With contributions from Josh Nye, Vivien Lee, Aaron Ma, Sheena Khan
Shutdown over – for now
The U.S. government shutdown ended on November 12, after a record 43 days. The shutdown was also amongst the most intense on record. All 12 appropriations buckets were affected, versus just five of twelve during the prior record 35-day shutdown in 2019.
Non-essential government workers are now returning to their jobs. Essential government workers will presumably end their “sick outs” and slowdown initiatives. Affected government services should shortly be restored and the Thanksgiving travel season is expected to proceed normally.
Politics
The shutdown was resolved when eight Senate Democrats crossed the floor to vote with the Senate Republicans.
On the surface, this capitulation is surprising. After all, the Democrats had the momentum. They had just won the local and state elections of November 4. They had outperformed expectations and captured the gubernatorial offices of both Virginia and New Jersey.
Further, during an era in which the Republican Party controls the Senate and the House, and in which the White House is wielding more power than at any other time in living memory, the shutdown had seemed to offer the Democrats their only opportunity to wield real clout.
But other considerations ultimately prevailed:
The Republicans were united in rejecting Democrat demands for a restoration of health care funding. They seemed the more willing of the two parties to tolerate the adverse consequences of a government shutdown.
Accordingly, the Democrats may have placed a higher value on having a functioning government, ensuring that low-income households received their SNAP benefits, getting government workers paid and helping frustrated travelers.
The Democrats may believe they received sufficient concessions from the Republicans in the form of a promised vote on expiring Affordable Care Act subsidies and a commitment not to permanently lay off threatened workers.
The Democrats may think the loss of Affordable Care Act subsidies will prove sufficiently painful to Americans over the coming year that it will hurt the ruling Republicans and help the Democrats’ election prospects in the critical midterm elections next November.
Economic implications
The catch-up payments to government workers are expected to occur between November 15 and 19. That should alleviate the liquidity pinch many such workers have been feeling and potentially unleash deferred consumer spending.
More generally, we continue to budget for a 1.0+ percentage point hit to fourth-quarter annualized GDP (gross domestic product) growth due to the loss of output over the first 43 days of the quarter. We anticipate this will be followed by a roughly equivalent addition to first-quarter 2026 growth as the scales balance back out.
The publication of U.S. economic data was largely paused during the shutdown. Now that it is resolved, there should be a deluge of data.
The U.S. Bureau of Labor Statistics announced it will publish the September job numbers this Thursday November 20. But that release is easy compared to everything else, as they had been on the cusp of release (scheduled for October 3) when the shutdown began on October 1.
The timing of everything else is not yet clear. The October job numbers may be limited in scope, as some part of the hiring data should be possible to reconstruct for the payrolls survey. But the unemployment rate figure that comes from the sister household survey may simply be lost.
Meanwhile, September’s CPI (Consumer Price Index) was already released after a special effort in the midst of the shutdown. But a significant fraction of the data necessary to publish the October CPI was never collected in October, rendering the fate of that release unclear.
Fortunately, these surveys measure the level of employment and the level of prices, and so analysts and central banks will not be permanently hobbled by any incomplete months. But they may have to wait longer – for November data, released in December – to be confident in what the economy is doing. In turn, the Fed is less certain to cut rates in December. However, we still believe this is more likely than the market thinks.
Round two?
Unfortunately, that might not be the end of the government shutdown saga. While three of the 12 appropriation bills were passed and are now funded right through to the end of the fiscal year to next September 30, the other nine merely received temporary extensions until the end of January.
This means that there could be another shutdown in just over 10 weeks. It would be a slightly less intense shutdown, with SNAP payments, Veteran Affairs, the Food & Drug Administration and defence-related capital expenditures all secure. But that still leaves a large fraction of the government affected, including air traffic controllers and the TSA (Transportation Security Administration).
Political priorities and even the power dynamic could be substantially different by then, potentially leading to an easier budget approval process. But it would be irresponsible not to flag the very real risk of another shutdown in short order. Indeed, the Polymarket betting platform identifies a 33% chance of this.
Arguing against a shutdown, the Democrats didn’t manage to extract anything in the way of concrete policy from the last one, potentially dimming their enthusiasm for another.
Then again, the Democrats arguably won the public relations battle during the shutdown. This potentially makes them more willing to tolerate another. If the promised Affordable Care Act vote does not occur or does not fare well, they could opt to obstruct the budget again.
If another shutdown did occur, we’d be inclined to think it might be shorter, in part because of the lessons learned from the prior one, and in part because essential workers would probably become fed up more quickly during a second shutdown. This would result in earlier delays at airports and elsewhere that would put pressure on politicians more quickly.
-EL
Economic data run
U.S. economic data
U.S. economic data remains scant until the shutdown-related backlog is processed. In the meantime, alternative indicators continue to point to the mild economic deceleration that we have been tracking for several months. Our tabulation of weekly jobless claims shows still-low numbers of newly laid off people, but a slightly rising trend (see next chart).
