~With contributions from Vivien Lee, Aaron Ma, Sheena Khan
Current developments
Final central bank meetings of 2025
The U.S. Federal Reserve (Fed) cut its policy rate by another 25 basis points (bps) in December, as expected following earlier guidance in that direction. It wasn’t quite the hawkish cut that the market anticipated, although Chair Powell’s “wait and see” language clearly suggested a pause. But heightened concern about the labour market – including suggesting payroll gains are being overstated and the economy is likely shedding jobs – came across as slightly dovish.
For reference, we discussed the over-estimation of payroll growth in a previous #MacroMemo.
Growing division among Fed officials was evident with one dovish dissent in December (in favour of a 50 bp cut) and two hawkish dissents (for no cut).There were also four ‘soft’ hawkish dissents from non-voters who would have preferred not to move. While the dot plot continues to point to a median of one rate cut next year, there is a sizeable camp that wants to hold rates steady and a number of others that look for two or more cuts.
President Trump plans to name Chair Powell’s successor early next year. Whoever gets the job will have their work cut out to convince hawkish regional bank presidents to get on board with rate cuts. Still, the incoming chair might have enough allies on the board of governors to deliver a bit more easing than the dot plot median suggests. The market is currently pricing in two rate cuts next year starting in June – the first meeting under the new chair.
The Bank of Canada (BoC) was a step ahead of the Fed. It already flagged a pause in October and held its policy rate steady in December. Governor Macklem sounded somewhat skeptical of recent, surprising strength in Canadian economic data, suggesting the outlook for 2026 hasn’t changed.
The futures market started pricing in a rate hike next year following another strong employment report. While the policy statement acknowledged some improvement in the labour market, it also pointed to ongoing weakness in trade-sensitive sectors and subdued hiring intentions.
That said, Macklem didn’t entirely close the door on the next move being a rate increase, noting the BoC would respond if an accumulation of evidence materially changes the economic outlook. It seems Governing Council wants to see a broader set of indicators confirming recent strength in labour market data before entertaining a tightening bias. While we look for Canada’s economy to progressively strengthen in 2026, we think recent data overstates momentum and don’t see the BoC raising rates next year.
As we write this, policy announcements from the Bank of England (BoE), Bank of Japan (BoJ) and the European Central Bank (ECB) are still to come. The BoE is widely expected to cut its Bank Rate for the first time since August as the economy and labour market continue to soften and wage and price pressures are finally showing signs of easing. The BoJ is likely to hike for the first time since January as inflation looks increasingly entrenched and more fiscal support is on the way. The ECB should continue to hold its policy rate steady, as has been the case over the second half of 2025.
G7 central banks move in different directions on policy rates
As of 12/12/2025. Dotted lines indicate futures pricing. Sources: Bloomberg, RBC GAM
Tariff news remains relatively quiet
Our previous #MacroMemo was issued without a tariff update for the first time in recent memory – a nice milestone, in our view. Developments since then have been relatively minor:
We continue to await the Supreme Court’s decision on the legality of the White House’s IEEPA tariffs. Betting markets still suggest relatively low odds of a ruling in the administration’s favour (22% as of writing). It’s unclear whether there will be a decision before year end.
President Trump threatened to withdraw from the USMCA trade agreement and once again floated the idea of separate deals with Canada and Mexico. The threat isn’t surprising and will likely be used as leverage during re-negotiations in 2026.
There will almost certainly be scary moments in the months ahead. The administration has to inform Congress of its position and objectives for the upcoming USCMA review by January 2. Our base case is for the deal to survive, albeit with changes that entrench some tariffs and shift from free to managed trade in certain sectors.
Canada and Mexico also faced fresh tariff threats.
President Trump raised the possibility of “very severe” tariffs on Canadian fertilizer – a somewhat puzzling move coming shortly after the White House offered tariff relief on some fertilizer imports. Canada supplied 85% of U.S. potassic fertilizer imports year-to-date, almost all of which entered tariff-free. Alternative sources are not readily available given that Russia and Belarus are the two other main global producers.
Separately, Mexico was threatened with an additional 5% tariff for failing to live up to a water-sharing agreement.
Canada and Mexico faced relatively low effective tariff rates as of September – 3.9% and 4.7%, respectively, compared with a 10.7% average on all U.S. imports.
