Economic Webcast - March 2025

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Hello and welcome. My name is Eric Lascelles. I'm the chief economist for RBC Global Asset Management. I’m very pleased to share with you our latest Economic Webcast for the month of March 2025.

You can see the title there, High policy uncertainty. That is absolutely a reference to a whole lot of public policy uncertainty that is specifically American. Those are certainly percolating around the world in a manner that does create a high degree of uncertainty elsewhere as well. I’ll elaborate on that, to be sure, over the span of this webcast.

But of course, there's a lot else going on as well. And so why don't we jump our way in as we always do?

Report card: I'll start with something of a report card, and we can just work our way through what's been going well on the economy.

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What are some positive themes? What's been more challenging? And some interesting ones as well. And actually, there's no shortage of those these days.

On the positive side, let's just not lose sight of some of the underpinnings from an economic standpoint. The first one is just that we're getting solid economic data. There’s no particular cause for alarm or cause for concern.

I can say that outside of the U.S., developed world economic growth is, if anything, picking up a little bit. That's probably not true of the U.S. The U.S. might even be slowing down a little bit, but, broadly fine. The rest of the world is picking up somewhat.

We have some positive Chinese news to mull over and I'll speak about that in a bit more detail later.

00:01:23:09 - - 00:02:09:00

We are seeing as an example, China's housing market seemingly stabilized to some extent. We've seen some favorable statements from the Chinese government toward the tech sector and toward the private sector. That had previously been a bit of a problematic relationship. We think there's some stimulus, perhaps, coming down the pipe. And so the China story is looking more positive than negative right now.

As much as there are fewer rate cuts going on these days, there are still some rate cuts being delivered. Let's not lose sight of that.

Lastly, we do believe that there is likely to be some U.S. fiscal stimulus out there. We're talking tax cuts and this sort of thing. That's maybe not an immediate proposition but then again, it might be. We have seen some significant action on that front recently. And we do believe there will be some tailwinds, at least, that come from the current administration.

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On the negative side: as the title of this very presentation referenced, there is a high level of policy uncertainty. That conceivably is weighing on activity a little bit as everyone waits for clarity on regulations and tariffs and taxes and other things. That is certainly a relevant consideration right now. It does appear, in fact we have seen some tariffs applied, but we may see further tariffs ahead.

I'll speak at length about that in a moment. But that does constitute a potential headwind and certainly a source of uncertainty, in and of itself. I think it would be fair to maybe broaden the frame of reference to White House policy more generally and say there's a lot of unconventional policy being proposed and in some cases being implemented.

00:02:51:23 - 00:03:41:04

I'll speak a little bit about that later. But it's just not your usual set of policies, so harder to interpret and to forecast on that basis. Maybe that speaks back to the policy uncertainty again.

And then back in kind of a more conventional economic landscape, U.S. inflation is proving sticky. It is still sitting in and around 3%, and we're not assuming a particular rapid movement toward the 2% targets that most central banks maintain.

We think the U.S. probably is a 3% kind of country for inflation for a fair chunk of this year. That's not ideal. That informs the Fed (Federal Reserve) and is why the U.S. central bank probably isn't going to do a whole lot of rate cutting this year.

And then just to throw Canada into the mix here, we still think that there is a potential for a fair amount of choppiness in the Canadian economy in the near term in particular. You're losing a lot of immigration and conceivably some tariffs applied.

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We're not quite sure how large or precisely when, but conceivably, on the flip side, we do see some evidence of the economy moving a bit more quickly and businesses feeling better, at least so far, not having seen any tariffs just yet.

Similarly, as we look at the broader economic landscape, we have to remember that the Bank of Canada has done quite a lot of rate cutting, and the Canadian dollar is quite soft. And those two things are actually sources of stimulus for the Canadian economy.

On the interesting side, this is actually the longest list of all. Normally it's the shortest list. And that's maybe interesting in and of itself. But U.S. exceptionalism has been a little bit less marked recently. What that means in an economic sense is that the U.S. economy has been outgrowing the rest of the developed world for a number of years now.

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And maybe that growth advantage is shrinking a little bit recently. Similarly, the U.S. stock market in particular has outperformed the rest of the world pretty reliably for quite a number of years. I'm not making any kind of definitive judgment as to whether that continues or not. But I can observe just recently that has not been the case. The U.S. market has actually been underperforming the likes of Europe. So that's a bit of a pivot as well.

The Fed is on hold now, as mentioned, we're not looking for Fed rate cuts in the near term at least. Let's acknowledge this is getting a little bit dated, but I'll just mention it to the extent that it is a part of our forecast.

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The fires in Los Angeles, of course, have been very tragic and unfortunate, primarily in the month of January. I can say that Los Angeles is a pretty important share of the U.S. economy. It’s about 5% of the U.S. economy. The thing to realize with these fires is only about 0.4% of the structures in Los Angeles were destroyed, and certainly not to make light of that and all sorts of tragedy involved within that.

But nevertheless, when we try and crunch the numbers as to what the economic impact is, it’s fairly small. It could be that U.S. economic output maybe grew 0.1 or 0.2 percent less quickly than normal in the month of January, likely mostly recovered in February.

Now, actually, and this is just the perversity of any kind of natural disaster, there is the opportunity to rebuild, which is an economic driver. You might even see a little bit more national level construction and even a bit more growth over the coming years in response.

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But that's all sort of at the margin, it doesn't significantly influence our forecasts.

