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 imported purchases and exported sales ahead of what was expected to be the implementation of severe “retaliatory tariffs” from the Trump White House. With recent trade talks failing to produce a deal before the August 1st deadline imposed by the Trump administration, Canada was slapped with 35% tariffs rates on any non-CUSMA (Canada-US-Mexico agreement) compliant product exports to the U.S., while the previously implemented tariffs on key products (including cars, energy, aluminum and steel) remain in place. The tariffs, and the uncertainty created by President Trump’s mercurial trade decisions, have hurt the economy and cast a chill over companies’ abilities to forecast purchases, sales and even economic conditions in the months ahead – and thus spending and hiring. This is likely to result in Canada continuing to post below-trend GDP growth in 2025 (our estimate: 1.2%), and even lower growth of 1% next year. Surprisingly, the June unemployment rate reversed trend and ticked lower as the economy added over 80,000 jobs, though many of those were part-time (perhaps indicating employers’ hesitance to hire due to tariffs, or in anticipation of them and their impact). The election of Prime Minister Mark Carney’s government in April has spurred optimism in the country’s longer term growth prospects, and the government has set to work at breakneck speed to implement pro-growth legislation and projects, as well as ramping up spending, especially on defence. Canadian markets, buoyed by the Materials (especially gold), Consumer Discretionary, Consumer Staples, and Financial sectors have performed strongly after April’s swoon, and are outperforming the S&P 500 over the last year. Markets are also expected to benefit in the months ahead from the more dovish approach to interest rates by the Bank of Canada (BoC) than its more hawkish U.S. Federal Reserve counterpart, although we believe additional cuts in the BoC rate will be on hold until further economic clarity is achieved.
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 decisions, generally the U.S. economy continues to hold up. While Q1 GDP contracted – which was largely a result of importers bulking up on goods ahead of the implementation of planned reciprocal tariffs – Q2 GDP bounced back, resulting in moderate growth in the first half of the year. Job growth has begun to weaken, with July’s surprisingly low non-farm payroll numbers and sharp downward revisions to May’s and June’s, causing real concern of a sharp downturn brewing for the second half. Despite these numbers, there continues to be cautious optimism that the impact of the Trump tariffs will not trigger a damaging surge in inflation. Retail sales, a crucially important aspect of the U.S. economy, have also held up better than expected, although there are early indications of a meaningful drop-off in July consumer spending. The U.S. (and the world) economy is still bracing for the impact of the tariffs announced on August 1st (along with those previously announced), although key economies such as the European Union (EU), Japan and South Korea were able to reach agreements with the U.S. administration. Despite these challenges, many large U.S. public companies remained cautiously optimistic in their outlooks. The S&P 500 Index recovered from its April swoon, and is now registering solid gains year-to-date, though it is still lagging its Canadian and European peers. The market has now turned its attention to the Federal Reserve’s (the Fed) next interest rate decision in September, with expectations high that the central bank will cut interest rates then, and perhaps one more time before year end.
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 impact of U.S. tariffs, despite a deal being worked out with the U.S. administration. Britain struck a broad outline of a trade deal with the United States before its continental peers, while the country’s economy continues to show weak growth and increasing unemployment. 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 to kick start the economy. Many of Europe’s largest countries are also ramping up defense spending, as the United States works to remove itself from the protection 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, 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 raced to establish new trade agreements with the U.S. before August 1st, to avoid the impact of President Trump’s threatened reciprocal tariffs, but with only a few exceptions, most failed to do so and will now be impacted by increased tariffs. One bright spot for EM countries has been their solid equity market performance, and are 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 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 15 years, while Chinese exports to the rest of the world are up 80%, 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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