President Trump continues to muse about sending tariff rebate cheques to Americans in 2026. We’ll be watching how this debate unfolds amid a growing focus on affordability and with less than a year until the mid-term elections. We haven’t penciled in any fiscal boost from tariff rebates but see it as an upside risk to growth next year.
U.S. data catch-up
Statistics agencies continue to play catch-up following the U.S. government shutdown. A number of key indicators will be released before the holidays, including October and November payrolls, November Consumer Price Index (CPI) and Q3 gross domestic product (GDP).
October’s payroll report will show a hit to federal employment – potentially in the -100,000 range – due to DOGE-related deferred resignations earlier this year. At the time of writing, consensus looks for a 50,000 gain in November payrolls and a 4.5% jobless rate, which would be up a tick from September. No unemployment rate will be estimated for October.
Note that with Powell suggesting job growth is overstated by about 60,000 per month, the consensus increase might be consistent with flat or slightly negative underlying job growth in the Fed’s view.
The market looks for headline and core CPI to remain in the 3% year-over-year range, with ongoing signs of tariff pass-through likely offset by some further softening in services inflation. As a reminder, October CPI will not be released as most of the data couldn’t be collected retroactively.
Q3 GDP is scheduled for December 23, and tracking by the Federal Reserve Bank of Atlanta points to a healthy 3.6% annualized gain. That’s down slightly from its previous estimate after the delayed September consumer spending report was a bit softer than expected. Slowing consumer momentum heading into Q4 supports our view that the Q3 pace of growth won’t be repeated, not least because of a 1%+ (annualized) drag from the government shutdown.
With that, the U.S. Bureau of Labor Statistics (BLS) will have caught up. Releases for December payrolls and CPI have been confirmed for their original dates. No word yet on whether the U.S. Bureau of Economic Analysis (BEA) will be able to release Q4 GDP as scheduled at the end of January, however.
These releases will help fill in some gaps about the U.S. economy’s performance in the late stages of 2025. But with the Fed already having taken out some insurance with a December rate cut, it would likely take dramatic underperformance for the central bank not to pause in January.
-JN
Holiday shopping wrap-up
High frequency spending data suggest the busy holiday shopping period around U.S. Thanksgiving – including Black Friday and Cyber Monday – saw adequate but not spectacular growth. Beyond the pace of sales, the data shows interesting trends like an ongoing shift toward e-commerce and mobile orders; buy now, pay later financing; growing influence of AI and further evidence of a K-shaped economy.
Here are some highlights from various holiday spending trackers:
Overall sales growth was reported in the low- to mid-single digits. Bank of America’s card data shows holiday spending was up 5% year-over-year in October and November but not quite as robust around Thanksgiving. Mastercard estimates U.S. retail sales excluding autos were up 3-4% on Black Friday and Cyber Monday.
Online sales grew in the mid- to high-single digits. Adobe Analytics reports a 7% year-over-year increase (see chart) while other estimates were slightly higher (MasterCard) or lower (Salesforce). Mobile orders now represent more than half of e-commerce sales.
In-store sales were flat to lower. RetailNext reports in-store foot traffic was down 6% year-over-year on Black Friday weekend and net sales were 4% lower. MasterCard suggests in-store sales increased slightly.
AI played a growing role. Salesforce suggests AI tools and agents – personalized recommendations, conversational customer service – influenced 20% of orders. Adobe Analytics estimates traffic from AI (Large Language Models) to retail sites increased by 7.5x.
K-shaped spending continued. Bank of America’s card data shows faster spending growth among higher income households. We discussed the K-shaped economy in a previous #MacroMemo.
Buy now, pay later financing supported slightly more than 7% of sales, up from the previous year.
U.S. holiday spending rose 7% year over year
As at 12/11/2025. Sources: Adobe Analytics, RBC GAM
Adobe Analytics estimates spending for the full holiday shopping season will be 5% higher than a year ago. That’s down from the 8.5% gain seen in 2024. Based on a limited history, that would still be consistent with real consumer spending growth in the 2%+ range in Q4.
However, we think the actual increase will fall short of that. With federal government employees having gone unpaid through the first half of the quarter, we expect to see evidence of spending restraint, even if back-pay allows for some catch-up purchases later in the quarter.
Indeed, looking beyond holiday spending, Bloomberg’s tracking of debit and credit card transactions points to a notable slowdown in Q4 (see chart). But we think this will be a temporary soft patch with sizeable tax refunds early next year acting as a tailwind for consumer spending.
