Hello and welcome to our latest monthly Economic Webcast for the month of July 2025. My name is Eric Lascelles. I'm the chief economist for RBC Global Asset Management and very pleased, as always, to share with you our latest economic thinking. You can see there's a real debate in the title this month: Declining fear versus lagged damage. Declining fear is a reference to the observation that when we look at financial markets in particular, they've actually rallied quite nicely and are feeling pretty good about the world right now.

And that's a welcome thing. And it's not completely unjustified in the sense that some of the tariff risks have diminished and tariff levels aren't quite as bad as had been feared a number of months ago. But we are still alert to a number of things. Central among them is that there is still, we think, some lagged damage coming from the tariffs that were imposed in recent months.

The economic data has looked not bad so far, but we’ll likely see some weakness over the summer. Markets will need to balance that against their pleasure that tariffs have not come in quite as badly as feared.

Let's jump forward.

Report card - As always we'll start with a report card and we'll just talk our way through some of the good and not so good things going on in the world right now to help frame our economic outlook.

On the positive side of things, the focus is really shifting. Tariffs, of course, are still front of mind and likely will be in the coming weeks in particular, for some reasons I'll mention in a moment. But equally, we are seeing more attention paid toward what was originally after the U.S. election last fall a pretty big part of the narrative.

This was that the White House is also delivering some tax cuts and aiming to do some deregulation. And animal spirits might prove supportive. Indeed, we do see some enthusiasm in markets again – not to suggest that that should be the dominant element whatsoever, but nevertheless, it's part of the story and it's capturing a bit more of the limelight right now.

Tariff news has been for its part, I would say, mostly benign. Obviously, some ebb and flow, and I'm sure there are some rebuttals to that observation. But in general, tariff rates have been fairly steady and they haven't been all that high, though as I'll talk to in a moment, there are some risks that are right in front of us.

When we look at the economic data, we've generally taken pains to distinguish between what I would call sentiment-type metrics and hard activity metrics. And the sentiment metrics really fell a number of months ago on fear about what tariffs might do. We're now seeing those partially rebound as the tariff damage seems not to be, again, as bad as feared.

On the other hand, looking at the hard economic data, well the good news is that growth persists, as my negative theme’s column will reveal in a moment, we do see some deceleration, but for the moment still seeing growth. It's also certainly very welcome news that inflation has not yet increased in any major way.

So that other expected source of tariff damage is not yet all that visible, though, as I'll talk to you in a moment, we are expecting some of that before too long. And then, of course, the stock market has revived. Indeed a number of markets were hitting all-time highs not that long ago. So the market’s feeling better as well.

On the negative side, let's not forget there are still some fairly sizable U.S. tariffs that are still in place. And so those will do some damage still, we believe one question mark remains. I should mention, I am recording this on July 2^nd – and sadly, these days it matters what day you're talking because things move awfully quickly.

I mention that date just because on July 9th, in theory, many, in fact all of the reciprocal tariffs that were delayed way back in early April are set to, in theory, re-emerge and possibly significantly raise the tariff rate on almost all countries. We're not completely convinced that happens. I'll get to that in a moment.

But there is some danger there, and there could be some bad news at that point. We are seeing that as much as economic growth persists, some slight economic deceleration is starting to become visible. We are budgeting for some additional softness over the summer and into the fall. We are looking also for some increase in inflation in the coming months.

I'll talk through all of this in a moment. I can say from a Canadian standpoint, for Canadian viewers, the Canadian economy is still showing some damage itself as well. We see some real hits there. It's less theoretical in Canada right now. And then just to remind everybody, this isn't brand new, but in recent months we have seen fiscal concerns surface in the sense that a lot of countries are running pretty big deficits and have quite high debt levels.

The bond market is paying a bit more attention. That's part of the reason why yield curves are steeper and risk premiums are a bit larger, and so on.

And then lastly, on the interesting side, Middle East conflict recently flared up. I guess that could go pretty firmly on the negative side if you liked. We put it under interesting just in the context of its impact on oil prices.

Of course, there are winners and losers when all prices go up. But I'll talk a little bit more about that later. I can say, just continuing with the world is a Dangerous Place theme, NATO countries did recently commit to military spending of 5% of GDP, which is pretty huge. Historically, they've been asked to target 2% and as often as not failed to reach that level.