On the AI front, we've been optimists for a while. We think there's a real fighting chance that AI is that next general-purpose technology that really drives productivity forward in an important way. I can say, of course, the news of the last month or so was DeepSeek, a Chinese natural language AI company,  making seemingly a fairly large leap forward.

In terms of takeaways, you can say it may not have been quite as radical of a leap as was initially imagined. Certainly it doesn't mean that companies don't need as many chips or this sort of thing, which was the initial thought process, because it would appear that this AI model was built in quite a light and cost-effective fashion.

To me, maybe the bigger, more important developments are just reiterating that China is at the technological frontier in a number of important ways, and maybe isn't so far behind in AI.

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As an aside, is right there when it comes to solar panels and drones and electric cars and maybe cars more generally, and the list goes on. And so that's worth keeping in mind. We think the Chinese economy is maybe a little better shape than people think, and there is still genuine innovation happening there.

The other one is just that there are still big gains, big leaps forward occurring in the AI space.

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We think the DeepSeek model in particular is pretty easy to replicate for some of the other incumbent players. And indeed, it sounds as though there are some big leaps about to be released by some of these other players, and they're currently in safety testing. And so bottom line is we can expect some further important gains in that space. And that's quite nice from an economic standpoint.

A new German government in place. Pivoting somewhat to the right, nevertheless, not to the far right, really maybe of greater relevance is just that it does seem fairly likely that Germany will manage to soften its so-called debt break, which may allow it to do a bit more infrastructure, which will be, I think, welcome for Germany, given its weak economy right now.

And then, of course, some of the big changes from a foreign policy perspective with the U.S. has a lot of countries, including Germany, including Europe, including Canada and others, thinking awfully hard about their defense and indeed planning to boost that. Germany is talking about a pretty big boost to their military spending.

And then from a Canadian standpoint, let's just flag there is a Canadian election ahead.

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We don't know for sure that it's in the spring. It could be in the fall. But I would say at this point it does seem to be more likely the spring than the fall. I'll talk a bit more about that a little bit later.

So that's really an overview of where we stand. I'm now going to dig into several of these subjects in a little bit more detail. Let me just start with a broad economic picture of the U.S. and indeed, a bit of comparison to the world.

Economic surprises diverge – U.S. exceptionalism weakened: And so these are economic surprises in blue for the U.S. and gold for the world. And you can see economic surprises in the U.S. were actually pretty notably positive since the fall. They've recently drifted down into slightly negative territory. So there's been a slight retreat there, consistent with the idea the U.S. economy isn't running quite as quickly as it was.

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Still fine, though, still within the realm of normal. Conversely, global economic surprises have been a little bit negative, if anything. They've been accelerating slightly and they are now slightly positive. And so, again, consistent with the idea that the rest of world growth is also decent we think. If anything, maybe picking up slightly. And so that U.S. exceptionalism is a little bit less powerful.

But the bigger picture being one in which we are seeing economic growth, we think that the economic conditions are reasonably healthy right now.

U.S. economy still ultimately fine: Looking at some other metrics, these are U.S.- specific purchasing manager indices, the ISM (Institute for Supply Management) manufacturing and the ISM services in the case of the U.S. And I can say the manufacturing side, we've actually seen significantly more optimism and the view that that sector could be stronger going forward, likely influenced in part by the view that maybe there's going to be some more on-shoring to the U.S. with the potential for tariffs.

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Conversely, the gold line, the services index has weakened a little bit recently. But to me, the takeaway is still it's at a pretty healthy level. Both of these metrics are now over 50, which means they're consistent with growth. Again, the U.S. economy is less exceptional than it was, but still ultimately fine.

U.S. inflation proving sticky: And then just to include inflation into the conversation, and as I mentioned earlier, inflation is proving awfully sticky in the U.S. in particular.

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Whether it's that all-items index or the core measure in gold, if you look at the month-over-month changes, they've been accelerating, not decelerating. And when we look at the annual numbers – not shown on the chart – but nevertheless when we look at those, we see headline inflation numbers that are only a little bit below three. We have core inflation metrics that are a little bit above three.

But we do believe there's room for inflation to improve over time. We see wage growth slowing a little bit. And we see a few other factors that would appear to be supportive. Maybe still some lagged effects from shelter costs that have been softening. But as it stands right now, we're not looking for big further improvements in inflation over the next few quarters.

Again, if you get some extra tariffs, that's not going to be very helpful for inflation. If the U.S. economy continues to move at a pretty solid rate, that's probably not consistent with inflation coming down a lot as well. And so for the moment, inflation really not fully resolved. And that's why the Fed is on hold at a fairly elevated policy rate.

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I just contrast that to the rest of the developed world, where inflation has made broadly further progress. Most inflation readings are, let's call them in the low- to mid-twos, as opposed to the high twos to low threes like in the U.S. So that's allowed central banks in those countries to cut a bit more. And it allows us to talk about slightly more rate cuts going forward as well, which is of course helpful for the economies there. Okay.

U.S. policy uncertainty is high: Let's pivot over to the title of this presentation, that high policy uncertainty. This is not the only way to look at this. It's not the be-all and the end-all. It's one particular, way of framing the issue. But when we look at just the level of policy uncertainty – and this is actually trade policy uncertainty specifically – we can see that by any kind of conventional metric, it's gone up quite a bit.

