-With contributions from Josh Nye, Vivien Lee, Aaron Ma and Ana Ardila

Monthly economic webcast

With the warning that it is mere days until the next monthly economic webcast will be recorded, do consider watching the May edition (recorded on May 1). Its content remains mostly fresh and it does a good job of framing the macro environment for those who prefer to watch rather than read about the economy: Tariff ebb and flow.

Tariff developments

As we will discuss, tariff news has been trending somewhat positively, including a China detente and a U.S.-UK trade deal. In turn, news sentiment in the U.S. has become somewhat less negative (see next chart).

Daily news sentiment in the U.S. has improved

As of 05/18/2025. Sources: Federal Reserve Bank of San Francisco, S&P Global, Macrobond, RBC GAM

But the backdrop is far from perfect. White House threats linger, including:

• a proposal to increase European Union (EU) tariffs to a gigantic 50% – recently delayed

• a threat that Apple iPhones produced abroad could be subjected to a 25% tariff

• a proposal to tariff foreign-made films at a 100% rate

Within these seeming contradictions, a few themes nevertheless present themselves.

The first is that certain guardrails are becoming visible in the tariff process.

Large tariffs such as the 145% rate briefly imposed on China and the 20%-plus tariffs imposed on much of the rest of the world proved too painful for the U.S. This suggests that tariffs of such magnitude are unlikely to be permanent. Similarly, the White House has proven adept at carving out exemptions when pain points prove too hot to handle, as in the case of Chinese-made cell phones and computers, and with regard to the severity of tariffs on auto imports.

It has been widely noted that the classic “Fed put” – whereby the U.S. central bank swoops to the rescue every time financial markets or the economy get a case of indigestion – appears to be in hibernation. Instead, the Fed is retaining its focus on inflation and biding its time for greater policy clarity. Now a “White House put” has seemingly formed in its stead. This is to say that the White House has made a habit of delivering tariff good news when the market is at its most distressed.

With regard to the guardrail on the other side of the road, the fact that the UK remains subject to a 10% tariff even after completing its trade deal highlights that tariffs are not going away – a further guardrail, if a less welcome one. We continue to point to a middle-of-the-road level of tariffs as the likely ultimate destination.

The risk is that tariffs land at least incrementally above the current market expectation, for two reasons.

1. Having been persuaded to back down by weaker financial markets in April, President Trump may now be taking advantage of subsequent stronger markets to continue inching toward his objective. This is to say, there is a tentative trend of the White House levying or at least threatening new tariffs whenever financial markets are looking strong enough to handle the blow. There may yet be more to come.

2. The initial evidence from tariff negotiations between the U.S. and a variety of parties is that the U.S. is focused on extracting concessions from other countries, and much less interested in looking for win-win deals that involve significant adjustment on both sides of the ledger. As such, the scope for sharply reducing tariffs on both sides may be limited.

A final tariff theme is that the degree of uncertainty, while materially reduced from early April, is still quite high when compared to any other point in time in modern history (see next chart). There are still many ways that things could go from here.

Global trade policy uncertainty has fallen but remains high

As of 05/25/2025. Shaded area represents U.S. recession. Index based on searches in economic, research and government-related topics in Bloomberg News and First Word feeds. Sources: Bloomberg, Macrobond, RBC GAM

Current lay of the land

The current lay of the land is that the U.S. average effective tariff rate on its trading partners now rests at approximately 13%. This is a reduction after the recent China and UK deals from a peak of 22% in early May (see next chart).

Average U.S. tariff rate is now approximately 13%

Effective tariff rates estimated based on tariffs implemented by the Trump administration up to May 16, 2025. Excludes de minimis effect. Sources: Evercore ISI Tariff Tracker, International Monetary Fund (IMF), Macrobond, RBC GAM

We continue to flag a final resting point for the average effective U.S. tariff rate of about 15%, with the view that some additional sectors tariffs are on their way. However, mounting exemptions and modest trade deals should exert an approximately equal force in the opposite direction. At the end of the day, many countries are likely to be subjected to average tariffs of around 8-15%, while China should drag the average somewhat higher, with a 25-50% rate expected.

Which countries are the most adversely impacted by U.S. tariffs? The answer lies at the intersection of which countries are subjected to the largest tariffs and which countries are most dependent on the U.S. for exports (see next chart).

Exposure to U.S. trade and U.S. tariffs varies

Effective tariff rates estimated based on tariffs implemented by the Trump administration up to May 12, 2025. Sources: Evercore ISI Tariff Tracker, IMF, Macrobond, RBC GAM

Examining each dimension separately, China is still the most heavily tariffed country, with an average rate of 39%. No other country exceeds 15% given the delay of full reciprocal tariff rates until July. Along the other axis, Vietnam and Mexico are by far the most reliant on the U.S. economy.

Combining the two dimensions together (see next table), the current level of tariffs should hit Mexico and Vietnam most profoundly, trailed by quite a considerable distance by Thailand, South Korea, China, Malaysia, Taiwan and Canada.

Countries ranked by current U.S. tariff impact

Effective tariff rates estimated based on tariffs implemented by the Trump administration up to May 12, 2025. Sources: Evercore ISI Tariff Tracker, IMF, Macrobond, RBC GAM

China de-escalation

For clarity, the U.S. and China did not actually reach a trade deal on May 12, but instead agreed to de-escalate tariffs while they pursue a later deal.