So this is a big leap higher. I should emphasize it's not quite what it seems in the sense that actually it really is a 3.5% of GDP military spending commitment and then a 1.5% of GDP fulfilled via other things like infrastructure spending – things that, to be honest, countries are probably already doing. So it's not quite as big a jump, but it is still significant. We expect that trend to persist for quite some time.

And then just one other thought – and this is highly speculative and probably not deserving of central billing, because the main story is one in which markets are feeling better and with some legitimacy. But we do wonder whether – just as the White House backed away from some of its less appetizing policy ideas when the stock market was quite weak in April – we do wonder whether the White House might be a little bit more emboldened or maybe willing to tolerate a bit of additional tariff pain in the near term . . .

Just because the stock market is now strong enough that they're less concerned about that, and they're able to advance their agenda without compromising markets too too much. So, we'll see whether that proves to be valid or not. But it is just a thought.

Okay, let's jump our way in now and we'll just talk through some of those ideas and themes, just with some graphical support and some extra detail from me.

U.S. effective tariff rate at possible inflection point - So here is the chart we've generally been using just to track the current level of U.S. tariffs. This is the average U.S. tariff rate on the rest of the world. Of course it started the year at a very low level, about 2%. It is now at about 15%. That's a high level. We haven't seen levels like this dating back a good 75+ years at this point in time, if not longer.

And so, we’re seeing significant tariff levels, expecting damage, classically of course growth negative inflation positive, that stagflationary impulse. So all of that is still very true. We did see a slight increase in that average tariff rate over the last six weeks or so, as the steel aluminum tariff rate was doubled from 25% to 50%.

The big question now is: what happens on July 9th? That will be, indeed, the big question and it could go a number of ways. I don't think it's unreasonable to think that the U.S. could just kick the can down the road and reciprocal tariffs do not rise on that date. And there's just more negotiating time perhaps into the fall. It's quite possible that is the takeaway.

We're slightly more inclined toward a more complicated result, which is to think that there could be maybe three sets of countries. So one set of countries strikes a deal with the U.S. and certainly a lot of countries are trying to do that. I don't doubt the U.S. would like to be able to brag that it has struck some deals, and so we wouldn't be surprised if a handful of countries were in a position to announce some sort of framework deal, at least, like the UK did, not too long ago.

So that would be the happy group. We think realistically, quite a lot of countries are not going to be in a position to strike a deal. And for that matter, the U.S. just struggles to negotiate with close to 200 countries all at once. And so probably a lot of countries will just see their current lower reciprocal tariff rates extended, perhaps for a number of months.

That's what most countries will probably experience. And then, this is very speculative, we don't really have a strict list here nor a clear sense -- but I would say it wouldn't be a surprise, perhaps if the bigger tariff rates were allowed to reemerge and to reapply to a handful of countries. The unlucky countries are the ones, perhaps, that have not made as much progress in negotiating or not negotiating in good faith as per White House criteria, perhaps countries that have huge trade surpluses with the U.S.

And so we do find ourselves watching in particular some of the Southeast Asian and East Asian economies, where they're currently paying only a 10% tariff rate. But they do have huge, huge trade surpluses with the U.S. It makes me wonder whether maybe some of those might actually end up with a significant leap in tariffs on or around July 9th.

So that's how we're thinking about it right now. On the net, that tariff rate here might go a little bit higher as opposed to a bit lower after adjusting for all those possible outcomes. But, with further negotiations to go, we're continuing just to work with the very loose idea that when all of this is settled, whether that's three months from now or two years from now, that the average tariff rate will probably be about 15%.

That isn't that far from where we are right now, granted, with some extra reciprocal tariffs minus some deals struck with countries. And so a lot of movement beneath the surface. But that's about what we're budgeting for. And as we've mentioned before, as we try to map that onto the economy and on to inflation, for the U.S. it subtracts maybe one and a third percentage points from U.S. growth over the next couple of years.

For inflation, it adds maybe one, one and a half percentage points to price levels. And so that’s significantly undesirable obviously, but equally not probably recession-inducing, not hyperinflation-inducing, not inducing the kind of inflation that was even experienced in 2022 and thereabouts. So, undesirable, but not a killer blow for the U.S. economy. And you can say similarly for other economies as well.

