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Hello and welcome to our latest monthly Economic Webcast for the month of August 2025. 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 thinking. Indeed, the title does give you some sense for the direction of travel. And so more tariffs.

As of August 1st, we saw copper tariffs coming on, some other things increasing, including on Canada. Damage is starting to become visible in some of the economic data.

So that's all true. Indeed, that title does reflect perhaps the dominant theme. I should acknowledge, though, that actually the economic damage has been a little bit slower than initially feared. Indeed, some of the tariffs that have come on for August 1st have been a little bit lighter than initially feared as well. So that's not the only way to frame things.

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Nevertheless, very much in focus. Okay. Let's move forward, as we always do.

Report card: We'll start with a report card of sorts. Indeed, we'll start within that with the positive themes, some of the good things going on out there. In fact, I can elaborate slightly on what I just said, which is that the tariff economic damage that we're seeing so far, while real – and again, the emphasis is on so far – is lighter than had been expected, or at a minimum is proving lagged. Initially the models, the forecasts would have suggested, particularly for the U.S., that there might have been considerable economic damage over the last several months.

And we're just starting to get a hint of that, which I'll talk about later. I can say that there are other forces, other headwinds and tailwinds worth thinking about that aren't called tariffs.

So let's also recognize that the U.S. has just delivered some pretty significant tax cuts, including some cuts, that encourage capital expenditures, which we think could be quite important.

00:01:42:14 - 00:02:42:21

There's a positive fiscal impulse, meaning that the U.S. government is spending more money than it's pulling in. Indeed, that is increasing and there's an economic tailwind that comes from that. We think it probably more powerful for 2026 and only a little bit of a helping hand for 2025.

We still think that the negative parts of tariffs, the economic drag part, easily dominates the benefit that comes from the tax cuts and the fiscal impulse. Nevertheless, it’s worth acknowledging that and it does slightly reduce the amount of damage associated with the overall economic picture.

In line with that, the recession fears, while still real – and while we can't completely rule them out – we are still of the view that a recession is likely avoided for the U.S. and indeed for most countries. we don't think that the tariff blow is quite on that order.

I will say as well, for Canada we've seen real damage. More on that a bit later. But actually the Canadian economic damage recently has come in a little bit milder and there has been quite an intriguing debate.

We saw surprisingly heavy damage in the spring for Canada, particularly before we’d actually seen all that many tariffs come online.

00:02:42:21 - 00:03:22:12

The debate was always to the extent that the tariffs that have landed are actually not quite as bad as initially feared, as I'll talk about a little bit later, whether the Canadian economy might manage some sort of rebound later. I'm not sure that's what we're seeing.

But I will say the latest job number as I'm recording this on August 6th – there's one coming in two days that could yet contradict this quite radically – but the one that we've seen, at least, was actually a little bit better. And we've seen a few other metrics, including retail sales that have held up a little bit better as well.

So we're still budgeting for weakness in the Canadian economy, but it's looked a little bit less bad just in the last month or so as well.

00:03:22:12 - 00:04:10:14

On the negative side, new tariffs did come on August 1st. We had the copper tariffs coming on for the world. We had a variety of tariff letters apply to countries that didn't strike deals, including Canada.

We had a number of countries strike tariff deals including the European Union, Japan and South Korea and some others. They're still seeing higher tariffs, but not as big of an increase as they might have seen. But the bottom line is tariff rates did go up and I'll speak to the specific numbers in just a moment.

We do see some economic deceleration. We were waiting on that for quite a while. We are seeing it. We are assuming there is still more – not to the point of eliminating U.S. growth altogether, but to the point of significantly dimming it over the second half of this year.

On inflation, we are starting to see those expected inflation effects as well.

00:04:10:14 - 00:05:06:19

So there’s a little bit of a peak at higher prices in the June data. We think that the July, August and September data may show more of the same, revealing some of those less attractive elements from tariffs.

On the interesting side, and this is the longest list of all quite unusually, let's talk about a few other things.

One would be still within the tariff space, I could say the distribution of the burden of tariffs is becoming more visible. What parties are suffering, what parties are managing to dodge the negative effects of tariffs. I'll talk a bit more about that later. The short answer is we are seeing it start to show up in the U.S. consumer.

We are seeing it start to show up in the foreign producer, less so actually in domestic American companies though a little bit there as well, but less. We have pressure on the Fed to cut rates and that pressure is maybe twofold:

One is that there were some recent softer economic numbers, but equally some political pressure being applied, which I'll talk to later and try to sort through for you.