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Interesting to note that, of course, it was also high during the first term of President Trump. And that makes sense. Tariffs were in play then as well, and relationships were being changed. I'll just note that so far, at least, the level of uncertainty seems to be higher this time than last time. And actually I would agree with that, which is it does seem as though the stakes are a bit higher and the proposals are a bit bolder. And so there are real issues here.

Again, the notion of uncertainty is that when you're uncertain, maybe as a business you're a bit less inclined to invest and a bit less inclined to hire. As a consumer you're a bit less inclined to spend.

We have seen tentatively, maybe not the bloom off the rose, but we've seen a little bit less enthusiasm out of American consumers in terms of confidence recently, as they express a bit of nervousness about many of these swirling policies as well.

And so there is some damage that comes from policy uncertainty. I'd be inclined to think the uncertainty is, at least in a trade-specific sense, maybe a little bit less damaging for the U.S. than for some of the potentially affected markets, just to the extent that the U.S. economy is less reliant on trade and for that matter, if you're a business trying to decide where am I going to put that next factory?

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Well, you know, if there are no tariffs, the U.S. is not a bad place to put your factory. If there are tariffs, the U.S. is a really good place to put your factory. In both cases maybe you say, well, I might just do it in the U.S. And so the U.S. maybe suffers less damage on that basis as well.

But let's take in more detail here.

Divining Trump tariff intentions – big or small? To begin with, just as a general construct, should we expect big tariffs, small tariffs, or no tariffs? The pessimistic arguments that I'm going to give you – with  the optimistic ones right after – but the pessimistic arguments are that, well, President Trump does wield greater clout this time than he did in his first term.

There’s a more aligned Congress, a more aligned White House. He knows what he's doing to a greater extent, having done it before. This win wasn't the utter surprise that the win in 2016 was. So the scope for action is greater there as well. President Trump is explicitly linking tariffs as a source of revenue to fund tax cuts.

00:13:37:20 - 00:14:34:18

You need some of that revenue to enable the tax cuts that he dearly desires to deliver. And so that argues that some tariffs at least should come along. Certainly he believes in protecting American businesses from foreign competition, which tariffs can help to do. He wants to lower the trade deficit, which you could say tariffs might do if you did them and the other party didn't respond – though to the extent other parties respond, I'm not sure you can get too, too far on that front.

Nevertheless, with the goal of lowering the trade deficit, with the goal of increasing U.S. self-sufficiency, and maybe even to punish disliked countries. I would argue Canada might well be in that mix along with some European nations at a minimum.

So certainly we need to be on guard for more and bigger tariffs. I would say that that is not the only perspective. And there are some reasons to think the tariffs shouldn't be too, too big or last for too, too long, or be too broad. Do recall that in Trump's first term that there weren't too many tariffs that stuck around for more than a year or so.

00:14:34:18 - 00:15:24:28

I guess Chinese tariffs would be the exception to that. You do note, of course, that, when we hear these big, bold tariff proposals, they probably do need to be viewed through the lens of being transactional – a negotiating tactic – making that maximalist threat and then perhaps negotiating down to a less extreme form of tariffs. Or maybe no tariffs later.

Do note I'm recording this on February 26th. You would guess, if you know anything about calendars, that is before March. And so of course March is, in theory, a time when conceivably Canada and Mexico could have a tariff put on them.

Mid-March is meant to be a time when steel and aluminum tariffs could begin. The start of April is then a time when tariffs could start. It could well be that things have changed. But as we see on the ground right now, we've seen repeated delays of tariffs.

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They didn't come on January 20th. They didn't come on February 1st. They didn't come on February 4th. And so they they've drifted into the future in a way that suggests that maybe the White House doesn't actually want, massive tariffs, but is using them as that negotiating strategy.

And then, of course, we do know that the White House – and this is not unique to President Trump but I would say maybe he feels it a bit more strongly than some – he wants to boost the U.S. economy. He wants to boost markets. And of course, big tariffs probably wouldn't achieve that aim. They might do the opposite. They might also increase inflation which would be undesirable.

So we're still of the view – and again we may yet see deviations and there may be temporary disagreements with this view – we could have big tariffs stick around for a brief period of time. Certainly we are hearing and we can expect to continue hearing big tariffs threatened. We do expect some new tariffs to stick. The steel and aluminum ones seem pretty likely to and perhaps some others as well.

But ultimately we think that narrower targeted tariffs are the most likely variety to endure. That is to say, a year from now, two years from now, it’s unlikely big 25% tariffs that are just blanket applied, are here.

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It's more likely to be narrower tariffs. And so to do less damage is the extension of that. Okay. So let's just run through this.

Tariff proposals and implementation: This is our blotter for sorting out just what's been proposed. What's the timing. What's in our view the likelihood or what are some thoughts around them. And so I won't speak to all of this at great length.

And this may yet become stale fairly quickly. But as it stands right now, in late February, of course, we had those 25% tariffs threatened on Canada and Mexico. That's been delayed to March 6th or later, in my view. And this one could be wrong very soon. But in my view, I'd expect that to be delayed again in all likelihood.

00:17:01:15 - 00:17:36:27

Probably gets aligned with early April when it seems like a broader set of tariffs are being considered. I'd be surprised, even if this were applied, if this endured. If this were enduringly implemented, it would be quite problematic for Canada and Mexico. It would not be great for the U.S. either. And I don't think it achieves too many aims.