Card spending data suggests some loss of consumer momentum
Bloomberg consumer spending as of 12/05/2025, Personal Consumption Expenditures (PCE) as of September 2025. Sources: U.S. Bureau of Economic Analysis (BEA), Bloomberg, Macrobond, RBC GAM
-JN
Is AI boosting productivity?
Artificial Intelligence (AI) saved the U.S. economy from a more significant slowdown in 2025 as data centre capital expenditure (CapEx) and equity wealth effects softened tariff and immigration headwinds. Did an AI-driven productivity boost also play a role?
Generative AI is widely expected to provide a productivity lift in the coming years as adoption becomes more widespread and models become ever more capable. But estimates of potential gains vary widely based on assumptions around implementation rates, use cases and cost savings (see chart).
Estimates of potential productivity gains from AI vary widely
As at 12/11/2025. Dotted bars indicate range of projections. Sources: Organisation for Economic Co-operation and Development (OECD), Brookings Penn Wharton Budget Model, RBC GAM
Goldman Sachs forecasts a 1.5% increase in annual U.S. productivity growth over the next 10 years.
Researchers at the OECD expect a 0.4-0.9% annual add.
Daron Acemoglu at MIT expects a 0.7% cumulative add to U.S. total factor productivity growth in the coming decade.
The Penn Wharton Budget Model estimates a 1.5% cumulative increase.
Timing is also uncertain – Goldman Sachs doesn’t expect to see measurable productivity impacts from AI until 2027 while Penn Wharton expects the strongest effects to materialize in 2030-35.
We agree that the biggest productivity lift from AI is yet to come, but we’re slightly more optimistic on its effects in the here and now. Adoption rates are rising, models are becoming more competent and powerful, and there is mounting evidence of task-specific productivity gains from AI.
Generative AI is still relatively new on the scene, but its use is growing faster than previous general-purpose technologies like personal computers and the Internet (see chart). Various surveys disagree about adoption rates. McKinsey found 71% of respondents’ organizations used generative AI in 2024 while a recent Census Bureau survey found 17% of firms used AI in at least one business function. But the trend toward more widespread use of AI is undisputed.
Use of Generative AI is growing faster than other general-purpose technologies
As at 12/09/2025. Sources: Generative AI Adoption Tracker (Bick et al), RBC GAM
AI tools are becoming increasingly capable. Smaller, less computationally intensive models are able to meet given performance benchmarks while newer reasoning models are tackling more challenging problems and generating complex outputs. AI now surpasses human baseline performance on many tests and is showing significant improvement against challenging new benchmarks.
With rising adoption rates and improving capabilities, there is a growing body of empirical research showing productivity gains in a variety of use cases. One study of customer service agents found AI increased efficiency by 14%, while a separate evaluation of software developers found a 26% average productivity gain. Aggregating these and other studies – 19 in total – Goldman Sachs found an average 27% increase in productivity from generative AI. Anecdotes from another 20 companies suggest gains of a similar magnitude.
At a more macro level, a recent survey by the St. Louis Fed found 37% of respondents used generative AI at work. Average time savings among users and non-users equalled 1.6% of total hours worked.
Based on this, the researchers think generative AI might have increased U.S. labour productivity by a cumulative 1.3% between the end of 2022 – when ChatGPT was introduced – and mid-2025. That would explain much of the recent acceleration in productivity growth relative to pre-pandemic trends (see chart). The study also found industries that reported more time savings from AI tended to see a greater pickup in productivity growth.
U.S. labour productivity growth has accelerated since ChatGPT’s release
As of 12/09/2025. Sources: Federal Reserve Bank of St. Louis, RBC GAM
We think it’s fair to say AI supported U.S. productivity growth in 2025. This is perhaps not to the same degree as the lift from data centre CapEx and AI-driven wealth effects, which each might have added something in the range of 1/2 percent to GDP growth this year. This also helps to explain the recent divergence between relatively firm GDP growth and muted job gains – a trend that could continue next year.
We budget for a bit more of a productivity lift in 2026, another significant increase in CapEx, and some lingering wealth effects – even if equity market gains aren’t as robust as in recent years. But the drivers of U.S. growth should broaden beyond AI, with easing tariff headwinds and a growing fiscal tailwind helping the economy accelerate next year.
