Hello everyone. Welcome to Economic Impact. Today is May 2nd, 2025
and as usual, I am with our Chief Economist, Stéfane Marion. Hello, Stéfane.
Hello, Denis. It's been only two weeks since we saw each other, but
it's been volatile in markets and actually, outside the U.S., people
remain pretty confident. So every asset class, pretty much every asset
class is up year to date now. It's a big change from early April,
except one.
Except one.
Except one, which one?
South of the border.
It's U.S. equities, are still down 8% year to date. Still the
uncertainty about the global economy, and particularly what the White
House wants to do with this whole tariff structure.
And talking about tariffs, where are they now because they move
quite a lot. The last time we were around 32% and now I think we're a
little bit down, but not as much as probably we would hope.
I can tell you that, in my entire career, I've never seen tariffs
move like that or moves like that. We went from 2 to 5 to 10 to 7 to
36 to 24. Now we stand at 23% as of today. So down from 26%, which was
where we were just two weeks ago, but still overly punitive for the
U.S. economy. So, I think that this needs to be settled. Everybody
thinks it will come down, but how soon will they come down will
dictate the U.S. economic performance and the performance of U.S. profits.
Yeah, because those tariffs are still pretty high, now we're
starting to talk more about stagflation. And the ISM showed that
inflation expected is high, but productivity is down too at the same
time, which is not good.
Yeah, many corporations don't even provide guidance right now
because they don't know what the tariff structure will be just in the
next few weeks. So, what you see in the U.S., GDP was negative in Q1
for the first time in over three years. In manufacturing, production
is down, which echoes what we saw on GDP. But notice Denis, the red
line, prices are up. That could squeeze your profit margins. You're
selling less and your input prices are rising. So, will you be able to
sustain your earnings guidance under these circumstances? People don't
know. Corporations don't know, they're dropping earnings guidance. And
unlike the pandemic episode, if you want, the government is not
sending cheques to households to allow prices to be fully reflected on
the CPI. So, this means uncertainty about profit margins and profit
growth and obviously the performance of the S&P 500.
Yeah, today we had the employment numbers in the United States.
Quite stable, despite everything we saw the past few weeks.
And
the White House was complacent and they're saying that this is the
proof that tariffs are not hurting the U.S. economy. I think we have
to be careful with that assessment Denis because historically,
corporations don't layoff people as soon as production comes down.
They wait a few months to say, is it improving or not? So, what we're
seeing in the U.S. is, yes, the unemployment rate has been stable
since the second half of last year, but will it be the same in the
next few months? I would venture to say that, if production does not
pick up, and I'm not so sure it will pick up, the unemployment rate is
likely to go up in the second half of this year. Now, from the Federal
Reserve perspective, can you really cut interest rates if inflation is
still rising? That's a big unknown. The market is very aggressive
right now, pricing in four rate cuts for the Federal Reserve. But if
it's a stagflationary component to U.S. economic growth they won't be
able to cut rates as aggressively, and that could fragilize the stock
market. So, this is very important. In the next few months, will the
U.S. see rising unemployment rates? And that will be the critical
element that will allow the president to be a lot less aggressive on tariffs.
Yeah, but he was happy this morning for sure.
Yes, but that means he can remain aggressive on tariffs, so I want
him to be less aggressive.
Which is bad for that number.
So, exactly. So, the unemployment rate will be critical in the next
few months.
If we come back in Canada. In Canada, you know, we had also the GDP
number. GDP number is positive, you know, compared to the U.S., which
was negative, but it has a bad trend right now.
So, yes. So, we're not going to be down on growth in Q1. So that's
great news when you consider that. However, so we have positive
growth, lackluster growth, you know, maybe 1.5%. But notice Denis that
population is going at 2.8%. And this is the issue from a Canadian
perspective: the blue line is supposed to grow faster than the red
line, not the other way around. So, this is a critical development
that needs to be addressed by our politician. We just had an election
in Canada. We have a new Prime Minister that said that, you know the
economy is a priority for him, so we need to fix this. Absolutely.