China tariff, of course, the 10% tariff has been applied. I think there's room for that possibly to be lifted if China makes various concessions. But for the moment we are assuming that sticks around, and China has already reciprocated.

Steel-aluminum tariffs are scheduled to come on March 12th. At this point, we're assuming those do indeed come on.

00:17:36:27 - 00:18:12:04

Maybe there'll be some wiggles here or there. Recall, aluminum tariffs were threatened at 25% in Trump’s first term. Ultimately they came on at 10%. Maybe there’s scope for that sort of adjustment. But ultimately we think there's a real chance this does stick around, at least for some period of time. These tariffs did stick for 14 months on Canada and Mexico last time.

It wouldn't shock me if they actually stuck around for longer or did prove more enduring this time, just based on the way President Trump is talking.

That brings you to reciprocal tariffs. By the way, this is not a color scheme of yellow, red, yellow, red. This is actually a color scheme of, I guess, how consequential each is.

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That's the interplay of how likely it is and how much damage it does. So the China tariffs have happened. They're not too damaging, but they've happened. So that's red. We're a bit more dubious on the Canada/Mexico tariffs. The steel-aluminum tariffs we think are likely but they're not too, too big. And so that's why they're just yellow not red.

Reciprocal tariffs are in red. That's why I met I mentioned all of that. This, to me, is the main act. I believe President Trump has called this the big one. So I do think this is the one to watch most closely. We've seen an executive order already signed. The idea is there's a study being done. The study will be concluded at the end of March.

In theory, the U.S. will be in a position to act as early as early April. And so the initial idea of these reciprocal tariffs is, it’s not so bad in the sense that the idea was to go look at other countries that are applying tariffs to the U.S. and essentially punish them for doing so and applying reciprocal tariffs on that country's products.

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Of course, in a best case scenario, maybe both countries then get to remove their tariffs if they agree to agree to do so together. So that doesn't sound too bad. However, the scope has become pretty worryingly broad, in these reciprocal tariff ideas. We're hearing not just on European autos, which are protected more than U.S. autos are, going in the opposite direction.

That's something maybe that does need to be addressed and probably will be addressed, but it seems like it also will apply to regulations. And so if regulations are perhaps protecting the domestic firms, I'm thinking, telecom, transportation, financial services and so on of a foreign country, that will be held against them in terms of the tariff that gets applied.

Sales taxes have been discussed, which is a bit of a puzzler, because sales taxes are applied equally to domestic firms and foreign firms, and of course, applied to the consumer ultimately. But that seems to be a point of objection. Countries with bigger sales taxes possibly are going to see bigger tariffs. So that's a real broadening of the situation as well, and that's somewhat concerning.

And then we've also heard mentions about exchange rates. And I believe it's mostly in the context of countries that manage their exchange rate. Maybe they make it artificially weak versus the U.S. dollar. They might be hit with bigger tariffs.

The point of all this to say it speaks to this much broader scope. It's not just on countries that have a tariff on a particular good and the U.S. matches that. This seems to be a form of punishment for all sorts of things and requires, you would think, then, significant concessions to avoid those tariffs being applied.

00:20:36:04 - 00:21:20:07

The question is, okay, it's one thing to increase your border security. It's one thing maybe even to increase your military spending, though that's expensive. But maybe you could just say it's very justified.

But it gets a little bit trickier when you're asking countries to change the value of their exchange rate or to stop charging a sales tax or, or to stop protecting their own strategic industries or key industries when I should say the U.S. broadly does the same with its own transportation rules and its own financials and its own telecoms and so on.

And so this is the one that makes me most nervous. I do think that we're going to see fairly big tariffs proposed, and it really will come down over the subsequent months as to whether a deal can be struck. If the U.S. is coming in with big, big, big demands, it might be hard to get that deal. That's how you get to one of those worst-case big tariff scenarios.

00:21:20:07 - 00:21:55:14

Maybe it will go more swimmingly. Maybe the asks will be more moderate. Maybe a deal could be struck. But this one does make us most nervous. As I’ve said a few times now, we still think as a base case scenario that narrower targeted tariffs are what is most likely to endure.

I would say we're feeling a bit less confident in that view. We still think it's the most likely view, but we're a bit less confident in that view. Just because how broad these reciprocal tariff ideas are, and how difficult it might be for some countries to make the kind of concessions that the U.S. is likely to ask for. That makes us somewhat concerned.

00:21:55:27 - 00:22:59:24

And then just to run through the remainder, I'm going to throw them all up at once here. So we've heard a few other things. So sector-specific tariffs. Steel and aluminum are sector-specific tariffs. So that's already discussed and very real. But we've also heard of metals more generally, including copper specifically . . . the auto sector, which would be very concerning in a North American context, maybe less so in a European context . . . the pharmaceutical sector . . .  computer chips . . . maybe even oil and gas.

I don't expect all of that to happen. I think we're going to hear more talk about some of these sectors. I think, though – in fact, I would say also with the country-specific tariffs, also with a 10% global tariff – I think these are all increasingly subsumed within the reciprocal tariff idea. I think that will be the big one in all likelihood.

That will be where a lot of these grievances are aired. And so to the extent that European autos have a favorable tariff setup, you talk about that in a reciprocal tariff context, even though technically it is also sector specific.

So that's where we are now, certainly subject to change. We're trying to stick with first principles here in terms of, well, we’re probably going to get some tariffs, but probably not the big ones, forever.