-JN
Updated Monroe Doctrine
In early December, U.S. President Trump announced what amounted to a revival and reinterpretation of the Monroe Doctrine under the byline “America250.” It is effectively the country’s new foreign policy strategy, with a particular emphasis on the United States’ Western Hemisphere neighbours.
The original Monroe Doctrine was a declaration by President James Monroe in 1823. It was intended to prevent European powers from reclaiming their recently liberated colonies in the Americas. He announced that European interference in the Americas would be viewed as an unfriendly act toward the U.S. In exchange, the U.S. promised not to intervene in European affairs.
President Trump is not the first to expand upon this framework. The (Theodore) “Roosevelt Corollary” of 1904 dialed up the level of aggression, with the U.S. claiming the right to intervene militarily and politically in its neighbours. The U.S. meddled a great deal in subsequent years.
In contrast, the new so-called “Trump Corollary” is less expansive. It does not declare the right to intervene militarily in Latin American countries. All the same, it is notably more activist and more focused on Latin America than has been the case in recent decades.
There are several basic principles in the new foreign policy statement.
Prioritize the Western Hemisphere
The U.S. is clearly prioritizing the Western Hemisphere over other parts of the world. This is in part a logical extension of recent isolationist inclinations. As the U.S. pulls back from the rest of the world, it naturally pulls back least from its most proximate neighbours.
The U.S. has cycled through a variety of regional focuses over the decades. The Cold War was of course defined by a focus on the Soviet Union, Eastern Europe and other Communist proxies. The decline of the Soviet Union and then the shock of 9/11 motivated a realignment toward the Middle East. The 2010s were then marked by a geopolitical pivot toward Asia. Today, the U.S. is pivoting once again – this time toward the Western Hemisphere.
Assert U.S. pre-eminence in the region
Seemingly landing somewhere between the relatively laissez-faire attitude of the original Monroe Doctrine and the assertive Roosevelt Corollary, the Trump Corollary actively declares U.S. pre-eminence in the region. The other countries are operating within the U.S. security perimeter, not the other way around.
This is already visible. The U.S. has moved the USS Gerald Ford carrier strike group to the Caribbean and now has at its disposable a range of formidable vessels. It is already engaging in anti-drug smuggling operations that have included strikes on suspected drug-trafficking boats.
The U.S. is also pursuing Mexican drug cartels with increased vigour, has applied new sanctions to Cuban leadership, and is expressing support for right-leaning political leaders in Argentina and Chile. Argentina has also been the beneficiary of a large new financial backstop. In contrast, the U.S. now has a much more antagonistic relationship against Brazil and its left-leaning leadership.
But the most consequential U.S. intensification may be against Venezuela. Long a pariah nation, friction with the U.S. has grown over the past year. The U.S. broadly disapproves of the country’s authoritarian government; its flawed 2024 election; its partnerships with Russia, China and Iran (respectively, for arms and intelligence, loans and infrastructure, and fuel swaps and sanctions evasion); and the destabilization to the region caused by the seven million-plus refugees who have fled the country. The U.S. recently seized an oil tanker off the coast of Venezuela due to alleged sanctions violations. Geopolitical experts believe the U.S. could soon seek to impose regime change on the country.
Polymarket assigns a 52% chance that the U.S. and Venezuelan militaries engage one another by March 31, and a 54% chance that Venezuelan President Maduro is ousted by year-end 2026.
Limit foreign strategic influence
As an extension of the prior objective, the U.S. seeks not just to establish its own dominance of the hemisphere, but to limit the access of other world powers. In practice that means limiting China, which has become the new primary trading partner for many Latin American countries including Brazil (see next chart).
Brazil is shifting trade to China
As of November 2025. 12-month moving average of monthly exports + imports. Sources: Brazilian Ministry of Development, Industry & Foreign Trade (Ministério do Desenvolvimento, Indústria e Comércio Exterior), Macrobond, RBC GAM
Our own analysis argues that the largest countries in the Americas remain more tilted toward the U.S. sphere of influence than the Chinese one. However, the tilt toward the U.S. is quite small for Peru, Argentina, Brazil and Chile, and it is telling that for five of the seven examined countries, China has been narrowing the gap over the past decade (see next table).
As at 07/04/2025. Alignment scores range from 1 (least alignment) to 5 (greatest alignment). Scores calculated using 15 variables that span trade, investment, people and policy. Tilt represents the difference between the U.S. score and China score. Source: RBC GAM
The U.S. is already actively pursuing this agenda:
The privately held ports associated with the Panama Canal are slated to be transferred from Chinese to American hands.