This is not normal. We need to put policies in place that will foster
an environment where the blue line grows faster than the red line.
And then, you know, talking about that, we need to talk about
investment because at some point, you know, we still have that lag
between the U.S. and Canada in terms of business investment, and that
has to change.
So we need.
Mr. Carney has to tackle that one.
So basically, what you're telling me, we need to improve
productivity and we can't just grow on population growth. And that
means we need to bring business investment. I think you're right on
that one. You're absolutely right on that one. And we haven't had, you
know, business investment that has been stable or stagnant for the
past decade. And that's unprecedented in Canadian history. So, the
U.S., you know, business investment is more than doubled over in the
U.S. over that period. So, this is the critical element. This needs to
be, this has to be a priority for Mr. Carney. So he won't be staying
home very long. So, this is a priority.
He's going to the White House next week.
You're right. So that's number one. So, in order to grow business
investment, you need to attract or retain investment in this country
or attract foreign direct investment in Canada. So, I need visibility
on my access to the U.S. market. So that's point number one. You're
absolutely right. The other one that we spoke too often is
domestically, we need to abolish these interprovincial trade barriers
in order to foster East-West production or trade.
Yeah, and we have to react on that because we keep talking about it,
but we haven't seen anything yet that is coming and saying we drop
that. We drop that. No, it's just words right now. And election.
You're right. And with the currency that continues to appreciate. So
basically the Canadian dollar is appreciated more than tariffs have
increased on Canada. So it doesn't really help our businesses. So not
only do we not know if we have market access to U.S., the currency is
appreciating, which is not necessarily great for earnings. So, this
needs to be settled, and if the currency appreciates, why don't we
show a little bit more, let's be a little bit more pragmatic. Let's
reduce the regulatory environment because, you know, the Prime
Minister says we need to spend more to invest more in the country, but
it won't help if you have this very prohibitive regulatory environment
that needs to be tackled. And, corporate income taxes as well as
energy policies is a big unknown. So, these are all priorities that
need to be addressed. Unfortunately, you don't have much time. So that
needs to be addressed over the next three to six months.
Yeah. And we know that corporations will probably go South of the
border because of everything going on right now. They want to produce
product there to get access to that big market. Then having those
foreigners coming to Canada, we're going to be, or we're going to need
to be very, very attractive. Then he mentioned it, fiscality, you
know, regulation, we need to do that fast. And you said it, Mr.
Carney, will have a big agenda in the coming weeks if we want to see
that curve moving up for the first time since a long period of time.
You're right that you can't coast just business investment. You
know, the private sector just with government spending. It's more than
that. It's the overall environment, the business environment. Are you
business-friendly? Are you open for business or only so? So, yes, the
priority is, as you said, renegotiate USMCA and tackle all the
regulatory environment that reduces business investment in this
country. And who knows Denis, if you do all this, I'm optimistic that
they would reduce the valuation gap between the S&P TSX and the
S&P 500. I think there's hope to be optimistic provided that the
Prime Minister acts swiftly on all of these fronts.
So what do we do as investors? You know, we've been very prudent. We
ask people to be very prudent, rightly so. Now we're seeing in some
assets are doing better except the U.S., but we know that never good
to short U.S. because that economy is very resilient.
You're absolutely right. However, I would say that there's probably
a, you know, investors are probably looking at, is it normal to deploy
so much capital in the U.S. if I have alternatives elsewhere? So, I
think Europe is starting to provide an alternative. I want Canada to
provide an alternative. So, from a relative performance standpoint, I
still think that the U.S. is likely to underperform unless Mr. Trump
backs down very aggressively on tariffs. So, but having said this,
Denis, we have yet to see this happen. So, for that reason, still
prudent in terms of our asset mix at this point in time.
Good. Thank you, Stéfane. Thank you to all of you to listening to
us. And above all, don't miss our next meeting next June. Thank you.