The official reduction in the U.S. tariff rate on China was from 145% to 30%, though given a myriad of other targeted tariffs and exemptions that persist, the effective rate has only fallen from 105% to 39%. On the other side of the ledger, Chinese tariffs on the U.S. fell from 125% to 10%, though also with a range of exceptions.

At a more granular level, the tariff rate on U.S. low-value imports from China will fall from 120% to 54% (having been at 0% until fairly recently). China in turn reduced certain non-tariff countermeasures such as allowing the delivery of Boeing aircraft into China and pausing its ban on exporting rare minerals to the U.S.

Of course, if a proper trade deal is not struck by August 11, the tariff rates will rise – albeit only partway back to their prior heights. This would mean an effective rate of 53% on China.

The negotiations are far from certain to succeed. It will be enormously hard for the U.S. to make a dent in the Chinese trade surplus. If that is the criteria for lifting tariffs, then success is unlikely. If the U.S. is instead willing to accept mere progress in that direction, demands may focus on:

• China’s industrial subsidies that undercut foreign competitors

• its non-market practices more generally

• greater respect for foreign intellectual property

• China’s failure to deliver on its commitments under the trade deal the two countries struck in 2020.

China only ever made 57% of the purchases that it had promised (though the pandemic complicated matters). The country did not fully deliver on its intellectual property and financial services liberalization promises, either. The U.S. will likely also ask for help in softening the U.S. dollar and reducing the flow of fentanyl, among other issues.

It is hard to say exactly where it all ends, but we tend to think that relative to the current effective tariff rate on China of 39%, a growth-friendly outcome would be a permanent effective tariff rate of about 25%. A less desirable outcome – reflecting a failure to strike a deal and perhaps even greater antagonism – would be an effective rate of about 50%.

UK-U.S. trade deal

It came as somewhat of a surprise on May 8 that the UK was the first country to pen a trade deal (or, really, a trade outline) with the U.S. But perhaps we should not have been so surprised given the country’s success in negotiating quite a number of other trade deals in recent weeks, discussed later.

This development is relevant for the two countries, but also for the rest of the world as it gives a first look into what the U.S. wants, and what it is willing to give up.

The net conclusion isn’t especially promising. Significant – albeit diminished – tariffs remain.

The deal leaves the U.S. baseline 10% tariff rate in place for UK products. This isn’t much of an accomplishment, as the UK was one of a handful of countries for which the full reciprocal tariff rate was also just 10% – so there wasn’t the looming threat of a doubling or tripling of the tariff rate come July, as for much of the rest of the world. Similarly, the fact that the UK will still be paying a broadly-based tariff to the U.S. even though it is the rare duck that runs a goods trade deficit with the U.S. is also not promising for the rest of the world’s nations.

What the UK did achieve was the reduction of sector-specific tariffs. For example:

• Instead of the global 25% tariff on UK motor vehicles, the new rate will be 10%, though limited to a quota of 100,000 vehicles annually – about in line with the volume of current exports to the U.S.

• Steel and aluminum tariffs have been cut from 25% to 0%, though only up to a quota and only formally articulated for 2025.

• UK aircraft engines will enter the U.S free of tariffs, while the UK committed to buy a significant number of U.S. planes.

• The UK will also get preferential treatment for future sector-specific tariffs (anticipated on pharmaceutical, lumber, copper and computer chips).

• The UK gains a quota of tariff-free access to the U.S. beef market and grants the U.S. beef industry the equivalent privilege.

In exchange, the UK has accepted U.S. security requirements for its steel and pharmaceutical industries. Essentially this means that China will no longer be allowed to participate in those supply chains. The thesis that countries will be forced to pick what umbrella they fall under is coming true – it is team USA versus team China. The UK has also removed its tariff on American ethanol. All told, the effective UK tariff on the U.S. falls from 5.1% to 1.8%. The effective U.S. tariff on the UK falls from 11.5% to 8.8%.

The deal also buys the UK much desired clarity and avoids further concessions.

The main message from the deal is the disheartening fact that tariffs are unlikely to vanish altogether for even the most inoffensive countries such as the UK. These trade deals are set to add further frictions to trade flows (not just via the collection of tariffs but also the fiddly imposition of quotas). Time will tell whether the U.S. honours the deal, or reneges on it later.

But it is a notable if small positive that the U.S. did not take a hardline approach to demanding concessions: despite some contradictory statements, it appears that the UK did not have to abandon its digital services tax (though more on that later). Its VAT tax went unremarked. The U.S. did not insist on greater access to protected UK service sectors. And, the U.S. did not impose a hard defense spending target.

Another round of tariff threats

With the stock market mostly recovered from its first bout of tariff worries (see next chart), this seemingly gave the White House space to once again push in a protectionist direction. The direction of travel is no longer clearly toward lighter tariffs, as it had been from early April until quite recently.

Stock market has jitters over tariff concerns

As of 05/23/2025. Sources: S&P Global, Macrobond, RBC GAM

On May 4, President Trump told the media that the U.S. would set new tariff rates for many trading partners within the subsequent two to three weeks. This is in part due to the impracticality of negotiating with over 100 countries at the same time. While the timing has proven suspect, it speaks to the chaotic uncertainty that persists. It raises questions such as why that timeline differs from the early July expiry of the reciprocal tariff delay, and whether these new tariff rates will be different than the reciprocal tariff rates (and why).