Okay. And so what are economic actors, households in this case, thinking about the economy?

Economic fears are fading - These are three rather different measures of consumer confidence. Two are quite similar. One is quite a different methodology and quite a different outcome. It's a Twitter-based AI-type metric. But nevertheless the common theme here is we did see a significant decline in consumer confidence in the early parts of 2025 as fears about tariffs in particular really mounted.

Then we've seen a fairly notable rebound recently. And, I'll grant one of these measures is now to a really high level of optimism. I will put a bit more weight in the two that have just made a partial recovery and still signal some level of caution. But the point again is that some of the most intense fears are fading.

And that's likely correct because we're not seeing the worst-case tariffs play out amd we're not seeing the worst-case economic results from said tariffs play out at least so far either.

Sentiment measures are not perfectly reliable for multiple reasons, including partisanship - Just to flag one thing, which is we're not, as it happens, huge fans of sentiment-based metrics. They do often diverge from reality. Sometimes you have very poor sentiment and ultimately fairly good economic activity.

So let's take this with a grain of salt, but it's worth watching. It can be a forward-looking indicator, but it's not perfect. What on earth does that have to do with what I'm showing you here?

Just to speak to when we think about the uncertainty and the lack of precision in sentiment measures --- there are all sorts of reasons for that – people just aren't a good gauge of what's happening in the broader economy is as good an answer as any.

Now there is this fascinating – and this is just an excuse for me to mention this really – this fascinating political element which is in the U.S. in particular, though I don't doubt to some extent elsewhere, we are seeing rising, not just partisanship, which clearly has been happening, a big partizan divide now exists. But it's gotten to the point that Republicans and Democrats have very different views of the economy and how things are going, based heavily on who the president is.

You can see, for instance, the sharp upward movement in this blue line most recently reflects a huge increase in the economic sentiment and consumer confidence around Republican voters, and simultaneously, a huge decline in confidence among Democratic voters. And that's, of course, when President Trump, a Republican, came in. It was significantly the reverse not long ago. When Democratic President Biden was in place the Democrats were much more confident, the Republicans much less.

You reverse that again in the first Trump term. So a couple of things here to consider. One would be it's pretty unlikely that the economy actually went from amazing to awful or back, the day that different presidents came into office. Empirically, that isn't the case. And so, people aren't doing a very good job of judging just how things are going right now.

And just to mention, it wasn't always this extreme. As you look back into the earlier 2010s and the 2000s and the 1990s and even to the 1980s, sure, there were some swings. Republicans and Democrats didn't have exactly the same view on the economy. But it wasn't nearly as linked to politics. And when there were political connections, they were much less powerful as well.

I guess the story is one in which probably we trust sentiment metrics less and less as political partisanship really takes over more and more. That’s just an interesting little aside.

Okay, let's push on here.

U.S. manufacturing expectations have significantly rebounded - Now we’ll talk about business sentiment measures. These are business orders and expectations of orders. I would say we put a little more confidence into these, but equally, they're not perfect.

I'll get to the hard data in a moment. But what are we seeing here, well, we saw it again, a pretty notable decline in expectations of orders and even in new orders coming in during the period when tariff anxiety was at its highest. We are now seeing some partial rebound. And so I think that's story.

Things aren't quite as bad as people had expected. Equally, things are not perfect as I'll get to in a moment. And so let's run through some of the actual metrics here.

Supply chain pressures remain tame - One thing we're paying particular attention to is supply chain pressures. I think we were all a little bit traumatized by supply chain problems, post-pandemic, a few years ago.

You can see here the global supply chain pressure index became quite problematic during that period. I can say right now things look okay so far. We've seen some upward movements just a little bit recently and also maybe a bit of a trend over the last year or so. So things are getting a bit less good with global supply chains, but they're still broadly fine.

We're going to keep watching this and look for evidence of trouble. And you could imagine some, conceivably, if the U.S. is effectively closing off access to some markets and leaving it open to others, you could expect some shift in shipping and so on, which can create headaches. So far, the direction of travel is toward more headaches, but it's still pretty muted.

