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Economic Impact

To keep you informed and stimulate your thinking, Stéfane Marion and Denis Girouard take a look at economic news and share their perspectives in our monthly informative videos.

Hello, everyone. Welcome to Economic Impact. Today, it's June 11th, 2025 and as usual, I am with our Chief Economist, Stéfane Marion. Hello, Stéfane, a little bit different today, a lot of structural change and we want to talk about it.

Well, we hope to keep people interested, but you're absolutely right that we'll mix a bunch of stuff that's cyclical versus structural, which makes the story more interesting, I think. But let's start with the cyclical dynamics that we've seen, we're seeing in U.S. so, well, we've said many months ago that, maybe US corporations would start reacting negatively to the uncertainty created by the tariff structure in the U.S.. And what we've seen in the latest jobs report in the U.S. is that corporations are still hiring if you look at the redline Denis, but they're not hiring full time. So, they're not committing their capital full time, whether it's human capital or physical capital, not investing right now. So, it's not just Canadian corporations that are struggling to understand the new dynamics, but we're seeing it in the jobs report. So, this sets the stage for slower growth in the U.S. in the second half of this year.

This is what you call uncertainty for the future. And you don't want to have a full-time employee, you prefer to have a part-time employee that, if things are going bad, you know, it's easier to lay off people.

You don't want to commit until you actually understand what your business model will be like say the next six months or next year.

But the equity market is doing well, not new high, but despite of that, you know there's good news.

So, let's put things in perspective. You're right, not doing badly in recent weeks. It's a recovery, but U.S. stock market is one of the only ones that's not back to its previous highs. So, there's still this level of uncertainty created by, there's high valuation in the U.S., we're talking about structural adjustment to the supply chain. Companies are not committing capital right now. So, the U.S. market is coming back, don't get me wrong, but it's one of the few markets that's not back to an all-time high.

Yeah, but that performance is probably only linked because of U.S. investors. Because when you look at the greenback or the U.S. dollar, it's not doing well at all and keeps going down.

So, it's been driven by U.S. investors, the recovery, because foreign investors, you're absolutely right, they're still shunning U.S. assets, whether it's the U.S. bond market or U.S. equity markets. It's not that they're not buying, but they're not buying as aggressively. And that's clearly apparent on the exchange rate in the U.S., which is struggling this quarter. It's one of the largest depreciations in over five years, down 3.5%. So, it means central banks are less active in buying U.S. assets, but also private investors. So that's, you're absolutely right, you know, the perception of U.S. investors versus U.S. economy explains why the U.S. stock market has struggled so far this year.

Yeah. And if you go up north in Canada, the story is totally different. Our stock market is at a new high right now.
Despite the fact that we have a 7% unemployment rate now and which is a massive difference with the U.S. at 4.2%. The stock market in Canada is at new highs. And Denis, I think that's a reflection that everybody understands that we are challenged cyclically right now with the uncertainty on tariffs. But at the same time, what we understand also is, since the federal election, the Prime Minister, well the throne speech was actually read by King Charles. But there's a commitment from the federal government to focus on the Canadian economy on the scale that we haven't seen in many, many years. So, people are saying, well, if I don't really like U.S. assets, I don't understand. I clearly understand that the federal government in Canada wants to be pro-growth. And that's, you know, there's, you know, there's this wind of optimism that is blowing north of the border.

And for this time around, it's not just oil and gas that's doing well, it's a bit widespread in the economy.

Yeah, so when we saw the stock market doing very well in 2000, it was mostly the energy sector. But, with this commitment of the federal government to reindustrialize the nation, that means, you know, more corporate lending, attracting capital, we're open for business. Then obviously, under these circumstances, you can understand that, you know, the financials of the Canadian banks are at a new all-time high. Having said that, it's still not a one trick pony with only the banks. We have industrials doing well, materials, consumer discretionary. People believe that there will be new structural policies deployed in Canada to close the valuation gap that we've endured with the U.S. for over a decade. So again, Denis, this is a structural change. Understand, we are cyclically challenged. Let's be careful in the months ahead. But structurally, there's something different happening in Canada. That's how powerful this can be when policymakers decide to become pro-growth.

Yeah, and the consequences of that, Canadian dollar is going higher because now you have probably Canadian investors, but foreign investors buying in Canada.

Well Denis, that's the flip side. I think if people are interested in your assets, the currency will do well. So, the Canadian dollar's appreciating about the most in four years. So, we were concerned earlier this year about Canadian dollar depreciation. But with the throne speech that we saw, the commitment to be pro-growth for the Canadian economy, these are words until now, but maybe the actions will speak for themselves in the next few quarters, but this is very powerful and it's driving a stronger Canadian dollar. So, might be a source of frustration for exporters, but clearly there's demand and that's an improvement in our terms of trade right now.

And you know, on the same path, Mr. Carney says that I want to invest more money in defense and, and that's kind of good military expenses because you have to build the economy around that. But it's not only building tanks, and it's helping the whole economy.

So, the commitment is to grow the economy, but at the same time to be an active participant within NATO because right now we have the lowest military expenditure in the G7, which means that we are struggling as a nation. Now, the commitment to increase our military complex is very, very important. So, to me, that speaks volumes to the government's commitment to do so. But if you do so, and with a Buy Canada Act, all of a sudden, I have more leeways to improve our industrial structure.

And the next slide will show that we need to invest in our economy. You know, you've been saying that for months and years now. And when you compare ourselves, there's a lot to do.