On May 23, President Trump announced plans to implement a 50% tariff on the EU on June 1. That has since been delayed until July 9 after a constructive conversation with EU officials, which puts the timing in line with the expiry of the 90-day reciprocal tariff delay. But concerningly, the proposal shows that the tariff landscape is still chaotic. The 50% number seemingly came out of nowhere. The EU had originally been targeted with a 20% rate and currently pays a 10% rate. Apparently the U.S. is willing to apply additional pressure when in the midst of negotiations over a trade deal, and the published reciprocal tariff rates may not quite represent the worst-case scenario for countries.

Also on May 23, President Trump announced a plan to impose a 25% tariff on all iPhones and other cell phones manufactured outside of the U.S. This was seemingly in response to Apple plans to shift a significant fraction of their phone production from China to India, rather than back to the U.S.

Incidentally, the iPhone threat supports our thesis that the White House may increasingly lean upon corporate-level threats and measures – leveraging not just the tariff toolkit but also moral suasion and the ability to alter the interpretation and enforcement of company- and industry-oriented regulations – to put pressure on American and foreign companies to increase their U.S.-based production. The problem with tariffs is that they hurt Americans immediately, whereas it takes years to shift manufacturing to the U.S. Pressuring companies and industries directly can yield commitments that result in less short-term pain but a similar long-term outcome (more domestic production, albeit still at the eventual cost of higher prices for Americans).

Another example of a corporate-level threat is the White House demand that Walmart not pass along higher prices to consumers. If respected, Walmart profit margins would presumably shrink. Amazon has also come under pressure along similar lines.

It’s unclear if another White House tariff threat from earlier in May – to levy a 100% tariff on foreign-made films – is legal or logistically practical given that this would be a tariff on a service rather than a good. Nevertheless, it flags the concerning possibility that tariffs could leap beyond the traditional realm of traded goods.

Efforts to negotiate with the U.S.

For their part, many of the world’s countries are doing their best to negotiate with the U.S. over American tariffs and grievances.

This is proving quite difficult to accomplish, for several reasons. One is simply the sheer logistics. There are over 100 countries trying to negotiate with the U.S. before an early-July deadline. During the first Trump term it took 14 months just to negotiate with a handful of them.

Another challenge is that U.S. officials allegedly cannot even articulate specific demands to their counterparts. In turn, it is impossible to evaluate whether those demands are achievable, and so to make progress toward a deal.

The U.K deal provides some sense for a framework. Baseline tariffs will likely remain, sector tariffs are up for grabs, and U.S. demands may not venture too far beyond the traditional trade space. But it is still another matter altogether to find someone in a position of authority to negotiate with when the ultimate decision appears to come down to the pinch point of a single person – the President.

At its essence, Trump likes tariffs. He wants the manufacturing industry back in the U.S. Also, he says he is inclined to set take-it-or-leave-it offers rather than engage in the to-and-fro bargaining of traditional trade negotiations.

In an effort to salvage one of the largest bilateral trading relationships in the world, the EU has articulated several goals:

• Mutually reduce tariff barriers.

• Mutually reduce non-tariff barriers.

• Cooperate on global challenges such as Chinese overproduction.

• Increase European investment into the U.S.

• Increase EU purchases of U.S. products such as natural gas and technologies.

Most of this should be of interest to the U.S., but the White House was apparently quite dissatisfied with the initial proposal.

News of negotiation efforts are trickling forth from other countries as well:

Japan: The U.S. is apparently steadfast in its refusal to consider lifting baseline or sectoral tariffs on Japan. The country seems to be on track for a worse deal than the UK. This is presumably because the U.S. wants to limit the large Japanese auto sector in particular. Japan is displeased with this U.S. stance, though it has indicated it does not plan to sell U.S. Treasuries as a bargaining tactic.

Taiwan: Taiwan is one of the countries more affected by U.S. tariffs. Its currency has surged at least in part on hopes of a deal – not just due to the economically positive ramifications, but also the prospect that the country would commit to help weaken the greenback.

India: India appears increasingly willing to tear down its own trade barriers. However,  frustration is mounting that the U.S. is trying to use tariffs as leverage to influence the country on geopolitical matters.

Vietnam: Vietnam’s rapid approval of a Trump Organization project in the country (first announced prior to the election last fall) is seen by some as a goodwill gesture that may help the country as it seeks to avoid one of the highest reciprocal tariff rates. A lot is at stake given that Vietnam is now the most economically linked country to China – above even Mexico and Canada.

There is some thought that the U.S. bargaining position may weaken over time as the U.S. economy and markets themselves weaken. But financial markets are proving resilient, putting a great deal of focus on where the U.S. economy goes in the coming months. Some countries may play it slow for this reason.

Legal resistance to Trump tariffs

A key question is whether Trump tariffs will actually survive a raft of lawsuits given the expansive manner in which existing legislation has been interpreted. On balance, the answer is a qualified “yes,” though with some twists and turns.