00:05:06:19 - 00:06:02:12

There are also quality concerns about the U.S. economic data. Some of that seems to be political in nature, in particular the latest U.S. job numbers. And so that's part of it. Part of it, though, is just that the Bureau of Labor Statistics is under-resourced and is not allowed to hire due to a hiring freeze.

And so it is actually finding itself unable to deliver the usual quality of economic data. So there are some concerns there. We don't think the data is junk by any means. We think we have a reasonable sense for what's going on. But I will say we are leaning perhaps more than usual on alternative indicators, just to round out our assessment of where things are.

U.S. economic exceptionalism is still declining, we think. And so that's just a reference to the idea that the U.S. economy was by far the top dog, the fastest growing and so on, for quite a period of time, and in particular over the last several of years. But it's losing a few of those advantages, we think, right now. And so, of course, the fiscal burden is growing.

00:06:02:12 - 00:06:55:26

The rest of the world doesn't trust the U.S. quite as much as it once did. There are some non-optimal policy decisions going on and a number of other things have happened in a way that suggests the U.S. economy might be a little bit less special going forward. Although, as I'm going to talk to you about a bit later, there are still some pretty exciting technological things happening there. So let's not write the U.S. off altogether.

And then spheres of influence, so this is really part of the shifting global order theme and the ascent of China and so on. But we've done what I think is some really interesting work on what other countries in the world should be naturally aligned with China versus the US.?.

And who's sitting on the fence and who has a difficult decision to make, because the world is fracturing to some extent. So this sort of analysis is perhaps becoming more relevant.

We even see in some of the U.S. trade deals, countries promising not to include China in some of the supply chains for particular sectors. And so we'll talk a bit about that as well.

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Okay. So that's our plan going forward. Let's just leap right in as we always do.

U.S. effective tariff rate rises to 17.1% in early August: We'll start with more detail on the tariffs while it's still the biggest news in town. Here is the trajectory of U.S. tariffs over the span of 2025. Upward direction is the main theme. There was a moment in April when tariffs were really high and then they got pulled back fairly quickly.

We've seen at least a slight upward movement again over the last several months. And then a more noted, a more concerted upward shift just in the last few days, of course, with August 1st being when many of these tariffs take effect, or at least are formalized with some taking effect, I believe, on August 7th.

So we've seen an upward tick. A couple of comments to make here. The new average U.S. tariff rate is 17.1%. It had been 14.3%, so a three percentage point or so increase. That is on the back of copper tariffs and reciprocal tariffs being applied and no-deal tariffs being applied. I'll get into some of those details later.

00:07:57:12 - 00:08:29:28

That's still broadly in line with our expectations. We've been talking a lot about a 15% increase in U.S. tariffs. If you note that the tariffs started at a 2% rate, that is about a 17% rate. So we are in the ballpark of what we expected. It's maybe coming in a little bit hotter than we would have thought right now.

But of course, it's also not the final word on the subject and there is room for further negotiations and so on. I'll lay out a few scenarios in a moment. But that's where we stand now. That's maybe a middling level of tariffs just by the standards of threats of 50% numbers and the possibility of no tariffs.

00:08:29:28 - 00:09:19:24

But of course, it is quite a high tariff by historical standards. We haven't seen these kind of numbers going back many, many decades, in fact, to the first half of the 20th century. So there is some real damage that happens there.

And then just as a quick reminder, because we're not going back to basics in this presentation, tariffs are stagflationary in nature. They tend to hurt economic growth. They tend to add to inflation. We don't really like either of those things that much.

A disproportionate share of the damage accrues to the country doing the tariff thing. So the U.S. economy stands to be hurt more than most. But there is real pain that is applied to other countries.

And if the other countries happen to be especially trade-oriented, like a Canada, and perhaps a much smaller economy, like a Canada, you could still have very real damage to those sorts of countries as well.

So that is part of the story. Okay. Let's jump into this rather complicated tariff table here.

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Latest tariff deals and developments: This is really a recent events table. And so we can say you've got three groupings of countries.

You have countries at the top where deals have been struck. And so those are deals struck , with the exception of the UK, just in the last month or so. The European Union and Japan and South Korea all reaching 15% average tariff rates.

Lots of details, by the way, in terms of commitments to buy U.S. products and exceptions and so on. But nevertheless, the main story is a 15% average tariff for those countries.

The UK had previously negotiated a 10% deal, which, you may recall, we hadn't thought was a great deal at the time, but it's looking pretty good by the standards of what other countries have subsequently managed. Of course, the UK doesn't even run a goods trade surplus with the U.S. And so it did arguably deserve the lightest of the blows of countries negotiating deals.