So I would say no big problems there so far. Looking at hard economic data . . .

Hard U.S. economic data starting to soften - This is actually how much hiring is happening, how much spending is happening. Nobody's opinion is going to pollute that. And we can say that the hard economic data has softened recently. So it was sort of trending a little bit lower over the first part of 2025.

It did seemingly take a larger step downward quite recently. I will warn, without getting into all of the weeds, that we think the drop is probably a little bit exaggerated. There was a big drop in durable goods orders and it was Boeing airplane orders, and that in itself is a very complicated subject. And there was a crash, and other things that you might think would influence that, but that wasn't it, really, just airplane orders are incredibly lumpy.

Several hundred that came in one month and were, I think, a couple dozen that came in the next month, and it looked like a crash. But it really is just the lumpy nature of orders from big airlines. And so I would say this drop probably exaggerates the weakness. But we do genuinely think there has been some softening of the U.S. economy.

We are budgeting for less growth in the coming months, indeed. Let me go to the next slide and just reflect on a few of these things.

Looking at hard economic data - So here is flipping this around. This is Chinese data, but it's Chinese exports. And you can see, perhaps to no one's particular surprise indeed, we are seeing a big drop in Chinese exports to the U.S.

That is the lighter yellow or the gold line at the bottom there. So there's been a real drop and you can see Chinese exports to other markets have not declined in that way. In fact, if anything, they've in some cases trended higher, perhaps as China is dumping products on other parts of the world that it can't sell to the U.S.

So there is a shift in trade patterns at a bare minimum. Similarly, these are some high frequency metrics we look at. They're not maybe the most popular indicators out there, but they just give us a nice real-time sense of what's happening.

Dallas Fed’s Weekly Economic Index: slight downshifting - The Dallas Fed has its national weekly economic index. And that is now clearly trending lower.

We've been speculating about that in recent months. I would say the data is now a bit more clear. And so we can say this metric would suggest some deceleration in nationwide economic activity.

It's very similar when we look at jobless claims in the U.S. – again, another weekly metric that gives us a fresh take on things.

U.S. jobless claims rising slightly - There's definitely an upward trend here. I can say that it hasn't gotten a whole lot worse in the last week or two. But it’s definitely trending higher. Not a particularly high level, not signaling big problems, but one in which you would think that unemployment is rising, not falling, and the economy is weakening, not strengthening.

So that's what we think we're seeing right now. And we are budgeting for less growth in the coming months.

U.S. consumer spending is fine but should slow - When I look at consumer spending, this is year-over-year consumer spending in dark blue. PCE is personal consumption expenditures. They’re looking okay and still growing at a pretty reasonable rate, still very much a positive number.

I will say that we run a model, one of many models and one of many, many ways of trying to gauge where the economy is and where it might be going. And the model is that gold line here. That model would say, gee, you would think just given what we know about hiring and income and oil prices and home prices and some other key household relevant metrics, you would think consumer spending growth would be slowing right now. You would think it would be a bit weaker than it is right now.

This model isn't perfect. You can see it's had misses before. Nevertheless, it does suggest – and it's consistent with our view – that consumer spending growth should slow somewhat in the future.

I should mention this model doesn't know anything about tariffs. The tariff consideration is an additional factor on top that again would support somewhat weaker consumer spending because in principle some product prices may go up somewhat more quickly.

Let's pivot over to the inflation side.

U.S. inflation surprisingly tame in recent months - So it's usually a good thing when you see a whole lot of green on a page. And this one maybe is a bit over the top. Nevertheless, here are different measures of U.S. inflation, quite a range of measures. We like to look at alternative metrics just to know that we're getting a proper clean sense of what really is going on without any distortions.

So the story here is one in which, with very few exception – particularly that one-month trend, the far left column – we've had very benign U.S. inflation recently. Pretty benign on a three-month basis. You start looking at six months and 12 months, the numbers are a little bit higher. But again, that's because there's more stale data.

Things weren't quite as good. Inflation has come down. We're looking pretty good right now and kind of amazingly, you know, here we are waiting for goods inflation to pick up because, of course, tariffs affect goods, not services. And look, the goods inflation was -1.5% annualized in the latest month and -2.3% annualized is the three-month trend.