The Trump Administration faces multiple lawsuits in the U.S. against its use of the International Emergency Economic Powers Act (IEEPA) to impose sweeping tariffs. Trump invoked IEEPA for two chief reasons:

• To declare several national emergencies relating to illegal immigration, illicit drugs, and trade deficits.

• To levy tariffs on imports from China, Canada, Mexico, and eventually almost all U.S. trading partners via his “Liberation Day” tariffs.

IEEPA is the legal justification for most of the U.S. import tariffs now in place, though sectoral levies rely on other legislation.

Plaintiffs in these cases generally argue that the IEEPA legislation makes no mention of tariffs – it only gives the President authority to “regulate” or “prohibit” imports. They also claim its use represents an over-reach by the executive branch. The U.S. Constitution grants the legislative branch power over tariffs, although Congress has delegated some of that authority to the President. Whether trade deficits constitute a national emergency and justify a 10% across-the-board tariff is also being debated.

IEEPA has been on the books since 1977 but has never been used to impose tariffs, until now. President Nixon did, however, use the Trading With the Enemy Act – a legislative predecessor that shares language with IEEPA – to impose tariffs on a Japanese zipper manufacturer in 1971. The courts upheld that move in 1974, and the government is arguing that precedent applies today.

One of the key cases to watch is being heard at the U.S. Court of International Trade. Several business owners are asking for a permanent injunction against Trump’s “Liberation Day” tariffs and damages equal to the duties already collected. A three-judge panel is hearing arguments in the case and could rule on a preliminary injunction sometime in June. A similar lawsuit brought by 12 state attorneys general – which asks for an injunction against border/fentanyl tariffs as well – began in the same court in the second half of May.

A preliminary injunction could stop the government from collecting IEEPA tariffs while the case proceeds. However, that would require the plaintiffs to demonstrate their businesses or states are suffering irreparable harm – not just lost profits. That is a relatively high bar. And even if a preliminary injunction is granted, it could be suspended while the government appeals the ruling.

If Trump’s use of IEEPA is stymied by the courts, he has other options (see table). Section 301 tariffs to counter unfair foreign trade practices were levied against China during Trump’s first term. These remain in place and are likely the most suitable alternative. The U.S. Trade Representative would have to conduct investigations into individual countries’ trade practices before tariffs could be put in place, but a large share of U.S. imports could likely be covered off by year end. In the interim, Section 122 tariffs could be implemented for up to 150 days.

It’s worth keeping an eye on legal challenges to Trump’s IEEPA tariffs, which raise the prospect of those tariffs being suspended in as little as a month. But ultimately, we think the Trump administration sees merit in levying broad tariffs across most of the U.S.’s trading partners. As such, legal resistance could be more of a speedbump than a roadblock on the path toward protectionism.

Trump’s tariff toolkit

Source: Bloomberg Economics, Congressional Research Service, RBC GAM

Rest-of-world trade actions

Other countries have been revisiting their own trading relationships beyond the U.S.

The UK has, remarkably, signed recent trade deals not just with the U.S., but also with India and the EU. The EU deal is particularly fascinating, as it represents a partial backtracking on the Brexit efforts that dominated UK politics and trade policy over much of the last decade.

Core to the deal are efforts to better integrate UK and EU defense and to better align agricultural sectors. For example:

• The UK will participate in the EU’s €150 billon defense fund.

• Carbon trading systems will be linked.

• The two jurisdictions will pursue a “youth experience” scheme that would permit an increased flow of people across the border.

• EU and British fishing boats will also have access to one another’s water for an additional 12 years, extending the existing system.

Interestingly, after the U.S. sharply scaled back its de minimis exemption for cheap foreign consumer goods from China, the EU and Japan are considering similar adjustments. This would effectively close a loophole that permits certain foreign products to enter a country outside of the usual tariff regime. The EU approach would be particularly innovative, as instead of going through the complicated process of assessing the value of each package separately and applying tariffs on a percent basis, the EU proposes to levy a flat fee of €2 per package.

Tariff economic impact so far

Some elements of the tariff macro impact are coming into view, while other aspects remain elusive.

The idea that companies and households would frontload their imports and consumer spending to get ahead of anticipated tariffs has proven to be true. Imports of U.S. consumer goods absolutely exploded in the months leading up to the April tariff onslaught (see next chart). U.S. retail sales also rose unusually quickly in March, right before the largest tariffs came on.

U.S. consumer goods imports surged ahead of tariffs

As of March 2025. Sources: U.S. Census Bureau, Macrobond, RBC GAM

Front-loading is actually now enjoying a second life in a U.S.-China context. The recent tariff détente between the two countries is encouraging a further surge in shipments before higher tariffs potentially again assert themselves. In the week after the U.S.-China announcement, the weekly number of shipping container bookings from China to the U.S. more than doubled.

Uncertainty – a theoretical economic drag as companies and households sit on their hands awaiting greater clarity rather than make major outlays – has been extremely high, but is now declining to still-elevated levels.

A few metrics provide some sense for the economic damage from this. Only around half as many publicly traded companies are providing earnings guidance as usual, and one might imagine that these companies are similarly disinclined to make splashy bets on the future. American manufacturers report that new orders have declined substantially on uncertainty-related concerns (see next chart). A Dallas Fed survey finds 39.6% Texas business executives plan to decrease their capital spending, versus just 10.1% planning to increase it.