You can see some emerging market countries have struck deals, Asian emerging market, big trade surplus countries like Vietnam and Thailand. Those are broadly a 20% kind of rate, so a little bit higher if you’re an emerging market country.

So those are the countries that struck deals. They're happy they struck deals. The counter factual would have been 20, 25, 30% plus tariff rates for these countries if they hadn't. All the same, it is worth acknowledging that these countries were just about all paying 10% tariff rates going into this. So their tariff rate goes up, just not quite as much as it might have.

00:10:36:27 - 00:11:16:13

You then have countries with different deadlines. So Mexico and China are the two countries in that category. With China we will see. The impression is they should get an extra 90 days or so. I guess that's not quite formalized yet, as per the August 12th deadline there. Nevertheless, the thinking is they will get the fall to negotiate.

Mexico has managed to receive a deadline that is three months delayed. So into November. They continue to pay a much lower rate until that point.

Then you have the no-deal countries. These are countries that have been hit by the full force of the tariff letter or the tariff threat.

00:11:16:13 - 00:12:40:01

And so Canada is now paying a 35% rate. Taiwan is sitting at 20% and India is at 25%. And the list goes on. These are just countries that represent more than 1% of U.S. imports. There are other countries. In fact, a few others have struck a deal with the U.S., but they're below that threshold. So we haven't included them here.

There's a couple things to say here. The countries without a deal are set to suffer more than the ones with a deal – with some twists because some, such as Taiwan with a 20% rate, it's the same as some of its peer nations have reached with a deal.

So perhaps not everyone is worse off, but certainly not really better off in any major way.

Then it's worth just reflecting on this: in theory, every country could have seen a notably higher tariff on August 1st. Actually, the damage is maybe proving more limited than that. You can see, as per our comment here, 65.4% of U.S. trading partners really have the share of imports and they have either struck a deal, meaning they limited the increase in tariffs or secured a delay, which means they have avoided an increase in tariffs until a later date.

So most are not seeing a big jump. And then arguably you can throw Canada in there as well. That's a bit of a funny one because of course Canada is seeing this 35% rate and it's very real. But the thing to be aware of, and this also applies to Mexico, is that that 35% rate and the prior 25% rate, which has been active since March or April, only applies to non-USMCA compliant products, only things that are not transiting the border under the existing free trade deal.

00:12:40:01 - 00:13:44:19

As it happens, we're now in a position where a good 90% of what Canada sells to the U.S. is finding its way under that USMCA deal. It's a pretty small fraction that’s paying the 35% tariff. It's maybe about 5% of what Canada sells to the U.S. paying the 35%.

It is very loosely another 5% or so that is encountering 25 to 50% rates: the aluminum, the steel, the copper or the autos. And so, real pain there still for Canada, but about 90% is still not paying a tariff. When you include that, you can actually say that only about 22% of what the U.S. imports is being hit by the full Liberation Day 2.0 threats.

So again, higher tariffs, but not as much perhaps as feared at one point. And then I'll show you this.

Countries most economically exposed to current tariffs: More numbers just to overwhelm you, I guess. In some sense, it rhymes with the prior table, nevertheless with a bit of a different angle. So this is an assessment or an attempt to assess which countries are most vulnerable and which will suffer the most.

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And so, really, it's multiplying effective tariff rates – who has the highest tariff on them, that's a source of pain – with who is very reliant as a share of their GDP on U.S. demand. And so, of course, countries with big tariffs that are quite reliant on U.S. demand hurt the most.

In fact, Vietnam is top of the list, even with a 19% rate. They trade so much that they will be hurt quite significantly.

If you have sharp eyes, you'll notice that the rightmost column of numbers, is actually not the exact same numbers on the prior table. So the prior table was just the generalized rate for the average product. In that case, Vietnam has a 20% kind of number.

However, when you tack on the various sector tariffs and various exemptions and so on, you end up with a slightly different figure. It's a higher number.

Maybe that difference is actually much more interesting looking at some other country. So again, looking at Canada, Canada has a 6.5% average tariff. So that helps you reconcile that it is 35% on some things. It is 50% on some things. I guess it's 25% on a few things. But a lot of things are 0%.

00:14:39:03 - 00:15:31:13

How does that average across all the products? Well, it averages 6.5%. That’s not much consolation for the company that's dealing with the 50% tariff products. So this isn't the realized experience for everyone, but just gives us a sense for maybe the cumulative economic damage.