The increased U.S. interest in Argentina has likely come about in part because China had been deepening its ties to the country. China has made soybean purchases that supplant American production, a deal to settle bilateral trade in renminbi rather than dollars, and billions of dollars of Chinese investments into Argentinean projects.
Mexico just agreed to increase tariffs on China for 1,400 wide-ranging categories of imports, effective January 1.
Canada earlier matched the 100% U.S. tariff on Chinese motor vehicles.
U.S. motivations
What is motivating the U.S. to pursue this new foreign policy agenda focusing on the Western Hemisphere? In addition to securing resources and markets for itself and constraining China, the updated Monroe Doctrine also conveniently aligns with the domestic policy objectives of constraining immigration, clamping down on illegal narcotics and reducing crime.
If Latin America can be stabilized economically and become more politically aligned with the U.S., that should reduce the flow of illegal immigrants into the U.S.
U.S. efforts to limit the flow of drugs from Mexico, Venezuela and elsewhere are direct and clear.
The hoped-for reduction in crime is a second-order condition of the first two objectives. The White House believes that reducing illegal immigration will reduce crime and hopes that the same goes for making illegal drugs less accessible (though there is a risk that higher drug prices then attract more sophisticated and potentially dangerous actors).
Positive implications
From an economic standpoint, this geopolitical realignment might in a best-case scenario create a “Fortress North America” economy. In this economy, Western Hemisphere neighbours become more tightly integrated, achieving something approximating self-sufficiency in the production of critical minerals, oil & gas, copper and lithium, and so on. (It should be noted that tariffing these nations is not the most obvious first step toward achieving this goal, however).
If regime change successfully occurs in Venezuela, that might unleash additional oil production. Venezuela has the largest proven oil reserves in the world and is a member of the Organization of the Petroleum Exporting Countries (OPEC). But due to a combination of sanctions, decaying infrastructure, capital flight and the atrophy of technical skills, it has plummeted from producing more than three million barrels of oil per day in the early 2000s to around one million barrels per day today.
While properly rebuilding the industry might take decades, it may be possible for an extra half million barrels per day to be added in a relatively short time frame. Lower oil prices would help inflation and affordability worldwide.
If the U.S. reduces societal damage from illegal drugs, that would be a positive. Mexico and a handful of other countries would also benefit if their drug-manufacturing industries were undermined.
It may be positive if the new U.S. stance results in greater scrutiny of Russian and Chinese investments into these markets.
Negative implications
On the negative side, there is the distinct risk that the U.S. is repeatedly sucked into various geopolitical quagmires across Latin America. In the early-20th century while operating under the Roosevelt Corollary, the U.S. at various points occupied Cuba, the Dominican Republic and Haiti, participated in the severing of Panama from Colombia and repeatedly sent troops into Nicaragua and Honduras.
By concentrating its power in the Americas, the U.S. will exert less control over the rest of the world. This is an opportunity for competitors such as China, Russia and Middle Eastern actors to strengthen their own influence.
By shifting to a managed trade environment with cliques of nations separated by tariffs and sanctions, the process of deglobalization accelerates. This in turn will lead to increased inflation and decreased economic growth.
The rest of the Americas suffer reduced freedom as the U.S. potentially seeks to corral them. A likely implication is losing unencumbered access to Chinese products and markets.
For Canada specifically, the goal of reducing reliance on the U.S. by pivoting to China is in doubt, depending on how hard the U.S. pushes to erect a China shield. The U.S. may involve itself more in matters of Arctic governance, implicitly reducing Canadian sovereignty in the north. Conversely, it is an important positive that prior U.S. aspirations regarding Greenland and Canada were not repeated in the document.
-EL
Policy uncertainty by sector
The theme of policy uncertainty has been a central focus over the past year in the U.S. given the many large and abrupt policy changes that have taken place. Policy uncertainty was incredibly high in the spring, before retreating to still lofty levels (see next chart). It is an important subject, as a high degree of uncertainty can discourage risk-taking activity in the economy and markets.
U.S. economic policy uncertainty is declining
As of November 2025. Shaded area represents recession. Sources: Economic Policy Uncertainty, Macrobond, RBC GAM
What has gone less remarked is that it is possible to disentangle this policy uncertainty into its component parts (see next chart). This is to say, it is possible to identify what specific public policy subjects are deemed especially uncertain.
