest rates from the Bank of Canada than its more hawkish U.S. Federal Reserve counterpart.
United States
Despite fears that the economy would rapidly decline into recession or fall into low growth as a result of the impact of President Trump’s tariff regime, generally the U.S. economy continues to hold up. While Q1 GDP contracted, these were largely a result of importers bulking up on goods ahead of the implementation of planned (and now mostly suspended) reciprocal tariffs. Job growth has begun to weaken but not disappear, and while lower job openings and higher jobless claims are worrying, their continues to be cautious optimism that the impact of the Trump tariffs will not trigger a damaging surge in inflation. Recent geopolitical flare-ups in the Middle East could drive oil and gasoline process higher, and the U.S. (and the world) economy are still bracing for the potential implementation of many of the original reciprocal tariffs. But despite these challenges, many large U.S. public companies remained optimistic in their outlooks. The S&P 500 Index recovered from its April swoon, but has registered only minimal gains year-to-date, lagging its Canadian and European peers, as it awaits the impact of tariffs and the Federal Reserve’s next interest rate decision, with expectations still intact that the central bank will cut interest rates twice more this year.
Europe
Despite strength in its equity markets over the last several months, Europe’s economy continues to post only moderate growth as the continent braces for the new U.S. trade policies and tariffs, many of which may still be fully implemented if trade deals are not worked out with the world’s largest economy. Britain has led the way on this front, with a broad outline of a trade deal with the United States, but the European Union and its members have not yet done so. Germany, the region’s largest economy, has finally begun to show signs of pulling out of its doldrums, as its new centre-right government works to leverage deficit spending – long a no-no in the country – to kick start the economy. Many of Europe’s major countries are also ramping up defense spending, as the United States works to remove itself from the defence of Europe and fears rise of an increasingly revanchist and belligerent Russia. With inflation moderating and employment remaining firm, there is growing optimism that the European Central Bank will continue to drive down the cost of borrowing, further enhancing the prospects for growth.
Emerging Markets
As a result of trade war and tariff fears, global demand is expected to weaken through 2025 and into 2026, resulting in lower demand for EM goods and services. This is also likely to impact capital expenditures as well, together leading to lower than previously expected growth for EM economies across the world. However, at long last a weaker U.S. dollar may help exports to the U.S., as well as reducing the burden of U.S.-denominated debt repayment. Many EM countries are racing to establish new trade agreements with the U.S. to avoid the impact of President Trump’s reciprocal tariffs. One bright spot for EM countries has been their solid equity market performance, which has even outpaced the S&P 500 Index’s returns year-to-date, and building solid momentum for the remainder of the year. China continues to work to overcome U.S. tariffs and trade restrictions, and was able to temporarily reduce the recent astronomical tariffs in a deal between President Trump and President Xi. Of note, trade between China and the U.S. has barely budged over the last decade and a half, while Chinese exports to the rest of the world are up 80 per cent, leaving the U.S. with less bargaining power than it once had – and possibly forcing the country to compromise with their rival and the world’s second largest economy.
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