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Hello everyone, welcome to Economic Impact. It's September 2nd, 2025, and as usual, I am with our friend and Chief Economist Stéfane Marion. Hello Stéfane.

Hi Denis.

Well, it's been a while since the last meeting, but you know, things are pretty good on the stock market.

It's been a while, but it's been eventful and one thing that you know not too many people expected, myself included Denis is the great performance of global equity markets up 10% year to date. Every region of the world is delivering positive returns. Note Denis that the second-best performing index among the main regions is the Canadian one, up 15%. So, again, we weren't expecting this, but I have to say, Denis, people were saying there's going to be a tariff war. It hasn't been a tariff war. It's been unilateral U.S. protectionism because U.S. is imposing tariffs, but there's no retaliation or very limited retaliation from other parts of the world. So, it's not your textbook tariff war. Maybe that explains the perspective, you know this performance of the stock market saying well maybe the global supply chain is not entering tremendous uncertainty, which I'm not certain about.

Yeah, at the same time, when you're looking at the economic news, it's kind of disturbing because you look at the GDP in Canada and it's not that good.

OK, so based on current news, can you justify 15% for Canada? GDP is not doing so well. I know a lot of people are saying, well, it's proven to be resilient. GDP is just down 1.6%. Consumers are still spending, but gross domestic income, which looks at all the revenues generated in Canadian economy, that was down almost 3%. That's the worst we've seen since COVID. So obviously, Denis, if people have less money and corporations are generating less revenues at this point in time, you could probably say that this might lead to an underperforming economy yet in the second half this year. So, Q2, there's not much of a rebound in place, I think for the second half of the year at this point in time. 

And at the same time, we see that the labour market is not that great now.

No so the GDI is the most correlated one with labour markets. So, less revenues in economy, generally speaking, that means corporations will invest less and they won't hire as much. So, diffusion unemployment right now, there's only 35% of corporations that are actually hiring, so below 50%. It's a figure we haven't seen outside periods where the economy is still in contraction. So again, great performance of the stock market, but it's mostly based on expectation as opposed to current news, which is not so good, but it does open the door for rate cuts by the Bank of Canada.

OK. But talking about expectation, you know, since the last time, Mr. Carney is doing a lot of announcements, you know, to promote and to give more money to the economy and the investing and a lot of sectors and it's quite unusual too.

Yeah, it's automatic about making Canada investable again because we've had no growth in business investment for the past 15 years. So, one thing, one of the big news, that’s been announced since we last met: deregulation. So, Mr. Carney is looking at this, looking also at valuing, putting more emphasis on natural resources, perhaps selling LNG to Germany, for example. But importantly, going forward for the stock market, the new commitment to spend up to 5% of GDP and defence spending, something we haven't seen since the Korean War, is a big deal Denis because it probably leads to a period of reindustrialization for the Canadian economy. So, in essence, that would mean that we transform our resources here in Canada and manufacture some of these resources. So, that might be why the stock market is performing so well as opposed, you know, to just, you know, current news. 

And maybe Mr. Carney was listening to you, because way back then, you know, you showed us a slide where, you know, the Canada industrial base was one of the lowest from the country.

So, the message we've been conveying to the authorities is that you can't be the 7th largest economy in the world and you're having a manufacturing sector that's 18th in the world, which means you're not, you're basically exporting raw resources to the rest of the world and you're shrinking your manufacturing sector. So, this is why there's a made in Canada solution to reindustrialize Canada. And maybe we can leverage what we want to do on the military side to promote an increase in manufacturing. Our manufacturing sector is just too small. If we can get a system where we can get a procurement to Canadian industries to boost their defence spending, that could be good for the Canadian economy and sustain the valuation of the stock market.

And that's probably what the stock market is telling us right now.

There could be some of that.

Maybe.

Yeah.

OK, now we need to talk about tariffs because it's, you know, we're talking about that everyday almost. What's the impact of the tariffs?

So, again, it's not a tariff war. It's unilateral protectionism. There was a meeting between China, India, and Russia this weekend. They want to change the supply chain. At the end of the day, I understand that the Q2 earnings season was better than expected globally and in the U.S. Denis. But note that it's only in the second quarter, at the very end of the second quarter, June to be precise, that the U.S. started collecting tariffs on a significant scale and it's increasing now. And so, the impact, the true impact of tariff collection, it was more likely to be observed in the third quarter, in the fourth quarter of this year as opposed to the first half of this year where they were announced, but they weren't collected.

And for the inflation, you know, we're expecting inflation to rise its state quite at the same level, you know, 3% for a while.

So, there's a belief in the market there and there's been tariffs. There's been no impact on inflation. Well, it's only starting now Denis and the latest news on inflation suggests that, the July numbers suggest that, you know what, over the past three months, core inflation is running at 3%. The 12-month change is actually accelerating at this point in time. So, you're well above the target, you know, normally, the 2% target that, you know, the central banks are looking at. So, it's going to make it hard for the Fed to cut rates. They will be cutting rates in in the weeks ahead, but how much can they cut when inflation is accelerating?

Yeah. And at the same time, you know, we're seeing peak in long-term rates.

So, you're absolutely right. If the bank, if the central bank cuts rates and the long end of the curve becomes de-anchored because they're not sure about, you know, whether the Fed's going to be politicized and what type of, there's a lack of discipline in government spending right now. What is unusual, and you have to go back, way back Denis to see the last time that the Fed was reducing interest rates and yet the 30-year bond yield is moving higher. And that's a global phenomenal: lack of discipline at the fiscal level in many countries, but the U.S. running a deficit of 6%. This will be important to watch Denis. This will be a key driver for financial markets in the months ahead.

Then we can see a steepening of the yield curve. 

Definitely a steepening under these circumstances. You're right.

OK, before the end, we need to talk about currency, especially the greenback.

So, you're talking about a potential steepening of the yield curve, maybe long-term rates moving higher at a time where 30% of the entire U.S. bond market is held by foreigners. Denis, if they're skeptical about your outlook about inflation, your commitment to keep inflation at 2%, you're going to shun the U.S. dollar. It's exactly what's happening right now. And U.S. dollar at a cyclical low. I think there’s scope for more downside, Denis, at the end of the day. So, that would mean, yeah, you know, the price of U.S. dollar alternatives be it gold alternative assets, even commodities, might be a lot more resilient because of this U.S. dollar depreciation. So, the point being Denis that we haven't seen the last of this tariff policy on the impact of financial markets. So, we've had no volatility or very little volatility this summer. I can't guarantee you the same for the next few weeks, next few months. So, let's be prudent. That's seasonally, that's not an easy season for financial markets or the stock market. The long end of the curve will be important to watch.

OK, Stéfane, our last meeting you were quite optimist. Are you still very optimist?

I'm, you know, from a Canadian perspective, I'm still optimistic in a sense that Ottawa has finally deployed policies that might be more structural in nature and good for the economy. But this type of stimulus won't come before 2026. So, I'm optimistic that we're going in the right, moving in the right direction, but doesn't mean there won't be any volatility in the weeks and months ahead. I need to tame the long end of the curve for global financial markets. And then Ottawa, I need to deliver on the fiscal plan and the budget won't come before later this fall.

Well, thank you, Stéfane, and thank you all of you who are listening to us. But above all, don't miss our next meeting early October. Thank you.