Canada
Canada's economy shows mixed signals in early 2025, with February GDP contracting 0.2% month-over-month, driven by declines in both the goods-producing and services sectors. Mining, oil/gas extraction and construction led the downturn, while finance/insurance provided some offset. March's preliminary data suggests a modest 0.1% rebound, resulting in Q1 annualized growth of 1.5%. The re-elected Liberal government under new leader and newly elected Prime Minister Mark Carney project 2.0% real GDP growth for 2025, though analysts warn that potential headwinds from U.S. trade tensions may significantly reduce this. The Prime Minister’s commitment to infrastructure and other government-supported spending, focused primarily on weathering any tariff-related impacts while stoking overall private sector spending, should help spur growth over the rest of 2025. Worries over the impact of a trade war side-swiped Canadian stocks, but the S&P/TSX Composite Index has largely recovered those losses and remained ahead of its S&P 500 Index counterpart this year. 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 negative impacts of the trade conflict.
United States
The U.S. economy experienced a notable slowdown in Q1 2025, with GDP contracting 0.3% annualized, marking a sharp deceleration from Q4 2024's 2.4% growth. The decline primarily reflected increased imports and decreased government spending, partially offset by resilient consumer spending and export growth. However, the labor market demonstrated remarkable strength, with private-sector employers adding 325,000 jobs in early 2025, showing recovery from January's winter storm disruptions. Inflation trends remain favourable, driven by lower energy prices and moderating consumer services inflation, suggesting progress toward the Federal Reserve’s (Fed) targets. These developments, combined with the recent pause in tariff implementations, may influence the Fed’s policy decisions, though no explicit changes have been announced. Annual GDP growth forecasts have been revised to 1.9% for 2025, but depending upon their impacts, President Trump’s trade policies and the policy uncertainty they have unleashed, may result in a more pronounced economic slowdown in the months ahead. Markets abhor uncertainty, which led major U.S. equity markets down and into deep correction territory through April, before they largely recovered late in the month, as the Trump administration backed down from implementing most reciprocal tariffs announced on April 2nd – with the exception of China, which remains locked in a tariff stand-off with the U.S.
Europe
The U.K. economy showed resilience in early 2025, with February GDP growing 0.5% month-on-month and 0.6% in the three months to February. Services, production, and construction, all contributed positively. The trade deficit narrowed to £4.8 billion in the three months to February, down from £8.9 billion in the previous quarter, with notable export growth to non-EU markets. The eurozone faces headwinds, with the currency bloc’s economic performance continuing to trail the U.S. amid trade uncertainty and slack business confidence. Its recovery remains modest, with 2025 GDP growth projections ranging between 0.8-1.3%. Regional disparities are significant: Spain leads major economies at 2.8% growth, while Germany lags at 0.5%. The European Central Bank has initiated monetary easing, with further rate cuts anticipated to support growth. Inflation remains slightly above 2%, with higher pressures in Central and Eastern Europe due to wage growth. 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 area. European markets have benefitted from the increased volatility in U.S. markets, delivering superior returns on a comparative basis.
Emerging Markets
Emerging Markets (EM) face mixed prospects in 2025, with growth projected to hold steady at 2.7% through 2026, despite global trade growth being revised downward to 1.7%. Of the EM countries most likely to be impacted by a U.S.-led trade war, Mexico is expected to be one of 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. China's economy shows signs of moderating, with growth expected to slow from 4.8% in 2024 to 4.4% by 2026, reflecting cooling domestic demand and external headwinds, including from the massive tariffs placed on Chinese exports by the Trump administration. Key risks for EM countries include trade slowdown impacts on export-reliant economies and ongoing policy uncertainty, with higher trade barriers and geopolitical tensions weighing on investment and consumption patterns. 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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