00:23:00:00 - 00:23:49:04

Maybe some of the smaller ones, reciprocal tariffs, the X factor. And again, just how big concessions are countries required to make and whether that's practical that they actually make them. We probably won't have clarity on that until early April.

And then just to run through a few other trade-type charts.

Canada is the largest steel and aluminum exporter to the U.S.: The steel-aluminum tariffs are coming on in a couple of weeks as I record this. And so just to flag that Canada is the big steel and aluminum exporter to the U.S., and that steel definition is a bit narrower than we'd like. I wouldn't be surprised if a month from now we have a bigger number there, just as you include some of the parts made of steel and so on.

Nevertheless, in terms of, steel in a raw context and aluminum, Canada number one in both. By far number one in aluminum exports. Some really cheap electricity costs contributing to that in Quebec in particular, and so set to be more adversely affected.

00:23:49:04 - 00:24:54:20

That's been the theme from the beginning, which is Canada and Mexico need to be on guard the most against tariffs. For everyone else tariffs certainly matter, but it is less existential, you might say.

In terms of other White House-related developments, I'm just going to run through some things and really just give a few high-level thoughts.

Other White House-related developments: We're certainly seeing changes to immigration policy. Ultimately one should expect significantly slower immigration and conceivably even slightly negative, significantly slower population growth, conceivably barely positive. And so, setting aside all the implications that come from that, of course to the extent economic growth is really population growth plus productivity growth, that does argue for a bit less economic growth.

It does argue also for some pressures, particularly in the sectors that have historically been reliant on undocumented workers. Of course, agriculture is a prominent one. Food services is another. There are a variety of others as well that are certainly affected by this. But in terms of developments in the last month or so, nothing too radically different than what was imagined coming into the second Trump term.

00:24:54:28 - 00:26:06:13

In terms of spending cuts, we're learning more things. And this is something that's underway right now. We've seen kind of the initial stage of the House of Representatives pass a tentative budget, but it now needs to be dealt with in the Senate and then taken back to the House. And so there's several further steps.

There is still some doubt, to the extent that the margins of victory are razor thin. And, of course, the Republicans have very small margins for error in both the House and the Senate. As a result, I don't think the final word has been said on this, and it's not quite a certainty that we see a big omnibus spending, taxation and debt ceiling bill all at once in the near term. But it is quite possible.

Based on the direction they're going right now, we can say a few things about spending cuts, which is of course, the box that popped up on your screen a moment ago. And so spending cuts, well, we can say that the proposal is $2 trillion of spending cuts. Now, let's clarify that's over 10 years. That is not per year.

As a result, not quite as extreme, but still we're talking about a very, very large sum of money, and it's not clear to me that can actually be delivered. The Department of Government Efficiency (DOGE). DOGE is certainly making cuts, but those are pretty small in the grand scheme.

00:26:06:13 - 00:26:54:10

That's not going to get you to those kind of spending cuts. It seems as though you would have to be starting to cut into things like Medicaid entitlements, in other words, and as a result it's not clear to me we're going to get all of that delivered. Nevertheless, you know, there are plans for spending cuts.

There are other plans for spending increases. Of course, there also plans for tax cuts, which I'll get to in a moment as well. But it does seem as though this White House is trying to make cuts in some areas. So far, though, when we look at the fiscal picture and just the money flowing in and the money flowing out, there really has not been serious austerity out of this government.

And I guess I could say as well, this is now giving a bit of a forward look at the tax cut side. The expectation – and based on this first bill that's been proposed – is actually the U.S. deficit would be bigger over the next 10 years as opposed to smaller as a result of the action.

00:26:54:10 - 00:28:02:21

So we can't really say that there's a lot of austerity that would be growth destructive. And we can't really say, conversely, that concerns about the U.S. deficit or concerns about the size of the U.S. debt get addressed. These are set to still remain quite large.

And then the taxes, I guess I've stolen a bit of thunder here.

But of course, tax cuts proposed. Most of the tax cuts really are continuing the prior Trump tax cuts. It's just very expensive to keep those in place. We're talking to the tune of $4-5 trillion worth of tax cuts over, again, a 10-year period. And that's why the spending cuts are necessary to make the math work to get there.

So we'll see if these tax cuts are actually delivered. But I would give fairly high odds that they are, just because they are a pretty high policy priority. One interesting thing, though, that has so far been the case in the second term, is that in the first Trump term, you had tax cuts first, which was the growth enhancer, then tariffs second – which was the growth headwind.

This time around, it seems to be progressing. And maybe this will change if this bill gets passed quickly, but it seems like it could be, tariffs first followed by tax cuts after. So the headwind first, then the tailwind later. And so you might have a bit of a different growth profile as a result of that.

00:28:03:08 - 00:29:04:02

The deregulation picture is certainly ongoing. I would say loosely as expected, as it stands right now. The expectation is looser financial sector regulations, looser regulation in an environmental context and a number of other directions. I would say that broadly seems to be playing out.

Animal spirits: that's not a White House policy, but it's certainly White House-related. We saw a huge surge in animal spirits, and that's really just confidence and expectations after President Trump was elected. I can say that as it stands right now, we still see pretty enthusiastic animal spirits. I would say we're getting a little bit of a pullback, though.

Small business expectations have come off a little bit in the latest month. Consumer confidence has come off a bit more than that recently. Some of that might just be realizing the scope for actual action maybe isn't quite as exciting as initially expected. But also just there's so many swirling issues and genuine fear about tariffs in particular, as it stands right now and maybe the inflation that might come from it, that the animal spirits effect is weakening a little bit right now.