Trade policy stands out in U.S. Categorical Economic Policy Uncertainty (EPU) Indices
As of November 2025. Sorted by index level in descending order. Sources: Baker, Bloom & Davis, Bloomberg, RBC GAM
On this front, trade policy uncertainty remains at the top both on an absolute basis and in terms of the number of standard deviations above normal.
It is interesting to observe that next on the list are entitlement programs and health care. This makes sense, as Medicaid benefits were tweaked lower with the passage of the One Big Beautiful Bill Act, and certain health insurance subsidies are also vanishing. This is a time of turmoil for the sector. There is a fierce political debate as to whether to reverse some of these developments at a later date – the definition of policy uncertainty (see next chart).
Health care sector remains in turmoil
As of November 2025. Sources: Baker, Bloom & Davis, Bloomberg, RBC GAM
Uncertainty regarding the path forward for monetary policy has declined now that the Fed did indeed cut rates in recent months, but it remains fairly high (see next chart). This makes sense for multiple reasons:
There is a significant divide on the Federal Open Market Committee around whether to continue monetary easing in 2026 or to stop.
It isn’t yet known who the next Fed Chair will be.
It is unclear how politicized the Committee could become in the future.
Uncertainty around monetary policy remains high
As of November 2025. Sources: Baker, Bloom & Davis, Bloomberg, RBC GAM
On the other hand, it is notable and initially a bit surprising that policy uncertainty around financial regulation has declined and is currently considered to be quite low (see next chart). Isn’t this a busy policy space given an active deregulatory push?
Yes, but perhaps the point is that there are few surprises on this front. The path forward is relatively clear, it is seemingly being handled by technocrats rather than the president and there is not a loud opposition muddying the water.
Uncertainty around financial regulation is low
As of November 2025. Sources: Baker, Bloom & Davis, Bloomberg, RBC GAM
-EL & AM
Continued Chinese housing weakness
China's housing market was once a key driver of the country's economic growth. But the boom turned to bust in 2022, snuffing out that support. It is not a coincidence that the country’s economic growth rate has slowed over the intervening years.
Has the property market now retreated to the point that it is again on stable ground? There were briefly green shoots a year ago that ultimately withered. Alas, in our opinion, the correction is still not yet complete.
There are quite a number of factors that support the view that China's housing weakness will continue in the near term. The first is that the country’s real estate sentiment index remains negative and recently took a turn for the worse (see next chart).
China’s real estate climate is at a historical low
As of November 2025. Sources: China National Bureau of Statistics (CNBS), Macrobond, RBC GAM
After the aforementioned false dawn a year ago, Chinese residential property prices are again falling fairly quickly on a month-to-month basis (see next chart). This arguably makes sense, as affordability remains quite poor.
Home price-to-income ratios have improved but remain extremely stretched for Tier 1 cities at above 10x.
For Tier 2 cities this is still above 8x – also quite challenging.
Rental yields have improved but remain not much over 2%, arguing it continues to make more sense to rent than to buy.
China’s home prices continue to fall
As of November 2025. Sources: CNBS, Macrobond, RBC GAM
Reflecting still-difficult conditions, developers continue to scale back their land purchases (see next chart). Similarly, the amount of floor space newly started, under construction and completed are all still trending lower (see subsequent chart).
Property investment in China continues to decline
As of October 2025. Sources: CNBS, Macrobond, RBC GAM
China’s housing market remains depressed
As of October 2025. 12-month moving total of floor space in square metres completed/under construction/newly started. Sources: CNBS, Bloomberg, Macrobond, RBC GAM
Home sales are also lower, though this is entirely contained within pre-sales (see next chart). Completed apartment sales are low but rising slightly – a small positive. Given a shrinking population, the demand for new homes is unlikely to be especially strong even after the market has returned to equilibrium.
Decline in home sales in China driven by drop in pre-sales
As of October 2025. Sources: CNBS, Macrobond, RBC GAM
Fundamentally, there remains a massive inventory imbalance between floor space for sale (high, rising) and floor space sold (low, falling). This excess will have to clear before home prices can start rising in earnest (see next chart).
Housing supply in China remains elevated while demand sits at multi-decade low
As of October 2025. Sources: CNBS, Bloomberg, Macrobond, RBC GAM
Reasons for cautious hope
Although Chinese housing should remain soft for the next few years, the situation is improving on a few fronts.
