Canada
Potential and actual impacts of a trade war with the country’s largest trading partner, the United States, has cast a chill over spending for both consumers and businesses, and created deep uncertainty over what harmful trade actions in the future may or may not be pursued by the world’s largest economy. Economic growth remained subdued through the second half of the first quarter, with GDP and employment showing little signs of a turnaround after providing some evidence of life to end 2024. Spending spiked at the end of last year as Canadians rushed to purchase vehicles, but even the GST holiday could do little to maintain the momentum in retail spending into Q1 as tariff worries grew. Fears of the impact of a trade war have side-swiped Canadian stocks, with the S&P/TSX Composite Index being pushed into correction territory (a correction is a loss of 10% or more, but less than 20%, from a market index’s all-time high), while still remaining ahead of its S&P 500 Index counterpart this year due to the former’s underweighting in suddenly slumping U.S. technology stocks. Despite a meaningful surge in consumer inflation in February, the Bank of Canada continues to cut interest rates to spur economic growth, while also hoping to offset the presumed impact of a trade conflict.
United States
The newly installed Trump administration’s trade policies have roiled equity and bond markets, with the impact of proposed, actual and delayed tariffs targeted at the country’s top trading partners – Canada, Mexico and China – and, as of April 2nd, more broadly at the rest of the world, causing widespread confusion for companies and consumers. Lack of clarity regarding the government’s intentions and strategy has caused the economic outlook to darken, with many companies pulling back on spending. The full extent of the impact of the government’s trade war is difficult to forecast, but markets abhor uncertainty, which has led major U.S. equity markets down and into correction levels, and even into bear market territory for the Nasdaq Index and the Russell 2000 (a bear market is a loss of 20% or more from the market’s all-time high), while halting what was seemingly the limitless rise of U.S. technology stocks. With inflation still stubbornly high and above their target rate, and the impact of any trade war unclear, the U.S. Federal Reserve has downgraded its economic growth forecasts, while holding to the expectation of two more cuts to their fed funds rate by year-end.
Europe
The region continues to show signs of a fledgling emergence from what has been years of sub-par growth, with key economies showing evidence of positive economic activity and the euro-area unemployment rate holding at a 25-year low. However, recently threatened U.S. tariffs against European Union (EU) and other non-EU nations, and the possibility of a global trade war, all threaten to snuff out these “green shoots”. Germany posted meagre but still positive growth in the most recent quarter after two years of economic contraction, and the country’s new government has promised massive spending (and borrowing) to re-ignite the economy. The war in Ukraine continues to plague the continent, but hope is rising that a possible ceasefire may be achieved in the coming days or weeks, which holds the possibility of some normalcy returning to the region. The European Central Bank continues to ease monetary policy conditions in light of moderating inflation, which has recently been held higher by rising energy prices, and is expected to continue to cut rates further through 2025. European markets have benefitted from the increased negative volatility in U.S. markets, delivery superior returns on a comparative basis. Britain’s economy is also showing signs of sustained economic and employment growth, but with inflation remaining elevated, the Bank of England has paused interest rate cuts for now.
Emerging Markets
Of the EM countries most likely to be impacted by a U.S.-led trade war, Mexico is expected to be the worst hit, and the country faces a significant risk of a recession over the coming months, depending upon the ultimate outcome of U.S. trade actions. Aside from Mexico, EM growth forecasts have been steadier, notably in China, where the 2025 growth outlook has been upgraded by a few tenths to 4.6%, despite the U.S. targeting the country with a 145% tariff rate on all imports. The improving outlook is underpinned by China’s export-led economy, which is not as vulnerable to U.S. tariffs as it has been in the past. Just 16% of what China exports is destined for North America, and a mere 2.4% of what China produces overall is consumed directly by Americans. Earnings growth in 2025 should become a key driver of EM equities returns. There are three key structural and cyclical drivers for a change in the earnings-per-share (EPS) growth for EM stocks: China’s return-on-equity (ROE) recovery, monetary policy easing and continued strong global investments in technology, given a large part of the value chain is in EM.
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