So things looking quite good, really. The only things holding inflation up in recent months have been the usual suspects: shelter costs in particular, which just slow, with a lag; a little bit of food price inflation, as well; a lot of a helping hand from lower gas prices recently also. Again, inflation has been tame, I will say maybe stubbornly so. Not hoping for this, just forecasting this.

We do think that inflation will pick up somewhat. And so here is a very, very choppy chart.

Real-time inflation has started to rise for goods affected by tariffs – But here are real-time inflation metrics focusing in on some of the more, I guess you could say bellwether products that the U.S. imports – maybe imports primarily even from China, where tariffs have gone up the most. It looks to me like whether you're talking apparel or furnishings or household equipment or recreation and electronics, it looks like something of an upward trend.

Current readings are somewhat higher than we're used to seeing – suggesting to me that as we go into the June data, the July data, the August data, we probably are still going to see some additional inflation.

But I would hasten to emphasize we're not talking about inflation that looks much like 2022. This is one in which maybe U.S. inflation would have been 2.5% without tariffs.

With tariffs, maybe it's going to be 3.5%. We don't like that. It's not ideal. But nevertheless that's a manageable blow in our view.

Okay. Just to maybe step back and frame things a little bit, as I mentioned in the introduction, we talk a lot about tariffs. Tariffs are still problematic and there's a lot of moving parts there both in terms of where the tariffs settle and what the economic damage is.

I do want to say that as maybe there's a little more oxygen in the room and a bit less of it is sucked out of the room by tariffs, just to mangle a metaphor there. Let's acknowledge that there are other things we should be thinking about from a U.S. federal policy perspective. From just about the get go, we've been thinking in this way.

Revisiting macro assumptions for Trump presidency - And so, tariffs are a negative for short-term economic growth. Immigration policy is a negative as well. Just fewer people are coming in, which is a negative to grow economies. You can grow from more workers and from more productivity. You're losing one of those two things.

But there have been, in theory, these positives that could send the economy moving more quickly that have gotten less attention recently.

One would be deregulation and it would appear that we are continuing to get some of that – some of that coming through this budget bill, some of that still planned as it pertains to financial services and a number of other directions that can unleash extra economic activity.

Tax cuts: those tax cuts do seem to be working their way through Congress, as I'll get to in a moment.

So there is some tailwind there. And there's a fair fiscal deficit that would grow, which is another way of saying a positive fiscal impulse to growth.

And then animal spirits – and, boy, we've had our moments of doubt here because the stock market went from being very, very enthusiastic about this administration late last year to very, very nervous as recently as April and early May, and now feeling pretty good about things again.

So we may yet have some twists and turns, but ultimately, a positive potential for growth, from just more enthusiastic confidence and sentiment.

And then government spending, as a small negative to the extent that you do see some austerity and Medicaid cuts and some other cuts as well. And so when we tally that all up at the top – and this is not an exact science – when we tally it all up, we do end up with a slight negative.

That is to say, we think the tariffs and less immigration and spending cuts probably do still outweigh any kind of growth boost comes from regulations and taxes and animal spirits. Again, we’re feeling a little better about some of the positives and seeing in particular tax policy seemingly being pushed through and very much of the view that 2026 for the U.S. could see a little bit more growth than normal – in part, perhaps, as there's a rebound after the worst of the tariff damage is done, but more importantly, as many of those tax cuts actually take effect really at the end of 2025 and early 2026.

I'll just flag here the thinking really hasn't changed too much on the inflation side. There should be a bit more inflation than otherwise when you combine these various policies. It really is primarily the tariffs, tariffs being inflationary, plus a little bit from tax cuts and animal spirits perhaps being inflationary as well.

And that's already fully factored into our forecasts.

Okay. Here's a big, long wordy slide. So I'll just summarize here.

U.S. fiscal developments - So just thinking through U.S. fiscal developments, we had a budget bill pass the House of Representatives some time ago. Quite literally in the last 24 hours as I'm recording this, the Senate approved their version of the bill.

The two versions are not identical. So they do need to be reconciled. And they need to agree on which version to go forward with and to split the difference in some cases. We think, ultimately, it's pretty likely this does get implemented. Probably a stretch to do it by July 4th, which was the original plan, but nevertheless, likely achievable before mid-August, which is when debt ceiling problems would emerge if this if this wasn't passed.