00:29:04:09 - 00:30:08:26

Then just on the foreign policy file, and I'm going to get into the international order and a few other things in a moment. But just on the foreign policy file, we are starting to see action. I think it's hard to classify President Trump and whether he is an isolationist. In many regards, yes.

Or is he an expansionist as he talks about Greenland and Panama Canal, and so on? There are maybe not contradictions, but some complicated elements that exist there. I guess as it stands right now, the greatest action seems to be in Ukraine, where it seems as though Ukraine is on the cusp of signing some sort of resource deal with the U.S., and, conceivably some sort of peace treaty following with Russia.

That may not be entirely to Ukraine's advantage. And it certainly has Europe scrambling in the context of needing to increase its military spending, because it seems as though the U.S. might be offering significantly less support on that front. So there is an awful lot in flux there as well.

And then just to throw in a broader thought, which is, for all of this – and it's a pretty unprecedented time, and there's an enormous amount happening – do keep in mind there are constraints and those constraints are legal and practical and political.

00:30:08:26 - 00:31:06:17

In terms of legal constraints, we've seen a number of the initial Trump initiatives be rejected by courts, and they're tied up in the courts. We'll see where they'll end, in the end. But as it stands right now, this is not complete free reign for the White House. There are legal constraints.

There are practical constraints in terms of how many people you can realistically deport and on a number of other fronts as well, how high a tariff you can realistically have before the economy screams, and similarly political constraints. It's a pretty narrow Republican majority as it exists right now. And so this is not a pure President Trump budget.

There are senators and representatives who have their own considerations at play, who will likely temper some of these policies. So let's just keep that in mind. We haven't seen the final form of most of these.

Fracturing international order: Speaking of the fracturing of the international order, well, we've known for quite a while now that we're transitioning from a hegemonic to a multipolar era. That is the idea that China is now becoming, in some ways, a peer of the U.S.

00:31:06:17 - 00:32:23:28

I suppose one needs to give a nod to Russia as well, in terms of throwing its weight around, at a minimum. Globalization is often a consequence of that to the extent you get cliques of countries that form spheres of influence. And so we are seeing some of that happen now. Maybe what's curious is the U.S. seems to be to some extent squandering its traditional sphere of influence.

So we'll see where that ends up. Nevertheless, I think that's an important theme to think about over the years and even decades ahead.

And then just in terms of many of the implications that could arise as a result of that: well, in general, you would expect more protectionism, more tariffs, more nationalism. I would say we are getting that, and prior international norms are being undermined by international bodies like the World Trade Organization and the United Nations and the IMF (International Monetary Fund) and the World Bank.

Indeed a variety of others are all somewhat diminished and no longer playing a central role and no longer stabilizing and coordinating countries to the extent that they once did. I'm not sure this is quite a strong argument, but nevertheless, you can say national borders are maybe becoming a bit more malleable. You look at these great powers and of course, Russia in Ukraine and previously Georgia, and China in the South China Sea and being much more assertive across Asia and the Pacific, and the U.S., at least musing and speculating about land acquisitions.

00:32:23:28 - 00:33:15:00

So, not quite the late 90s period of stability, the end of history, as many thought might be the case at that time. It was a time certainly of more military spending. I would expect quite a lot more military spending, particularly by countries that are losing perhaps some measure of U.S. support, but even countries not affected in that way.

Stronger national identities are being formed. There's maybe good and bad that comes from that. It can be a kick in the pants to some countries that they perhaps need to do more, need to compete harder.  Equally, of course, nationalism can be a frightening thing and can lead to war and so on.

And so that needs to be managed.

Just in general, when we are in a multipolar era, when there is protectionism and de-globalization, usually you get a bit less growth. Usually you get a bit more inflation. And these aren't the sorts of trends that last for six months or even two years. They’re the sorts of trends that last for decades, usually. Let's presume that these continue for the time being.

00:33:15:00 - 00:33:33:21

Okay. So we're going to pivot from that.

Setting aside finally U.S. public policy, we'll talk about China for a moment. And then we're going to get into Canada fairly quickly and talk about Canadian productivity for a moment.

So, let's talk about China though.

China stocks rally on pro-business developments: This is the Chinese stock market, the MSCI China.

00:33:33:21 - 00:34:58:18

The point here is we've seen quite an impressive rally recently. And so that would be on the back of a variety of things. Some was DeepSeek, the AI advances. Hey, China is in the realm of the technological frontier. And so that was certainly a check mark in favor of China.

I can say as well that recently China's premier met with tech executives and seemingly has given them, the green light for expansion and growth. For a period of time, it seemed as though they were in the doghouse and not in a position to innovate or to grow. So we're back to the Chinese private sector perhaps being in a position to expand in a way that obviously, almost definitionally, is very helpful for the Chinese economy.

I can say, and maybe indirectly reflected here, there is tentative evidence that the Chinese housing market isn't just stabilizing but is actually getting a little bit better as well. We've made arguments on a number of occasions that the U.S. tariffs on China, while certainly undesirable from a Chinese perspective, perhaps aren't as damaging as one would think.

The trade relationship just isn't that big. And similarly, this presents certain opportunities as the U.S. shuns some of its traditional allies. It does present an opportunity for China to grow a little bit more closely to some of these countries. Broadly speaking, the Chinese picture does look a bit better.