And so 6.5% is a pretty low, pretty light burden compared to most of the countries on this list. Canada does, of course, have a big trading relationship, but you still end up with maybe a more middling economic hit than you might have thought. And actually, Canada is only fifth on this list now that we continue to revise.

And so Vietnam is by far the most hit, then Mexico – though Mexico's also avoiding a lot of tariffs through its USMCA-compliant products. And then you get a number of broadly Southeast Asian countries that also have a lot of trade with the U.S. and are being hit by fairly significant tariffs. So that's where we stand right now.

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And then just to maybe flag the idea that Canada is not being hit as badly as some countries, but it still is surely very exposed in particular to the sector tariffs.

Canada is the largest steel, aluminum and copper exporter to the U.S.: As it happens, we knew two of these three things before, but now we know the third one as well. Canada is the largest steel exporter to the U.S.

I say that because, of course, there's a big tariff on steel. Canada's the largest aluminum exporter to the U.S. by a very astonishingly wide margin. And then copper was the question. And when we initially looked into copper, the tentative answer was Chile is the most exposed, Canada is second, significantly behind. And then there was a big gap down to other countries, including China.

But actually, the U.S. has clarified what copper articles are and are not exposed to those tariffs. And as it turns out, what you might describe as being sort of raw, less processed copper, is being exempted. It’s like the U.S. recognizes it probably can't make new mines in the span of six months, and in fact, probably takes a decade to do that.

And so, it probably still wants the raw stuff coming in, but it would like to process it itself. And so when you look at who exports processed copper to the U.S., unfortunately, Canada is number one on that list as well, and by a very significant margin. We're more than double what anyone else exports to the U.S.

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Now, if you look at the values here, the takeaway is that aluminum is the most relevant one for Canada. Then steel and actually copper is significantly smaller. I'll say just US$2.3 billion of exports from Canada to the U.S. But of course that does still hurt and it does still represent a very real tariff on a an important sector of the economy.

Okay. Let's proceed forward here. I'm going to talk a bit about scenarios. We'll run just a base case, then an optimistic scenario and then a pessimistic scenario. This is a moving target.

Medium-term tariff scenarios: So this is our best guess right now. But it does change as developments occur. We would say the most likely scenario with something like a 60% chance, our base case outlook, is that the U.S. tariff rate on the world does average about 15 to 20%.

So again, it's 17% right now as per the earlier chart. So we're in that realm right now, this is saying, and we said a level not too, too different than this, which doesn't seem unreasonable. Within that you'd assume 15% baseline tariff rates on a lot of countries as we're seeing.

We've seen that for Europe and Japan and South Korea and some others, some sector tariffs on top of that, which of course takes the number up somewhat. We’ve seen 20%-type tariffs on big trade surplus countries like China, Vietnam and some others. China is seemingly tracking a little bit higher than 20%.

00:17:55:28 - 00:18:56:14

Some extra tariffs on sectors are coming. It still looks like forestry, pharmaceuticals and computer chips may be on their way but equally there’s scope for some deals. If you were to tally all that up, you'd probably get to 20% plus, but with some scope for other countries to strike deals, probably scope actually for the existing countries to strike additional deals too, where they make military commitments and this sort of thing.

And perhaps our tariff rate can come down slightly on that basis. So that's what we think is most likely and our forecasting is based on that. And we think, again, recessions can be avoided. But it is still somewhat painful.

The positive risk scenario: this means that the risks tariffs are smaller and less damaging than expected. Let's call it a 5 to 10% average tariff.

We give this about a 25% chance. So very real chance, but certainly not as likely as the base case. How would this happen? Well, you know, maybe the U.S. appetite for tariffs diminishes, as the economic damage mounts over the next few months. So the public appetite shrinks and the U.S. strikes some quick deals and the tariffs come down.

00:18:56:14 - 00:20:12:02

So that's quite possible. Maybe the U.S. reduces tariffs in exchange for military commitments, procurement commitments, foreign tax commitments and so on. Maybe we get lots of trade deals struck as a result of that. Maybe prior deals are revisited in a favorable way. Maybe China gets its tariff rate down from about 40% to about 20%.

Maybe some of the threatened sector tariffs that are outstanding don't happen. Maybe the U.S. creates a lot of exemptions. There were exemptions made for cell phones because no one wanted to pay $2-3,000 for a cell phone. And so, there could be other pain points that the U.S. creates exemptions for us. So it still technically has the tariff, but the tariff has all sorts of Swiss cheese-sized holes in it, if that makes sense.