U.S. jobless claims nudging higher
The latest small business confidence survey for the U.S. edged slightly lower, though not enough to undo the huge surge in confidence the group experienced at the time of the presidential election last fall (see next chart).
U.S. small business optimism declines slightly
As of October 2025. Shaded area represent recession. Source: National Federation of Independent Business, Macrobond, RBC GAM
Japanese GDP
Japanese third-quarter GDP came in soft, down 1.8% annualized. But a decline had been universally expected and indeed this drop was less than had been anticipated. The weakness was mainly from international trade, which makes sense given the application of U.S. tariffs.
Recall also that the Japanese economy doesn’t normally grow very quickly due to its shrinking population, with the implication that negative quarters should be expected with greater regularity than in most of the rest of the world.
The Japanese economy had grown fairly quickly in four of its five prior quarters (see next chart). This leads us to believe the economy is still broadly fine. With a new Prime Minister and stimulative fiscal expectations, the country should be back to reasonable growth fairly shortly.
Japan GDP has declined as expected
Japan Gross Domestic Product, Constant Prices, SA, AR, JPY. Note: As of 2025 Q3. Source: Japanese Cabinet Office (CAO), Macrobond, RBC GAM
Canadian employment
The Canadian economy has been more badly damaged by U.S. tariffs and associated policy uncertainty more than nearly anywhere else. Canadian GDP shrank outright in the second quarter and is tracking only a modest increase in the third quarter. Until recently, employment had been in outright decline.
But the past two months of Canadian employment figures are casting doubt on that sour narrative. Employment rose a surprisingly large 60,000 jobs in September and then an even larger 67,000 jobs in October (see next chart). The true rate of job creation was probably less than this – immigration in Canada has cratered in 2025 and the Labour Force Survey tends to be slow to adjust to this reality. But even if the absolute numbers are in doubt, the rate of hiring would appear to have accelerated greatly from earlier in the summer.
Canadian hiring has been choppy
As of 09.25. Source: Statistics Canada, Macrobond, RBC GAM
Our interpretation is that the Canadian economy probably is faring somewhat better than it did over the spring and summer. Realized tariff rates are relatively low on Canada relative to initial fears. Uncertainty has declined somewhat (even if important questions linger until the USMCA trade agreement has been sorted out). The Bank of Canada (BoC) has cut rates, the government has introduced fiscal stimulus and the stock market is soaring. At a bare minimum, it makes sense that the economy is growing.
But we are skeptical the revival is quite as sharp as these jobs numbers would suggest. Other measures of employment such as the country’s payroll survey showed a more muted rate of hiring in September (just +3,300). The October number is not yet available. The Business Outlook Survey shows relatively subdued hiring intentions, and the Canadian Federation of Independent Business survey shows more plans for job cuts than hiring.
Canadian inflation
On the price side, Canadian inflation cooled somewhat in October. The headline rate edged down to 2.2% year-over-year. Removal of the consumer carbon tax in April continues to bias that reading lower. Prices were up 2.7% excluding tax changes.
Core inflation, which excludes tax changes, remains close to 3% year-over-year However, recent monthly readings have been roughly in line with the BoC’s assessment that underlying inflation is around 2.5%. Shelter inflation has slowed to a similar rate, with earlier increases in mortgage interest costs now fading.
While inflation remains slightly above the BoC’s 2% midpoint target, it appears to be moving in the right direction. We don’t see inflation as an impediment to further rate cuts if the BoC thinks a bit more stimulus is needed.
However, welcome signs of stabilization in the labour market and incoming fiscal stimulus suggest the BoC will take a wait-and-see approach for now. But given slack in the economy and with inflation looking fairly well-behaved, we think the central bank might have limited patience if economic data disappoint early next year.
-EL & JN
Positive tariff developments
In contrast to earlier in the autumn, recent changes to U.S. trade policy have generally been in the direction of lower tariffs. Several new deals have been struck and fresh exemptions placed on some food imports. The incremental trend toward less protectionism has helped global trade policy uncertainty recede to its lowest level since last year’s presidential election (see next chart).
That said, the uncertainty measure is still historically elevated. It remains around levels last seen during the 2018-19 U.S.-China trade war and NAFTA/USMCA negotiations
Global trade policy uncertainty falls amid tariff negotiations/deals though still high
As of 11/16/25. Shaded area represents U.S. recession. Index based on searches in economic, research and government related topics in Bloomberg News and First Word feeds. Source: Bloomberg, Macrobond, RBC GAM
New trade deals
Following on the heels of a trade truce that lowered China’s tariff rate by 10%, the U.S. has reached framework agreements with several countries: Switzerland and Liechtenstein, as well as a group of Central and South American countries (Argentina, Ecuador, El Salvador and Guatemala).