Admittedly, if we were to step back and broaden this chart out and go back another 10 years, you would say, Holy cow, the Chinese market is still way off its highs. It still is, to be clear. But nevertheless, we are seeing some signs of enthusiasm again.

00:34:58:18 - 00:35:56:06

And then, Canada. So let's start actually on the tariff file, just briefly.

Potential Canadian tariff responses: And to reiterate, here we are perhaps on the cusp of tariffs for Canada – or at least more explicit tariff proposals that Canada will need to combat.

As we've said before, we think there's really two main elements to any kind of response. Maybe a third backup plan. And so, of course, if Canada is hit with tariffs, Canada would hit the U.S. with tariffs. Probably not fully tit for tat, probably nearly. And that was indeed the tentative proposal back in early February.

You target U.S. sectors that are politically sensitive, for which Canadian demand is elastic, for which Canada has domestic substitutes. And of course, in all of this the Bank of Canada is likely cutting rates more in a tariff scenario, fiscal stimulus conceivably, if needed, coming on more forcefully as well, if needed. I can say the other main element is, of course, to negotiate.

00:35:56:14 - 00:36:38:00

Border security, defense spending are the big ones for which realistically Canada can do some things and maybe is even better off for having done them.

Protected sectors, that one gets a bit trickier. And of course, the dairy sector and conceivably some of the service sectors that weren't really part of the conversation in Trump's first term. So there will be discussions to that effect. I'm unclear how much progress that will make. I think that's potentially a sticking point.

Reopening the USMCA (U.S.-Mexica-Canada Agreement) trade deal is a foregone conclusion. Hopefully, most of the changes there are in line with ensuring minimum wage standards, ensuring limitations of trans-shipment or through shipment of Chinese products. But nevertheless, there is some question there as well, but there's room for negotiations, I suppose, is the point.

00:36:38:00 - 00:37:02:13

Then, of course, the backup plan is more extreme measures, along the lines of export taxes or restrictions and even import restrictions, and seeking to deepen ties with other regions, as per the China comments on the prior slide – though perhaps for Canada, Europe and the UK might be the more obvious candidates.

And then unconventional options of any number of descriptions that I don't really expect to see those implemented, but I suppose they're in the back pocket somewhere as well.

00:37:02:23 - 00:38:18:08

Canadian election approaches – race narrowing: The Canadian electio, as mentioned, is approaching. There has been important movement here. As we look at the likelihood, there's the popularity of the different parties. The Conservative Party in dark blue is still very much in the lead. That has been the story, now going back quite a number of years. But that hugenlead has shrunk significantly.

It was a pretty enormous lead at the start of 2025 and a short two months later, that lead has shrunk quite significantly. The Liberal Party has staged quite a rally at the expense of the NDP and some of the other and the conservatives as well, I suppose. So it is conceivably a race again. What I can say is that some of the polling that specifically pits Carney against Poilievre would suggest it is even closer.

I've seen polls suggesting maybe a three-point gap and this sort of thing. And of course, a reminder that often the Liberal vote is more efficiently distributed across the country in a way that does render that race potentially closer. So I would still say for the moment, it looks as though a Conservative win is the more likely outcome.

But you have to acknowledge that there is a chance of the Liberals winning this, and there are a number of minority government scenarios where it would look like it could be a majority. This could yet change again in terms of the movement.

By the way, I get the sense that the big part is, of course, antagonism toward the U.S. and a feeling of nationalism.

00:38:18:26 - 00:39:35:13

Similarly, perhaps greater thought about the candidates and the view that a Carney might be a technocrat and have skills in economic negotiations. So we'll see where this ends up. But this could actually come to the fore fairly soon because this could be a spring election.

Okay. And then on to that productivity story, I promise.

Acute recent productivity problem in Canada: And so three quick slides just to show the problem. First of all, the norm is for productivity to rise. We get new computers, we get more experience and smarter over time. The norm for productivity is to go up. It's been very unusual in recent years in that it has gone down. And so let's start by acknowledging it's been really something of a crisis in recent years.

It's going the wrong way. We are becoming less productive. There are some acute temporary factors explaining that that I'll get to in a moment, but that has been most unwelcome.

Long-term Canadian productivity trend lags U.S.: I can say that more generally – and this is now going back to the early ‘80s – certainly Canada lost a lot of ground to the U.S. in the early ‘80s. Canadian labor productivity was almost on par with the U.S. in the high 90% of the U.S. levels. That is now down to 75% of the U.S. level. And that is sacrificing quite a bit.

You'll note, actually, the 2010s weren't too bad for Canada comparatively. Canada kept pace with the U.S., but I would argue that's maybe not enough to the extent that Canada is now just the 75th percentile. All sorts of studies abound showing that Canadian provinces are now poorer than the great majority of U.S. states.

00:39:35:13 - 00:40:32:11

Canadian productivity doesn’t look quite as bad versus non-U.S. peers: And then maybe this is the one that adds a bit of nuance to that last observation of Canada badly lagging the U.S. The U.S. is the exceptional one here. So we're back to that U.S. exceptionalism story on the left.

So this indexes everyone to the same number in 2000. So it's not the case that that was the productivity level. But just looking at how productivity evolved from the year 2000. U.S. productivity growth was faster than its major peers. Canada actually sort of hovering there in the middle when you look at it, in the light blue. And so well behind the U.S., but actually fairly middle of the pack in an ex-U.S. context.