So we think that's possible, but not the most likely.

Lastly, the negative risk scenario. We think it's the least likely, with a 15% chance of significant further increase in tariffs. And it seems reasonably unlikely to me because we're going to get some economic pain.

The appetite for more probably isn't that high. The existing tariffs are probably enough to generate the revenue the White House seeks to fund some of its other priorities. But still we can't rule this out, so let's say a 25% tariff. How could we get there?

Well, maybe the White House just keeps hammering on the tariff agenda until it's trade deficit has shrunk significantly and until industrial production is revived.

00:20:12:02 - 00:21:26:17

Those are things that move very slowly. Those are things that are, in part, a decision of Americans in terms of if Americans don't want to save money, then they don't get to run a current account surplus. Those are just identities that fit into each other. And so it might be hard to reduce that deficit.

So there might be additional tariffs designed to help force that outcome. Additional tariff deals could be less favorable than the pre-August deals. It might just be that was the sale price and then the regular price is a bit worse. There may not be any later negotiation for countries that have struck a deal. We could see more tariffs on China. There have been some threats to that effect.

We could see sector level tariffs coming in at 50% as opposed to kind of creating 25% versus 50%. There could be extra product level and so more granular tariffs. For Canada and Mexico, that USMCA deal, we'd like to think it persists beyond its renegotiation date of July 1st, 2026.

But, you know, it's not impossible it gets canceled. And suddenly the effective tariff on Canada and Mexico skyrockets because those 25 and 35% type of numbers suddenly apply to a lot of what's being sold to the U.S. as opposed to a little. So, not expecting that. We think it’s the least likely outcome. We just can't completely rule it out.

And it's worth just recognizing there is an upside and a downside risk. We're pretty comfortable with the base case forecast right now.

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Only small tariff pain showing up in domestic corporate margins, but pain becoming visible: Let's turn to who's actually being hit by these tariffs. Strictly speaking, it is importers who are paying the tariff. But of course they make every effort to pass that cost along up and down the supply chain and avoid paying it themselves. So who is actually paying it?

It is still early to say, but we should acknowledge that over time a growing fraction usually accrues to the consumer. And so we are still budgeting for a fairly large part to be paid by the consumer in the form of higher prices. That is ultimately the expectation. But we can start to make a couple comments on what the interim or the initial effects are.

And so these are the three spots that you would look. The first would be the profit margins of U.S. retailers and wholesalers and whether they're eating much of the cost. That's the chart on the top left. We've seen a little bit of a drop in margin there. But I would say for the most part, we have seen those margins mostly hold up, with some exceptions.

It seems like carmakers are eating losses and are being forced to reduce their profit targets and so on. So some fraction is accruing to domestic American businesses, but fairly small so far and fairly specific to the auto sector. In fact, that might change over time. We will see.

Then you go to the top right corner, and so the top right corner is import prices.

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Those gold bars pointing to the left are import prices that are falling. Now, this is confusing because you might have thought, gee, with tariffs, you’d think import prices would go up and everything's more expensive. But these import prices are captured the moment before the tariff is applied. And so if the foreign producer is being forced to eat some of the effective tariff cost, to reduce their prices to make this viable for the American consumer, you would see import prices falling.

So falling import prices means that a fraction of the damage is accruing to the foreign producer. What are we seeing? As per these gold bars pointing to the left, we are seeing that in some of the more heavily tariff sectors, there is indeed some decline in what foreign producers are receiving.

You can see toys, games, sports equipment, aluminum, as you might have guessed, some other products as well, a bit further down the list. So we do think foreign producers are eating some of this as well. So take note of that. That could go down over time to some extent, but nevertheless, for the moment they are.

00:23:45:14 - 00:24:56:13

And then the bottom chart. This is the spot you normally spend most of your time looking. This is just consumer prices, looking at particular areas within the consumer basket that are goods and traded goods, and perhaps even specifically traded with China kind of goods, since that's where the tariff rate has come in the highest. And just as of the last month or two, we have started to see what I think are some pretty clear effects here.

So appliances, for example, heavily imported, about half of what is consumed is imported. We've been seeing quite large annualized increases in the consumer price for appliances, as an example. Household furnishings are another one. Sporting goods are another one. So, we're starting to see this, we think. Curiously, new vehicles not, as per the earlier comment. Actually the domestic producers seem to be eating some of that, but nevertheless seeing some effect there.