On the consumer front, existing home sales have also declined palpably after having picked up due to lower rates at the end of last year. This is all to say that there appears to be some genuine economic damage from the uncertainty effect, even if it is difficult to perfectly disentangle it from the anticipated damage of the tariffs themselves, or other related forces.

New orders and expectations have plummeted since announcement of Trump tariffs

As of April 2025. New orders and future new orders are normalized aggregate of new orders from surveys on manufacturing firms conducted by Chapman University, Creighton University, Institute for Supply Management (ISM), Federal Reserve Bank of Dallas, Federal Reserve Bank of Kansas City, Federal Reserve Bank of New York, Federal Reserve Bank of Philadelphia, and Federal Reserve Bank of Richmond. Sources: Macrobond, RBC GAM

It cannot be said that the U.S. economy is suffering too badly under the weight of new tariffs, at least not yet. U.S. economic surprises have actually been universally positive over the past month for major indicators (see next chart).

U.S.-focused Economic Surprise Index turns positive

As of 05/20/2025. U.S.-focused Economic Surprise Index (FESI) is the equal-weighted average of the normalized data surprises of the underlying components. Sources: Bloomberg, RBC GAM

The Dallas Fed Weekly Economic Index is perhaps tilting slightly lower but has not made a sharp move (see next chart). Weekly jobless claims have inched higher (a negative), but again the movement is minor (see subsequent chart).

Dallas Fed Weekly Economic Index may be tilting lower

As of the week ended 05/10/2025. The Weekly Economic Index is an index of 10 indicators of real economic activity, scaled to align with the four-quarter GDP growth rate. Sources: Federal Reserve Bank of Dallas, Macrobond, RBC GAM

U.S. jobless claims still look fine

As of the week ending 05/17/2025. Sources: Department of Labor, Macrobond, RBC GAM

Some U.S. sectors are even profiting from tariffs, such as the U.S. steel industry as its foreign competition is hobbled (see next chart). U.S. credit growth has also picked up in the short run, albeit we believe primarily because companies are dipping into their lines of credit to ensure sufficient liquidity in the event of more challenging economic circumstances ahead (see subsequent chart).

U.S. raw steel production is benefiting from tariffs

As of the week ending 05/17/2025. Sources: American Iron and Steel Institute, Haver Analytics, RBC GAM

U.S. credit growth has picked up

As of the week ending 04/16/2025. Shaded area represents recession. Sources: Federal Reserve, Macrobond, RBC GAM

Tariff economic impact ahead

Looking forward, logistics and transportation companies are broadly pessimistic, with some planning or reporting layoffs. There is still some measure of economic pain on its way.

The consensus U.S. outlook for gross domestic product (GDP) in 2025 and 2026 continues to decline (see next chart). In fact, the consensus growth outlook for nearly every country in the world is in decline.

U.S. consensus growth forecasts have been revised lower

As of May 2025. Sources: Consensus Economics, RBC GAM

While recession concerns are elevated (see next chart), the scale of the tariff economic damage ahead looks to be somewhat smaller than initially feared, in significant part as Chinese tariff rates descend from the triple digits to double digits. That’s the difference between products that aren’t even worth importing – resulting in shortages and empty shelves, and products that are simply more expensive than they were before.

Those higher prices still mean that real incomes have effectively fallen. In turn, lower real incomes argue for a weaker spending trajectory. We still budget for around a 1.3 percentage point hit to the rate of U.S. economic growth. But it probably isn’t a recession.

For that matter the economic pain may arrive somewhat later than previously expected as inventories hold out for longer. What might once have been a story of diminished consumption beginning in May and June may instead be one that appears more visible in the July and August data.

Trending now: U.S. recession concerns have risen

As of April 2025. The number of Google web searches for the topic relative to the total number of searches on Google over time is scaled and normalized to arrive at the search interest over time. Shaded area represents recession. Sources: Google Trends, Macrobond, RBC GAM

Initial tariff price effects?

The price effects of tariffs are also fairly slow in coming. The U.S. Consumer Price Index (CPI) for April was slightly softer than expected, at just +2.3% YoY. There was no visible tariff effect on motor vehicle prices or apparel prices, or in other trade-oriented sectors (see next chart).

Factors that contribute to the latest U.S. monthly inflation rate

As of April 2025. Sources: U.S. Bureau of Labor Statistics, Macrobond, RBC GAM

Looking further up the supply chain, import inflation remains ordinary (see next chart). Correctly interpreting this is key, and counterintuitive. Import prices would not be expected to rise on tariffs as the tariff is applied immediately after the product is imported. If anything, one might imagine that import prices should fall as importers pushed some of their newfound expenses toward the foreign manufacturer (in the form of cheaper import prices). But that isn’t visible here, either – it’s a whole lot of nothing, so far.

Import price inflation is still benign

As of April 2025. Sources: U.S. Bureau of Labor Statistics (BLS), Macrobond, RBC GAM

But some higher prices should be on their way, both from a theoretical standpoint and because manufacturers indicate that their costs are starting to rise in a significant way (see next chart).