So we think it likely does get passed. In terms of the components, well, they are moving a little bit as the House and Senate versions are not identical. But as a broad comment, you can say they do maintain the tax cuts currently in place past the end of 2025 when they were otherwise set to expire.

There are some new tax cuts in terms of a higher standard deduction and getting rid of taxes on tips and over time and things like this. There is some accelerated depreciation of capital, and we bolded that in part because that is potentially – as we talk to companies –potentially set to unleash a wave of extra CapEx, which can be a strong growth support.

So let's very much focus on that. There’s some more military spending, some more border spending, or conversely, some spending cuts. I guess most controversially and most prominently, partially paid for by making some cuts to Medicaid. That is the program that broadly would provide health care to lower income Americans. Some food stamp cuts as well.

Some other changes too. I would say on the net increasing inequality as opposed to decreasing it, if you want to think of it through that lens. It phases out some green tax incentives that were championed by prior President Biden.

And then one element – and we'll see where this ultimately settles – but the Senate has removed this.

There was a real concern, it was section 899 of this bill. It proposed pretty significant tax hikes on foreign investors into the U.S. It looks like that's now been removed, which is something of a relief.

In terms of the fiscal implication, the deficit gets bigger from all of this.

The deficit is loosely $2-5 trillion larger. I think probably $2-3.5 trillion is probably closer to the actual outcome right now. The Senate version is in the $3-3.5 trillion range that currently is in place. That does provide an economic boost next year, as mentioned. But it does raise fiscal concerns, in that the U.S. deficit is already big and set to get potentially even bigger.

With a large debt load and maybe bond vigilantes paying a bit more attention, we are seeing, in particular, longer-term borrowing costs rise somewhat in the U.S., or at least not fall even as the Fed (U.S. Federal Reserve) occasionally is in a position to cut rates. Indeed, as I mentioned, we're not the only ones who are a little nervous about this fiscal position.

Moody's did downgrade the U.S. debt rating from Triple-A to double plus very recently, and really just joining the club. The other two major rating agencies had already done that downgrade in prior years.

Okay. Let's move on from there. So quick comment on oil prices. I won't get into all of the details of exactly what's happening.

Oil prices gyrate on Middle Eastern developments - Essentially the conflict, of course, has more than flared up between Iran and Israel. Whenever that happens, markets immediately leap to oil prices, which, of course, are maybe the most globally economically relevant variable when we're talking about the Middle East.

And so you can see oil prices, which had been on this fairly happy downward trend.

I shouldn't say happy. It's unhappy if you're an oil producer. And of course, parts of Canada would very much prefer high oil. You're talking the global economy. Generally lower oil is a boost to growth and so that's the context I'm using.

We had seen this downward trend. But a big spike in oil. However we've seen a significant decline.

It seems as though tensions are cooling and worst-case scenarios of Middle East-wide wars have been avoided. And the Strait of Hormuz is still, to my knowledge, functioning and so on. So oil prices have staged a significant decline from here. I would still emphasize, I don't think matters are completely settled and there is still some risk.

That risk might extend more toward higher oil prices and lower oil prices, just given the current state of affairs. But in the end, I can say that we don't need to budget for a big new inflation driver, it would appear, because oil prices have mostly settled back to where they were.

I guess I can say – and this is a story we've been telling over the last year or so – that as much as tariffs are stagflationary, lower oil prices are, you might say, reverse stagflationary in the sense that lower oil prices are a support for global growth and help to pull down global inflation.

I don't want to suggest that this is on the order of the damage that tariffs will do. It's much less central of a driver and so not a full offset. Nevertheless to the extent oil prices are down pretty significantly from a year ago, you can say that does again partially offset tariff damage.

Okay. We're going to finish with a couple of Canadian thoughts, really tariff-focused here.

Canadian tariff thoughts - And so just a reminder, Canada is being hit by tariffs. Yes, it has a lighter blow than most countries out there, but it is still being hit. And so, for a variety of reasons, most prominently sector-based tariffs like steel and aluminum and auto tariffs as well some damage from Canada's retaliation, even though we think that's maybe operating at about half of its official level as companies get exemptions.