So starting to show up, indeed, set to do some economic damage, we think, both to the foreign economy and to the domestic economy. Over time, you would think more of this accrues to the consumer, just as companies have the ability to position and to reprice. And we do hear a notable number of U.S. retailers talking about finally being forced to raise prices and July, August, September is often the timeline that they cite.

00:24:56:13 - 00:26:13:16

Okay. Onward from there. Let's step back from tariffs for a moment and just think more generally about U.S. public policy. This is a very U.S.-focused webcast. But of course, this policy and this set of policies are proving quite relevant. And so what else do we need to think about when we're trying to forecast the economy from a policy standpoint?

Revisiting macro assumptions for Trump presidency: Well, if we think about tariffs, of course, we also think about immigration. We also think about regulations and taxes and the fiscal impulse and even animal spirits. That's whether markets are feeling excited and enthusiastic in a way that could help the economy or not. And so when we talk about the economy, actually we do need to distinguish between 2025 and 2026.

This is a new point of distinction that we are making. For 2025, we do have a net negative effect on the economy. That's a statement really about tariffs. All those negative signs beside the tariff impulse. But don't forget about immigration. The U.S. has tightened immigration rules and so we are really not seeing population growth of the sort that we once saw – and just recall, economic growth is really more productivity plus more workers.

So if you're not getting more workers, that is a significant drag on growth. And I think its’ probably underappreciated. Against that though, in the tailwind department would be we're seeing some deregulation. We are seeing some tax cuts, and a positive fiscal impulse. More of that next year, but some this year.

00:26:13:16 - 00:27:09:10

With animal spirits, we see the stock market that's feeling pretty good again and that sort of thing. The overall effect, we think, is a net negative. We have a quite modest growth forecast for the second half of the year for the U.S. in particular.

So that's the 2025 story, but there are some positives too. For 2026, we actually have a net positive at the top, the overall effect.

And so tariffs still do some drag. But the worst of the active drag on growth will be through. The economy will still be smaller than it would have been, but back to growing more normally. Immigration is still a drag, a significant drag that persists, we think. Deregulation though can help.

We think the tax cuts and the fiscal impulses will be more powerful next year than this year. And the animal spirits can help a little bit. We think it tallies up actually to a little bit of extra growth. And so, particularly when we talk about the second, third and fourth quarters of next year, we are forecasting somewhat faster economic growth as opposed to slower growth.

Lastly, that takes us to inflation. On the inflation side, a lot of signs are reversed here – and pluses are bad here instead of being good.

00:27:09:10 - 00:27:27:10

But we can say we are still forecasting additional inflation – and this hasn't changed. That is because tariffs are inflationary and tax cuts, and fiscal impulses are inflationary. And even just animal spirits, people feeling excited about the future makes them maybe more willing to tolerate higher prices.

00:27:27:10 - 00:28:23:21

So there is still an inflationary impulse there. Now, to what extent are we seeing these things happen?

Hard U.S. economic data has softened: Here is a measure, a data change index from Citibank. It shows that U.S. economic data does seem to be in deceleration mode to some extent.

There were a few funny numbers there for a moment that sent it down and then back up a few months ago. But in general, we are seeing a declining trend – an economy that's not shrinking, but an economy that is looking weaker than it looked, say, at the end of 2024.

So, on the aggregate, we are starting to see that maybe the most prominent example was the U.S. payrolls report, which just came out. This was fairly soft itself, but also had some pretty profound downward revisions to earlier months in a way that did really force us to reexamine the labor market and conclude that it is showing some softness at this point in time. So the U.S. economy is slowing. But again, we don't think to a recession.

00:28:23:21 - 00:29:27:18

Signs of tariff pass-through are showing up in consumer prices: We can also see the beginning of tariff effects in the inflation data as well. The blue line here, this is core goods excluding transportation commodities. It's a roundabout way of saying it's a lot of imported goods at least in the consumer basket. And so we can say we're seeing a real acceleration here.

Those prices are starting to go up. It's not overwhelmingly visible to the average American at this juncture because, everything else is moving somewhat less quickly, and so weighing this down. But we are we are seeing higher prices start to appear.

Real-time inflation has started to run hotter for goods affected by tariffs: Indeed, when we look at some of the real-time inflation metrics that we examine – this is price stats data, and again, focusing in on sectors where you might think there'd be bigger effects because these are often imported goods.

So apparel, furnishings and household equipment, recreation and electronics – these are very choppy. And I guess you could read almost whatever you like, depending on which line you look at. Not to focus exclusively on the dark blue line, the other two matter as well. But I would still say just in general on a trend basis over the last few months, those lines are higher than we're used to seeing them.