Raw material prices jumped; supplier deliveries slowed

As of April 2025. Shaded area represents recession. Sources: Institute for Supply Management (ISM), Macrobond, RBC GAM

It will take some time for input costs to work through the supply chain, but not too long. The Dallas Fed survey of Texas executives shows that 51% expect to raise their prices within a month of tariffs taking effect. Another 26% indicate they will do so within 1-3 months.

On the other hand, another survey – from the National Federation of Independent Businesses – shows only a small uptick in the fraction of firms planning on raising their prices (see next chart).

Fraction of U.S. businesses planning to raise prices ticked up on Trump tariffs

As of April 2025. Shaded area represents recession. Sources: National Federation of Independent Business, Macrobond, RBC GAM

While survey-based consumer inflation expectations have soared, other more reliable indicators – such as the market-based inflation expectations – are showing much less of a jump (see next chart). Another reason to think the inflation leap may not be too extreme is that wage pressures are significantly abating (see subsequent chart).

U.S. inflation expectations rise to varying degrees

Market-based expectations as of 05/12/2025, survey-based consumer and business expectations as of April 2025. Sources: Federal Reserve Bank of Atlanta, Federal Reserve Board, University of Michigan Surveys of Consumers, Haver Analytics, RBC GAM

Wage pressure in U.S. has eased

As of April 2025. Wage Pressure Composite constructed using business intentions to raise wages. Shaded area represents recession. Sources: Macrobond, RBC GAM

On the whole, we reiterate that prices should rise somewhat due to tariffs, but it hasn’t happened yet at the consumer level. In fact, the overall effect may be a bit smaller than conventionally imagined. Our models argue for consumer prices that will be “just” 1.1 percentage points higher than they would otherwise have been.

Corporate cross-checking

U.S. earnings season is nearing a close and more than 90% of S&P 500 companies have reported at the time of this analysis. This gives us an opportunity to examine key themes from the latest quarter. Tariffs were unsurprisingly a major topic of conversation on earnings calls, garnering by far the greatest increase in mentions relative to the previous quarter (see table). Industrials, health care and consumer companies dwelled most on the topic.

Some other interesting themes emerge from earnings call transcripts:

• Next to tariffs, mentions of pricing strategy, material costs and an economic slowdown increased significantly in Q2. This shift highlights the potential stagflationary impact of protectionist trade policies (higher inflation, slower growth). Industrials, materials and energy companies saw the greatest pickup in mentions of material costs, while industrial and consumer discretionary companies talked pricing strategy. Discussion of an economic slowdown was prevalent among financials.

• Mentions of supply chain disruptions and shifts increased, but companies weren’t necessarily highlighting transportation costs. This seems to align with supply chain data and other anecdotes suggesting volatility in shipping demand and some logistical headaches, but limited increase in overall shipping costs.

• There were growing mentions of consumer confidence, which we assume were generally negative given recent deterioration in consumer sentiment data. Consumer discretionary and staples companies recorded the greatest increase in mentions. The latter also noted more “trading down,” which suggests evidence of consumer frugality.

• Despite growing mentions of an economic slowdown, there was no increase in mentions of job cuts relative to the previous quarter. Again, that seems to align with resilience in payroll and jobless claims data thus far.

• There was some increase in mentions of reshoring, but not of nearshoring. This makes sense in our view as the threat of universal tariffs (even if Canada and Mexico are being targeted relatively less at this point) doesn’t exactly encourage regionalization of supply chains.

• There was no significant increase in mentions of boycotts, although several travel service and credit card companies noted fewer trips to the U.S., particularly by Canadians, which we see as evidence of boycotting. This dynamic is also evident in tourism and border crossing data.

Overall, these trends seem to provide anecdotal confirmation of what we’re seeing in the economic and survey data and provide an interesting lens on the channels through which various sectors are (or aren’t) being impacted by tariffs.

What corporations talked about in earnings calls

Notes: As of 05/23/2025. Prorated by number of earnings calls so far in Q2 vs Q1. Industry totals might not sum to S&P 500 due to prorating. Source: Bloomberg, RBC GAM

Business cycle update

Our business cycle scorecard has received its quarterly update. Notably, it has downgraded the likelihood that this is the beginning of a fresh new cycle, while upgrading the risk that this is an end of cycle or recessionary phase (see next chart).

U.S. business cycle score shows risk of ‘end of cycle’ or recession is rising

As of 05/02/2025. Calculated via scorecard technique by RBC GAM. Source: RBC GAM

This pivot makes sense when considered from a quarter-to-quarter perspective. As tariffs blasted onto the scene over the past quarter, they materially increased the prospect of economic weakness and the risk of a recession.

Two caveats are in order.

One is that the tariff risk has declined somewhat since this update occurred at the beginning of May. As such, we have downgraded our assessed risk of a U.S. recession over the coming 12 months to 30% from 40%. That is still an elevated number. But the implication is that the next update to the business cycle scorecard could show some improvement.

The second caveat is that the business cycle scorecard is adept at interpreting the effects of organic economic forces like an overheating economy or one that is growing tired and old. It is not as  good at interpreting or capturing exogenous policy shocks such the U.S. decision to impose tariffs on trading partners, or the many tweaks that have been made since that initial decision. We continue to update it and believe it says something of value. But it is less central to our forecasting process than at other times in history.