Let's also note there are additional tariff challenges or at least questions ahead. Maybe the framework here would be one in which Canada announced a target of striking a deal with the U.S. within a 30-day time frame. And that 30-day timeframe ends in mid to late July. July 21st is the date I'm seeing most, though I do see some disagreement there.

But let's call it July 21st. Of course, best case scenario is that Canada strikes a deal with the U.S. and the uncertainty is gone. And maybe the tariffs are even gone, as well. I would say that might be overly optimistic, though, on a couple of fronts, both from a timing and an outcome perspective.

Let's note that the Canadian government did recently concede that it is not necessarily expecting to eliminate all tariffs altogether that the U.S. is applying to Canada. Indeed, I gather it (the Canadian government) went to various sector leaders and said what kind of tariff rate could you survive with, which, again, would be a suggestion that probably we're not going to see steel, aluminum and auto tariffs completely disappear. This is consistent with that UK trade deal that was struck before, with potentially some quotas coming in and so on.

But not a perfect return to pre-2025 kind of trading outcomes. And we do know the U.S. still has lots of complaints about Canada. It was complaining a lot about Canada's digital services tax, but actually Canada just got rid of that tax. We figured that would be an important decision date. But on July 1st, Canada was going to collect $2 billion essentially from large U.S tech firms.

And we thought that something would likely be done about that before then and indeed that was the case. So the U.S. had strongly objected, and Canada has now canceled that tax. Hopefully that does count for some brownie points in the negotiations. We’ve seen a lot of discussion about Canada perhaps making significant military commitments as a way of avoiding too many U.S. tariffs.

The expectation is not just that military spending increases, but maybe Canada commits to procuring some U.S. military goods, perhaps to the point of continuing with that F-35 contract, potentially joins the U.S. Golden Dome missile defense system, which you might imagine could involve bases or at least military installations in northern Canada, protecting all of North America.

So we will see where this ends. It really is very hard to say with precision. We're still working with the view that the average tariff rate that hits Canada coming out of all this is in the 5 to 10% range. It's currently about 6%, if you're wondering. I would say there is a scenario where it ends up being somewhat lower than that.

But as it stands right now, we’re assuming not too different than where it is right now. We may learn a lot, though, in the coming weeks. And again, Canada, one would think, must have some reason to think it can strike a deal in the coming weeks. And so perhaps we'll have more to say in a month's time.

Tariffs already doing economic damage to Canada – And just recognizing for Canada, maybe this is a good segue to my last slide, just to say that the Canadian economy, unlike a lot of economies, has seen, it would appear, real damage from tariffs, you would say.

Really, it’s tariff expectations and tariff uncertainty and fear of losing this big trading relationship.

And so you look at hiring in the last four months and it's just essentially non-existent. And I should emphasize some of that is because Canada's immigration rate also fell as temporary resident rules were changed and as people's visas expired and so on. So a normal rate of hiring would always have been slower than what we saw in recent years.

A lot of that was unusually fast, come to think of it. Nevertheless, we are seeing some genuine weakness. The unemployment rate is going up. We are budgeting for some moderate further increase. And so really the tariffs are doing damage. But as much as anything, it is just the tariff uncertainty and fear perhaps, that other sectors beyond steel, aluminum and autos could be swept up in this as well.

If a deal were struck, you could imagine a significantly better trajectory just because the uncertainty would be down. We stop short of saying the economy should rebound or bounce in the coming months as much as you could maybe make a theoretical argument for that if a deal was struck. We are still expecting some genuine weakness over the coming months.

But we're not expecting a full recession. It's possible. I wouldn't want to say it's impossible. But I would say that at this point, we're looking still for modest growth in the next quarter or two. And we think Canada can emerge perhaps somewhat stronger after that, particularly as there are some policy initiatives at the federal level that are plausibly pro-growth as well.

Okay, I will stop there. Please, as always, feel free to follow us online if you like this sort of thing. There's our X, LinkedIn and indeed our web page, rbcgam.com/insights, it’s maybe the best place to go. We have a new QR code if you feel like bringing your camera out and accessing it in that way as well.

I'll just say again, thanks so much for your time. I hope you found this useful and interesting. And please tune in again next month.