Oh, Denis, you know, on manufacturing, we've been atrophying our manufacturing so much that, you know, now for the first time ever, our manufacturing sector is smaller than Ireland, which is a population of 5,000,000. So, we need to do a lot better there. And I think that I can be hopeful that with this new procurement system, we can actually kick start manufacturing, and that means reindustrializing our nation.

And you've been discussing that in the past. You know, there's so much regulation in Canada. But once again, the next slide, you know, speak by themself, we need to do something.

It's a big slide, but all you need to know, Denis, is that the federal government is responsible for 320,000 regulations, in manufacturing alone at 110,000. So, it doesn't cost much for the federal government to show the example and say, in order to deploy private capital in Canada, I'll make it easier. I will slash the regulatory requirements that we have, which are one of, some of the most punitive in the industrialized world.

And that's excluding provincials and municipalities.

No provinces, no municipalities on that. So, but if the federal government shows the example, all of a sudden, Canada becomes more investable. So, to me, that's a structural change that would be extremely conducive to this growth and evaluations, the discount that we've been dealing with for the past decade can go away. This is, you know, structurally speaking, as I said, I mean, these are probably the most, the best news we've had from Ottawa. If we can tackle regulations as well as the other commitment that you have, I can only be more optimistic for our country going forward.

Well, Stéfane, this is a change from the past few months and not only few years about Canada, but it's the first time we were seeing your optimism about Canada. And it seems that also, you know, the investors and the foreign investors are, then more to come I believe.

The next challenge Denis is the upcoming G7 meeting. If Mr. Trump, if Mr. Carney can show that he gets along with Mr. Trump and then it looks like we can commit to a trade agreement in the next few quarters, I think people will become even more interested in Canada. So, you know, the words have been put out there. Now we need to see the actions and if there's a commitment to come up with these actions and after G7 meetings, all of these things could make us even more positive for Canada so hopefully when we see each other later this summer, we'll have better news for the Canadian economy. But things look up right now despite the fact that we are cyclically challenged, there's good news, structurally speaking.

Well, thank you very much, Stéfane. Thank you all for listening to us and we'll see you in a few weeks. Thank you.

5 • 4 • 3 Market Outlook

5 minutes, 4 graphs, 3 key takeaways! Discover a fresh focused quarterly review of markets, the economy and investments with expert Louis Lajoie from our CIO Office.

Hello everyone. Today, June 5, we're going to take as usual just a few minutes to look back on what turned out to be quite a spectacular quarter and then look ahead and try to shed some light on what may lie ahead, always with a good dose of humility given prevailing uncertainties. 

What made last quarter so spectacular was obviously the bombshell tariff announcement of April 2, which sent U.S. equity markets falling by about just 10% in just two days as recession risks were actually doubling, which was definitely a non-sustainable situation, which effectively lead, just a week later, to a 90-day pause and a substantial rebound. This was actually the third best day for U.S. equity markets in the last 6 decades. But behind that there was an escalation in tariffs with China, which was equally unsustainable and also lead ultimately to a 90-day pause this time in May, which brings us to today with recession risks still higher than usual but somewhat stabilizing as equity markets have recouped most of their losses.

When we look at what this all means for a globally diversified portfolio in Canadian dollars, this all means that we are essentially back to where we were last February. That is marginally positive, somewhere between 0% and 5% depending on your risk profiles, thanks to equity markets outside of the U.S. which continue to do better this the last few months, notably in Canada, but also elsewhere overseas. So, a lot of volatility, but ultimately not too much damage down the road. This was largely the expectations as we entered the year and that remains our expectations as we look forward, although there is obviously still potential for surprises. Specifically, what we'll be looking at is the actual impact on the economy of all that has happened since the start of the year, because for now, the impact is mostly being felt in sentiment surveys, for instance, consumer sentiment, which is according to some surveys, near its weakest in the last 35 years, which is quite a contrast with the actual state, the concrete data of where the economy is with things like inflation or the unemployment rate, which if you look at the most recent data was anything but dramatic. Now, there are some pockets of weaknesses here and there. We've got to be careful, but overall, nothing overly dramatic. 

For as long as fluctuations in tariffs remain limited going forward and the U.S. administration remains focused on reaching so-called trade deals – and that is in their interest –, odds are that the reconnection between sentiment and reality will happen at a level not overly problematic for the economy and not overly problematic for equity markets accordingly, where we have seen some sort of the same trend with sentiment surveys from investors actually showing the most pessimism in the last 35 years. Ironically, this is typically a sign that the worst is actually already behind us. Now as in any rule, there's always exceptions. So, we've got to be careful here. Equities have rebounded already quite a bit as we've talked about just a few minutes ago. But again, it does suggest that bearing a global recession – and we don't foresee one for now –, odds are that the path of least resistance for equities will actually remain upward for the remainder of the year.

Three takeaways for now. Again, more fear than harm, so far. We've seen markets react sharply to these tariff announcements, with initially consumers, businesses, investors, sentiment surveys plunging. That sent a strong signal to Washington, which effectively changed its tone, a change in tone that remains fragile, much like the economy and it also remains fragile. The coming months will be very revealing on both fronts. We should get more precision as to all the parameters of their economic agenda and the scale, the amplitude of the economic slowdown that will result from these policy changes. Stay tuned, but this promises to be a volatile summer period. But again, bearing a global recession, which we don't foresee, odds are that equities will remain well footed, especially outside of the U.S., which is a trend that we see ongoing for the remainder of the year.

Thank you for listening. Have a great summer everyone, and we will talk again in September.

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