Fiscal developments

“Big, beautiful bill” passes the House

U.S. legislators are making progress toward extending  tax cuts (passed under the Tax Cuts and Jobs Act (TCJA) during the first Trump Administration) alongside some additional tax relief and spending cuts under the One Big Beautiful Bill Act. But beauty is in the eye of the beholder, and bond investors don’t seem to find the legislation’s debt and deficit implications particularly attractive. Long-term Treasury yields recently crossed the 5% mark for just the second time since 2007. One estimate of the Treasury “term premium” – that is, additional compensation investors receive for locking up their money for longer – hit its highest level in 11 years.

Why the concern? The Penn Wharton Budget Model estimated the bill (prior to some last-minute tweaks) would increase the primary deficit by a cumulative $3.2T over 10 years. However, that assumes some of the new, temporary tax cuts and credits are allowed to expire after four years. If they were made permanent – as is happening now with TCJA tax cuts – the 10-year cost would balloon to $4.8T. Rather than a 7% increase in public debt over the next decade relative to the baseline projection, extending those changes would result in an 11% increase.

Tax cuts will add significantly to budget deficits, particularly if made permanent

As of 05/20/2025. Sources: Penn Wharton Budget Model, Congressional Budget Office (CBO), Joint Committee on Taxation, House committees, RBC GAM

Key tax cuts, credits and new spending in the House bill includes:

• Extension and expansion of TCJA tax cuts that were set to expire at the end of the year

• Extension and temporary expansion of child tax credits

• An increase in the standard deduction for single filers and seniors – the latter in place of Trump’s promise to stop taxing Social Security benefits, which is legislatively difficult

• Eliminating tax on tips and overtime

• An increase in military and border spending

Those are partially offset by some savings via:

• Cuts to Medicaid and SNAP (formerly known as food stamps) as stricter work requirements will reduce the number of beneficiaries

• Capping the state and local tax (SALT) deduction rather than allowing a previous limit to expire, which would have reduced revenue

• Phasing out Biden-era clean energy tax incentives

Medicaid and SNAP cuts contribute to the finding of the Congressional Budget Office (CBO) that the bill would reduce resources for the lowest 10% of earners while benefiting the top 10%. But overall, the bill is net stimulative, even relative to a current policy baseline that assumes TCJA tax cuts persist. For households, that stimulus will show up next spring when taxpayers receive refunds for personal income tax cuts that are retroactive to the start of this year. This fiscal tailwind and the associated increase in budget deficits will be partially offset by tariff impacts and DOGE spending cuts, which are not factored into the budget projections.

It’s worth noting that this tax bill still has a way to go in the legislative process. It was passed in the House by the narrowest of margins (215 to 214) and now proceeds to the Senate, where changes are likely – which will then have to be approved by the House. Lawmakers hope to have the bill on the President’s desk by July 4. As it also includes a $4T debt ceiling increase, it needs to be passed by August when the Treasury is expected to run out of cash if its borrowing authority isn’t increased.

U.S. tax hike on international investors

Embedded within the gargantuan 1,100-page budget document is section 899, which proposes a retaliatory tax against foreign countries that have “discriminatory or unfair taxes” that include digital services taxes.

Canada, the UK, France, Italy and Spain, among others, all have a digital services tax. These taxes disproportionately impact U.S. tech giants simply by virtue of the fact that U.S. companies happen to be the world’s (ex-China) tech giants.

Should countries not lift their digital services tax, they will experience higher taxes on U.S. income. For example:

• Foreign corporations that receive dividends from U.S. subsidiaries would see their withholding tax rate rise from the current 5% rate by five percentage points per year to a maximum 50% rate.

• Foreign individuals who directly own U.S. securities currently pay a 15% withholding tax rate under the current tax treaty. That rate could increase to a maximum rate of 50%.

If the budget is implemented, this puts the U.S. in a strong bargaining position to pressure other countries to eliminate their digital sales taxes. This could explain why the UK was not asked to abandon their digital sales tax as part of the bilateral trade deal – a different pressure point was coming.

But it would not be entirely costless to the U.S. to implement this retaliatory tax. International investors would be significantly less interested in investing in the U.S. if the effective dividend tax rate were much higher. This would result in reduced capital flows to the U.S.

We continue to believe that there is a strong likelihood that most of the targeted countries, including Canada, will abandon their digital sales taxes and so manage to avoid this tax.

U.S. fiscal concerns

On May 16, ratings agency Moody’s finally downgraded the U.S. to an AA+ equivalent rating, aligning with the two other major ratings agencies in their assessment of the U.S. fiscal position.

While an AA+ rating is hardly bad in the grand scheme, it represents something of a generous interpretation due to the unique U.S. advantage of possessing the world’s reserve currency, alongside a deep Treasury market and a big economic engine.

When we look at the U.S. fiscal position on a like-for-like basis with other countries, it appears considerably less favourable than this.

Our fiscal health index argues that – when deficit, debt and other relevant fiscal metrics are combined – the U.S. has now risen to the most worrying position among the world’s major countries (see next table).