While home prices are falling, prices in Tier 1 cities are again rising, and prices in Tier 2 cities may be stabilizing. It is the lower-tier cities where home prices continue to suffer, and these drag down the average (see next chart).
Home prices rising again in Tier 1 cities
As of October 2025. Sources: Bloomberg, Macrobond, RBC GAM
Providing some support to future housing demand, mortgage rates have fallen significantly over the past several years and could fall modestly further. Similarly, as Chinese home prices have fallen, the rental yield has increased slightly (see next chart). The latter is now the highest in eight years – good news for home buyers – though renting remains cheaper and the rate of return is still insufficient to excite investors unless it were paired with substantially rising home prices.
China’s mortgage rates have dropped significantly since the start of housing crisis
Chinese government bond yields as of 12/12/2025, weighted average mortgage rates as of Q3 2025. 6-city average rental yields (October 2025) measured as the equal-weighted average of rental yields in Beijing, Chengdu, Guangzhou, Shanghai, Shenzhen and Tianjin. Sources: People’s Bank of China (PBoC), Centaline Property Agency Ltd., Bloomberg, Macrobond, RBC GAM
Builders continue to struggle. Two-thirds of China’s top 50 builders have missed a bond payment at some point in the last several years. A number have restructured or even received liquidation orders, meaning they are being wound down.
None of this is great, but the situation is far less dire than it was several years ago. High-yield credit spreads related to the Chinese property market peaked at more than 6,000 basis points, versus around 1,000 today. This implies that the level of danger has declined approximately sixfold. It is no longer likely that the housing bust will induce a full-scale Chinese financial crisis, whereas that was a real concern for several years.
While China’s shrinking population acts as a governor on housing demand, it should not be presumed that the country won’t need additional homes in the future. Why?
Urbanization continues, bringing new people to China’s cities.
Much of the existing housing stock is relatively low quality and the growing middle class will want better.
Homes naturally decay over time, requiring eventual replacement.
Household sizes are shrinking (globally!), resulting in the need for more housing units per capita than before.
As we wait for China’s housing market to turn the corner, the country is lucky to have other growth drivers providing an important partial offset, headlined by impressive innovation across a range of technologies.
-EL & VL
Canadian corporate tax rate
There has been a great deal of grumbling about Canada's uncompetitive tax regime relative to the U.S. in recent years, spurred by Canada’s anemic productivity growth.
Seemingly contradicting this, Canada's November budget bragged that companies in Canada now enjoy the lowest marginal effective tax rate on capital in the G7.
What to make of this?
Defining METR
Let's start with what the marginal effective tax rate (METR) is useful for and how it is calculated.
The primary purpose of the METR is used to assess whether it makes sense to invest one more dollar of capital into a business – to expand existing operations.
The METR is a highly stylized calculation that tries to create a like-for-like comparison across countries of what the tax rate would be on the profits generated by that next dollar of capital.
The calculation includes not just the corporate income tax rate, but also the impact of depreciation rates, tax credits, payroll taxes, the effect of sales taxes on inputs and so on.
To arrive at a coherent and comparable number, it is necessary to make a lot of very specific assumptions:
Each business sector is assumed to have identical capital-to-labour ratios across countries (to help in calculating how important a payroll tax is, for example) and the same capital intensities.
Businesses are assumed to already be operating profitably and efficiently, meaning their capital stock is already optimized to the point that they are indifferent to acquiring more capital. That’s why the calculation assumes that the return on capital for that next marginal dollar is a mere 7%. (It is necessary to assume a particular return on capital because otherwise there would be no marginal profit number against which to calculate the taxes deducted).
The METR calculation even has to assume companies maintain a particular distribution between debt and equity financing so as to be able to convey the consequences of different interest deduction regimes, and the effect of varying tax rates on dividends and capital gains.
Assessing Canadian tax competitiveness
Again, according to Government of Canada, Canada has the lowest METR in the G7 at 15.6%. However, it isn’t the only entity that attempts to measure such things (see next chart).
Using slightly different assumptions, Mintz and Bazel generate their own estimates. They criticize the Government of Canada for excluding banking & insurance plus mining, oil & gas from the calculations altogether – key industries for Canada. They also add additional considerations including the effect of property taxes, resource royalties, carbon taxes, real estate taxes and so on.