Similarly, on the right side, this is now the actual comparable level of productivity as it stands. I guess 2022 is the most recent data that we can get. And so the U.S. productivity level is very high, not the highest in the world, but it is quite high.

00:40:32:23 - 00:40:55:26

Canadian productivity is significantly behind that. And as much as Canada is maybe loosely mid-pack, I would still say Canada lagging probably somewhat versus where it would like to be. So, the conclusion is that there is an issue here. There is work to be done. It's maybe at least as much the U.S. being a special case as Canada being a particular laggard, but nevertheless, why not try to emulate the U.S.?

00:40:55:26 - 00:41:33:11

Canadian productivity scorecard: And so let's just run through what we think are the key productivity problems in Canada. And how powerful that problem is and why it's a problem, and then how easy it is to get a solution.

We can start by saying some of the problems, the recent productivity decline, we think is just an acute temporary problem. It's a function of some post-pandemic distortions. Even more substantially, it's a function of this spike in immigration that took place and an immigration policy that targeted low-skilled workers in a way that just dragged productivity down and the capital stock per capita down. So we think this was medium importance, fairly easy to fix.

00:41:33:11 - 00:42:48:21

In fact, it’s being fixed, time is being gained from the pandemic every day. Similarly, we can say that the immigration policy has been changed, that probably gets better.

Public policy is a big problem. There are unfriendly tax rates, there are unfriendly regulations. I do not want to put it all on this because the taxes in particular aren't that unfriendly.

Canada is middle of the pack and lagging the U.S., but hardly a horrible country as it comes to taxation. But there are opportunities there. And if you're a small country beside a big country, you probably need to be more friendly, not just almost as friendly.

Similarly, the regulatory environment is quite challenging. And we would say solution difficulty is medium. We think there's progress that can be made.

There's certainly plenty of room for improvement. It is politically dependent. Let's watch the election. We'll see which candidate emerges from the Liberal side as well to help inform that. We think there is room for some improvement there.

In terms of culture, Canada does seem to have a risk averse, complacent culture. It's hard to define truthfully. We think it's a pretty big part of the story. Probably pretty hard to fix as well.

Culture doesn't change all that quickly. Maybe the recent surge of nationalism and national spirit will do something, but we're not assuming a lot changes there.

00:42:48:21 - 00:43:37:20

The economic structure is maybe a medium importance. Of course, Canada is a big country, which presents challenges. Population density is low, and the scale. There isn't the sort of network effects in Canada that can exist because the population isn't 340 million people, like in the U.S. And so you're not going to fix some of those things.

Some of the sector tilts, you could maybe fix a little bit. So Canada has a really big public service and it's grown a lot, and productivity has fallen a lot in that there may be room to address that.  

We can talk about some other sectors as well. The housing sector is a really, really big share of GDP (gross domestic product). Historically, countries with a big share mis-allocate capital. They're putting all their money into housing, not enough into productivity-enhancing sectors. To the extent housing is cooling, maybe there's room for improvement there as well. So we think there's some room. But again it's hard to do a lot given so much of it is just baked into the cake for a country like Canada.

00:43:38:00 - 00:44:53:04

Business decisions, we think, are a big part of the issue. There just is too little CapEx. There's too little research and development. Too many smaller companies selling to American rivals and so on. You would struggle to justify this on the basis of tax rate differentials.

In fact, some of the depreciation rates in some of the R&D programs, while ultimately, you could say maybe less generous in the U.S. But they are not that much less generous. That would explain as an example that in Canada, CapEx per worker is running on the order of about half of CapEx per worker in the U.S. That's a pretty extraordinary difference.

Some of that does come down to the decisions businesses are making and I guess a lack of aggression in that business decision-making. There is arguably some room for improvement there, we think.

Global forces, we do think that just it happened to have been the case that the last 15 years were a period of slow productivity growth.

Most countries saw less productivity growth than they did over prior decades. We're hopeful that the global picture does improve a bit. We talked about AI earlier. We think that there is scope, for AI to drive faster productivity growth, not just in the U.S., but in all the countries that benefit from this enhanced technology, including Canada.

00:44:53:06 - 00:45:43:27

This is sort of the last one, but I'll throw human capital in here. We don't think human capital is a problem right now. We think that Canada is actually well-educated, compares favorably to most other countries. But it's possible to get even better and even more favorable. And so I suppose there is some opportunity there. Our takeaway is that productivity has been a problem.

There isn't one reason. It's six different reasons. Arguably, some of them are hard to fix. Some of them were easier to fix. Some are likely to be improved. Some are maybe less likely to be improved.

On the net we think that there is scope for some action. There is some motivation to do something about this. And this is a pretty opportune time to do something.

And so we are penciling in the idea that Canadian productivity growth can pick up somewhat from here. Maybe not quite matching the U.S., maybe not quite matching the historical norm, but running somewhat faster than the norm over the last 15 years or so.

With that, I'll say thank you very much for your time. I hope you found that interesting. We're going to spend some more time on Canadian productivity in future months as well, to be clear. Certainly if you found this useful, please do consider following us online. That's the Twitter – now X – connection. There's LinkedIn.

Maybe best of all is just www.rbcgam.com. There's an insights tab. All sorts of great research from my team, but also from other groups within the asset manager as well.

So I'll say thanks so much for your time. Please consider tuning in again next month.