A fiscal health scorecard of major countries shows U.S. weakness

2024 data for all indicators except interest payments (2023) and GDP growth (International Monetary Fund forecast for 2030 used as proxy for ‘normal’). Fiscal adjustments refers to the necessary reduction in fiscal deficit to stabilize debt-to-GDP ratio. Sources: IMF, Macrobond, RBC GAM

The U.S. would need to make among the largest fiscal adjustments to get back to a stable debt-to-GDP ratio. But its latest budget actually forges in the opposite direction, proposing another $3.2 trillion worth of debt. That substantially outweighs any anticipated tariff-generated revenue and DOGE-driven savings.

Framed slightly differently (see next chart), the U.S. has the least fiscal flexibility among major countries – as defined by the fraction of its government spending that is locked into entitlements, interest payments and military spending. When combined with its necessary fiscal adjustment to stabilize its debt-to-GDP ratio, the U.S. is a significant outlier from the pack.

Fiscal adjustment and flexibility, NATO countries

As of 05/21/2025. Sources: RBC GAM, U.S. Bureau of Economic Analysis (BEA), UK Office for National Statistics (ONS), IMF, EuroStat, StatsCan, NATO

Financial markets have not been indifferent to these U.S. challenges. The U.S. dollar has declined sharply since the downgrade and the U.S. 30-year yield now up above 5.00%. Both trends will be addressed in more detail –in the broader context of declining trust and declining U.S. exceptionalism – in a future report.

UK and EU update

After a sluggish second half of 2024, the UK economy perked up at the start of 2025. Q1 GDP rose by 0.7% (non-annualized). That pace could be difficult to sustain, though, with net trade accounting for about half of the increase as the economy appeared to benefit from front-loading of exports ahead of tariffs. Although the UK was the first to secure a trade deal with the U.S., it only offered relief from some sectoral levies and maintained a 10% baseline tariff rate. Relative to other major economies, we expect the UK will be less significantly impacted by growing trade frictions with the U.S., but some drag on growth is still likely.

UK consumer spending, meanwhile, was unimpressive and could remain challenged as the labour market continues to gradually soften. For example:

• The unemployment rate has now retraced half of its post-pandemic decline.

• Payroll data show falling headcounts as higher payroll taxes (announced in last autumn’s budget) took effect in April.

• A weakening job market has yet to ease wage pressures, which limits the scope for rate cuts by the Bank of England (BoE).

BoE delivered a 25-basis point rate reduction in May but suggested the quarterly pace of cuts that began last August is likely to continue. At 4.25%, the UK still has one of the highest policy rates in the G10.

UK unemployment rate has retraced half of its post-pandemic decline

As of February 2025. Sources: ONS, Macrobond, RBC GAM

The Eurozone also appears to have benefited from some front-loading of economic activity in Q1. Highlights include:

• Industrial production rose by nearly 5% in the quarter, the fastest pace in the currency bloc’s history apart from the immediate post-pandemic rebound.

• GDP increased by 0.3% in Q1 as all four of the Eurozone’s largest economies (accounting for nearly three-quarters of output) expanded simultaneously for the first time in a year.

• With inflation helped lower by declining energy prices and currency appreciation, the ECB looks set to deliver another rate cut in June. If it does, it will have cut by twice as much as the BoE over the past year, and from a lower starting point.

The EU is making slower progress toward a trade deal with the U.S. Apparently frustrated by the lack of advancement, Trump recently threatened a 50% tariff on imports from the EU starting June 1. This was subsequently delayed until July 9.

The EU had reportedly made a new proposal that included gradually reducing tariffs to zero (on both sides) for non-sensitive agricultural products and industrial goods. However, Trump apparently thought the deal was less than other countries are offering. The EU currently faces an effective tariff rate of around 10%. Even without the threatened 50% tariffs, that effective rate could increase substantially if further sectoral tariffs are applied, particularly to pharmaceuticals, which account for one-quarter of goods exports to the U.S.

Eurozone industrial production surged in Q1 ahead of potential tariffs

As of Q1 2025. Sources: Eurostat, Macrobond, RBC GAM

Much has been made of upcoming fiscal support in Europe as Germany loosens its purse strings and EU budget rules allow for greater defense spending. Recent estimates from the European Commission suggest Germany’s 12-year, €500B infrastructure fund (worth 11.6% of 2024 GDP) could boost the country’s economy by 1.25% by 2029 – with some lift starting as soon as the second half of this year. At the same time, modestly positive spillover effects should accrue to other member states.

Greater defense spending across the EU is seen providing about a half percentage point lift to economic activity by 2028. A temporary “escape clause” from budget rules allows countries to increase defense spending by 1.5% of GDP.

Amid growing trade frictions with the U.S., the UK and EU are revisiting their own trade ties. They recently announced a new agreement that touches on trade, defense, climate, energy, fishing rights and the movement of people. Some of the details include:

• Working toward alignment on sanitary and phytosanitary (SPS) rules that would reduce border checks on food and animal products

• Linking EU and UK carbon markets, thus exempting one another from impending carbon taxes

• A “youth experience scheme” that could offer time-limited work visas to those between the ages of 18 and 35, subject to quotas

Ultimately, this deal only undoes a modest amount of the de-coupling brought about by Brexit. The UK government claims the SPS and carbon market agreements will add £9B to the UK economy by 2040.That number is equivalent to 0.35% of current GDP. It only retraces about one-tenth of Brexit’s 4% hit to the UK economy’s long-run productivity, as estimated by the Office for Budget Responsibility.