00:29:27:18 - 00:30:09:24

Take a look at where those lines were in 2024, and now take a look at what's happening in 2025. It's absolutely higher, when you look through the chop. So that would suggest extra inflation perhaps on its way – not picked up yet by the official CPI data.

Okay. Quick little pivot here.

U.S. term premium rising: This is the U.S. term premium in the bond market, suggesting that you get paid more to own longer dated bonds.

That's nice if you're in the business of owning longer-dated bonds. I will say, though that it's worth asking why is this happening? Why suddenly are longer-dated bond yields sort of holding up even as central banks and the Fed have done some rate-cutting at the short end? Some of that is just that there were distortions in the 2010s that kept the term premium really low – in fact negative – which wasn't normal.

00:30:09:24 - 00:31:38:00

So some of this is a normalization. But we do think there's more to it than that. There's concern about the U.S. fiscal position. There is concern perhaps on other fronts about policy decisions and the erratic nature with which they have sometimes been made. But equally, concern about Fed independence and the U.S. central bank.

We've seen a lot of criticism leveled from the White House at the Federal Reserve, and requests for rate cuts of 2 or 300 basis points, which would be quite substantial. There are a number of Trump-appointed economists on the Fed voting committee already and there will be a few more. And the president is in a position to nominate a new chair of the Fed as of May 2026 – or sooner, if legal machinations were to take place – but probably May in 2026.

And so there are some concerns that perhaps monetary policy will cease to be quite so optimal and might be a little bit too stimulative in a way that overheats the economy down the road and this sort of thing. We'll see. We're somewhat skeptical that monetary policy will go off the rails or go entirely away from what economic conditions would dictate.

And it's very important to appreciate that there are 12 voters at the Fed. The chair of the Fed only gets one of those 12 votes. Yes, they do get to set some research agendas. Yes, they do get to chair the meeting. Yes, I'm sure there is some persuasion that can occur. But it would be a surprise if monetary policy went in a direction completely different than what the economy calls for.

00:31:38:00 - 00:32:16:18

I do think it's fair to say, though, that as the U.S. economy softens somewhat, there is some call for rate cuts, and that's not unreasonable. Furthermore, that rate cutting could be a little bit more than most of the models might normally suggest, just because there may be some slight politicization of the Fed. So that's one thought in terms of the rate-cutting outlook for the next year.

The other thought was that when you get that, you tend to see a bigger risk premium, a steeper yield curve, a higher term premium. That could also contribute to this growing term premium, which makes it more expensive for the U.S. to service longer-dated debt, more expensive for Americans to borrow or to buy houses as well.

Okay, let's make a sharp turn here. Let's talk really long-term type themes. I'm going to touch a couple here.

00:32:16:18 - 00:33:40:00

Sphere of influence scorecard: The first one is the sphere of influence. And so this is really, as I mentioned earlier, connected to the changing global order and the idea that the U.S. is perhaps stepping back a little bit globally, and China is on the ascent, and at a bare minimum it's not a hegemonic world anymore.

It's a multipolar world. You have these two superpowers. So we should make an effort to figure out who's aligned with whom – economically, primarily. And so, we have done that, and we built this Spheres of influence scorecard. We looked at a pretty remarkable number of things like cultural affinity, and certainly how much trade countries engage in with China versus the U.S.

Those are the two spheres of influence considered here. Who votes with whom in the United Nations? Quite a sophisticated assessment, I have to say, done by Josh Nye, our new senior economist. Countries on the left column are more affiliated with the U.S., while countries in the right column are more tied to China. Countries in the middle don't have an obvious alignment. They're fairly equally connected to both.

I can say a couple of things here. In terms of who's connected to the U.S., well, no great surprises here. Number one is Canada, of course, very close geographically and with lots of trade connections and historically cultural ties as well. Israel is quite closely connected. Mexico, the UK, a lot of a lot of European countries, and a fair number of South American and Central American countries as well.

00:33:40:00 - 00:35:05:01

So perhaps no great surprise, here. Conversely, with team China, well, mostly Asian countries, not quite exclusively, but mostly. Interestingly, Pakistan number one, which might not have been my initial guess, but nevertheless, close ties there.

And then you have, and I should say, a shorter list. And so you could argue China has fewer natural allies when you think about the economic connections and some of these other things.

And then in the middle, the divided countries, you have Australia, of course, you know, culturally, perhaps more like the U.S., but economically very tied to China. South Korea is engaging a great deal with both countries, a number of other countries in that position as well.