Despite all of the differences, Mintz and Bazel also find that Canada has the lowest METR in the G7 and arrive at quite a similar number of 15.8%.
Does Canada have the lowest marginal effective tax rate (METR) in G7?
Canada’s Budget METR is based on the 2025 Federal Budget. Canada’s METR reflects pre- and post-Productivity Super Deduction (15.6% and 13/2%, respectively). U.S. METR of 17.6% includes OBBBA. Mintz and Bazel’s METR calculations are based on 2020 data for all 57 countries ex Canada and the U.S., which is based on 2025 data post-PSD and OBBA. OECD’s METR calculations are based on 2024 data. Sources: OECD Corporate Tax Statistics 2025, Canada 2025 Federal Budget, University of Calgary School of Public Policy, RBC GAM
The OECD, however, begs to differ. They estimate that Canada’s METR is only sixth best out of the G7 nations. (The data is from 2024 – one might posit that Canada would improve to fifth place after its recent budget initiatives.) Interestingly, Canada’s rate barely changes (16.1%) – it is the other countries that are lower in the OECD’s version.
One key methodological difference is that the OECD assumes the same fixed sector weights for all countries. This might sound silly since in reality some countries have significantly different sector skews than others. However, if the idea is to do an apples-for-apples comparison of whether an average business would prefer to operate in one country or another, it isn’t fair to portray one country in a better light than another just because it happens to have a lot of businesses in a lower tax sector.
Just to add to the chaos, one can argue that if the goal is to determine what countries are most attractive to a newly entering business, we should care about the overall tax burden, not just the burden faced by an existing business on their marginal dollar of capital.
The average effective tax rate on capital (AETR) is an alternative measure that seeks to capture this. The calculation is strikingly similar to the METR except a much higher return on capital is assumed (22%). This makes sense since we are now focused on the entire profitable operations of a business, not just their bare-bones next-dollar profit. Canada is only fourth best out of seven according to this metric.
For that matter, some businesses are not especially sophisticated in their assessment of the tax environment and may use the official corporate income tax rate as a proxy when deciding where to operate or whether to expand. Canada ranks third best by this metric (see next chart).
Canada’s ranking varies depending on the tax measures
AETR reflects OECD’s measure of average effective tax rate as of 2024. CIT reflects OECD’s measure of corporate income tax rate as of 2025. Sources: OECD Corporate Tax Statistics 2025, RBC GAM
AETR reflects OECD’s measure of average effective tax rate as of 2024. CIT reflects OECD’s measure of corporate income tax rate as of 2025. Sources: OECD Corporate Tax Statistics 2025, RBC GAM
Tax bottom line
The bottom line is that Canada ranges between best and sixth best out of seven, depending on what you measure.
If the question is whether a business would want to operate in one country or another, Canada is only average (AETR matters most).
If the question is whether an existing business is well supported if it is considering expanding within the country it is already in, Canada looks pretty good (METR matters most).
We have constructed a very simple average corporate tax competitiveness metric that gives an equal weight to the three METR measures (collectively one-third), the AETR (one-third) and the corporate income tax rate (one-third). The result is that Canada finishes first overall in the G7, but by the slimmest of margins (see next chart).
Canada edges out U.S. in average corporate tax competitiveness
Weighted average based on marginal effective tax rate (METR) as calculated by Mintz and Bazel, Canada’s 2025 Budget, and OECD; average effective tax rate (AETR) as calculated by OECD; and corporate income tax rate (CIT) as calculated by OECD. Sources: OECD Corporate Tax Statistics 2025, Canada 2025 Federal Budget, University of Calgary School of Public Policy, RBC GAM
In all of these numbers, let us not lose sight of a key question: if a business is deciding on the U.S. versus Canada, it probably isn’t sufficient for Canada to have a tax rate that is very similar to the U.S. The U.S. scale advantage is such that Canada would probably need a substantially lower rate to be competitive.
An additional thought: Canada’s productivity shortfall is clearly not entirely rooted in taxes. As we have argued in the past, Canada’s productivity underperformance vis-à-vis the U.S. is a complicated combination of public policy shortcomings (arguably more red tape than taxes), acute temporary factors (such as the immigration surge and more working from home in Canada post-pandemic than other nations), an insufficiently risk-embracing culture, an economic structure that happens to tilt toward some sectors with low productivity and/or low productivity growth, and complacent businesses that invest radically less capital per worker than they probably should.
-EL & SK