One other thought here is you do see countries that are really connected to both. This has been sorted on the basis of who's more connected to one versus the other, but not the absolute connection. If you look at the absolute connection, again, South Korea and Japan kind of in that middle category, they're really connected to both.

This is high stakes for them. Of course every country wants to continue interacting with both the U.S. and China, and will make every effort to do so. But it becomes a bit less viable or at least a bit more difficult over time.

That's a particular challenge for South Korea and Japan. You can also see Singapore, Hong Kong, Switzerland and I believe the Netherlands are countries that are actually quite tightly connected to both, even though they do have a skew and they are more connected to one than the other.

00:35:05:01 - 00:36:00:28

So we'll see where this goes from here, of course. But for the moment, I think becoming more and more relevant and probably something we'll be talking about 10 years from now as well.

00:37:32:01 - 00:37:54:20

Slowing, below consensus long-term demographic outlook: The UN forecast anticipates that the world's population peaks in 2084 at 10.3 billion people. Our forecast thinks that global peak is sooner, 2066, and significantly lower, about 9.6 billion people. So 700 million fewer people, at that peak.

00:37:54:20 - 00:38:20:16

And so that is significant. Keep in mind, population growth informs economic growth. It informs how expensive fiscal obligations are. It informs indirectly the level of interest rates. If you have weaker population growth, you might think interest rates are a little lower. You might think that perhaps fiscal obligations are a bit more expensive because you have more old people and not as many young people being born. You might think economic growth runs a little bit cooler than otherwise.

00:38:20:16 - 00:38:37:21

You might think inflation runs a little bit cooler as well. So this is all important. It's at the margin. It only builds over time. But this is an important building block to our work. And I wanted to share that with you. We’re able to do this at a more sophisticated level now.

Okay. And then technology, this is my last big thought piece long term.

00:38:37:21 - 00:38:59:19

Key technology scorecard: When we talk about economic growth, we generally say demographics. Plus we talk about productivity growth as the other big driver.

And so productivity growth comes from a lot of things. But part of that comes from just new technologies. In fact, Harvard University conducted a research study recently identifying critical technologies and then figuring out what countries are best positioned and most advanced in those critical technologies.

00:38:59:22 - 00:39:28:11

We observe the indirect implication that these countries are then well positioned for the coming decades in terms of driving their own innovation and productivity forward. And so they flagged artificial intelligence, computer chips, biotechnology, space and quantum technologies as being the big five technologies that could be the main drivers of innovation going forward. And they tried to assess where each country sits in terms of its current technologies and its resources being applied to these technologies and the quality of the labor and this sort of thing.

00:39:28:11 - 00:39:51:25

And the main takeaway is the U.S. came out on top for all five. I talked earlier about the U.S. becoming less economically exceptional. I think that's true in many ways. But it is still pretty exceptional in at least one way, which is its lead in technology. And so I think we should still budget for the U.S. economy probably running faster than Europe and Japan and other major markets, because they do have this advantage.

00:39:51:25 - 00:40:08:26

It might be less of a lead than in the past, as we see some suboptimal public policy come into the fore in particular. But I would still say they probably can outgrow the rest. They do have some pretty amazing companies doing some pretty amazing things in these spaces.

China comes in second. So this multi-polar era seems to be real.

00:40:08:29 - 00:40:29:20

In some cases, China is nipping at the U.S.’s heels. In other regards, it is more substantially behind including, interestingly, in AI. We've all followed DeepSeek versus ChatGPT and so on. But it does appear that China is a little further behind, perhaps, than some might imagine.

Europe significantly behind again. So when we talk about a European renaissance, I think there's some truth to that.

00:40:29:20 - 00:40:51:03

But we have not yet seen it in the innovation or the productivity space. And we need that to really fully embrace that. Same with Japan, same with some others as well.

So the U.S. is still pretty exceptional in this regard. And I should say from a global standpoint, we do think there are some exciting technologies coming. And it could be a global productivity driver that everyone benefits from to some extent as well.

00:40:51:06 - 00:41:07:24

Okay, so I'll stop there. Hopefully you found something of value somewhere in there. And so I thank you so much for your time. If you found this interesting, please do as always follow us online either on X or on LinkedIn, or best of all, on our own website. And indeed that QR code, if you take a picture of it, will get you right there as well.

00:41:07:24 - 00:41:13:09

Again, I'll thank you so much for your time. I wish you very well with your investing and talk to you again next month.