Switzerland and Liechtenstein tariff deals
From an effective tariff rate perspective, the deal with Switzerland is by far the most impactful. It lowers the reciprocal rate on Swiss imports to 15% from 39% previously – assuming a full agreement is finalized early next year.
Prior to this, Switzerland had faced the highest rate applied to an advanced economy, reflecting the country’s sizeable trade surplus with the U.S. The new 15% agreement aligns with the rates negotiated by other advanced economy peers like the European Union (EU) and Japan.
Note that key Swiss exports like pharmaceuticals and gold were never subject to the 39% rate, so Switzerland’s effective tariff rate was already closer to 17% by our math. The deal brings that down to around 8% and shaves 0.2 percentage points (ppts) off the overall U.S. effective tariff rate when implemented.
Liechtenstein is party to the same agreement, although its reciprocal tariff rate was already 15%. But future sectoral tariffs should be capped at 15%. The deal also removes any lingering threat of a higher reciprocal rate. The principality was originally threatened with 37% back in April.
In exchange, Switzerland and Liechtenstein will reportedly invest $200 billion in the U.S. – including at least $67 billion next year – and open up their domestic markets to U.S. exports. The White House claims Switzerland has made commitments to balance its trade with the U.S.
Central and South American tariff deals
New deals with Central and South American trading partners are more limited in scope. They grant relief from reciprocal tariffs on products that can’t be produced in sufficient quantities in the U.S. Only Ecuador was subject to an explicit reciprocal tariff of 15%. The actual tariff rate levied on imports from Argentina was below 5% in July, while El Salvador and Guatemala’s rates were 9-10%.
Those four countries combined for just 0.7% of U.S. imports in 2024, compared with Switzerland’s 1.9%. While their deals also represent a step in the right direction, they amount to a rounding error on the U.S. effective tariff rate.
Tariff relief on food products
After strong Democratic showings in recent state and local elections underscored voters’ cost of living concerns, the administration is providing tariff relief on some food products that it says aren’t produced in sufficient quantities domestically. The list includes coffee and tea, tropical fruits and fruit juices, cocoa and spices, bananas, oranges, tomatoes, beef and some fertilizers that weren’t already exempt from tariffs.
Providing tariff relief on products that are produced in extremely limited quantities in the U.S., like coffee and bananas, seems like a no-brainer. But the U.S. is a significant producer of some of those products. For example, it was a net exporter of beef as recently as 2022. But with consumer beef prices up 15% year-over-year, cost-of-living concerns seem to have outweighed the desire to shield domestic producers from foreign competition.
The list of exempted food products covers more than $60 billion in U.S. imports, although some of that trade was already carved out under other agreements. The exemptions should lower the U.S. effective tariff rate by about 0.2 ppts and unlike the Swiss agreement, take effect immediately.
Tariff rebates?
President Trump also floated a more dramatic measure to address affordability concerns: $2,000 tariff rebate cheques to many American taxpayers, excluding high income individuals. The pandemic offers a precedent for sending cheques directly to households.
The Tax Foundation estimates $2,000 cheques for 150 million American taxpayers who earn less than $100,000 per year would cost the Treasury $300 billion. That’s roughly similar, by our math, to the incremental annual tariff revenue brought in by the administration’s new levies.
But the general consensus was that the tariff revenue is already accounted for: it is being used to help offset the cost of tax cuts under the One Big Beautiful Bill Act (OBBBA). Sending out rebate cheques would amount to spending the same dollar twice. Bond investors might not take kindly to budget deficits that would be roughly 1% of GDP higher than expected.
Perhaps with that in mind, Treasury Secretary Bessent seemed to throw cold water on the idea. He has suggested tariff rebates could take many forms, including the personal income tax cuts and credits already incorporated in OBBBA. But other White House officials have suggested rebate cheques are being seriously considered.
Let’s see where this goes. For now, we aren’t incorporating any additional fiscal stimulus in our forecasts. We are already assuming some fiscal lift in 2026 from retroactive OBBBA tax cuts that will boost personal income tax refunds next spring.
Supreme Court IEEPA case
On November 5, the Supreme Court began hearing oral arguments in the case against the administration’s IEEPA tariffs. As a reminder, those country-level tariffs account for nearly half of U.S. tariff revenue collected through August and almost three quarters of new levies imposed this year (see next chart).
IEEPA accounts for almost half of U.S. tariff revenue, nearly 3/4 of new tariffs
As at 2025-11-12. Some Section 232 tariffs (steel and aluminum) were pre-existing but increased/broadened this year. Source: U.S. customs and Border Protection, RBC GAM
The case didn’t get off to a good start from the White House’s perspective. Several justices directed particularly pointed questions at administration lawyers. After the first day of hearings, betting market odds of a ruling in the administration’s favour dropped to around 25% from 40-45% previously (see next chart).
Betting in U.S. Polymarket that Supreme Court rules in favour of Trump’s tariffs
As of 11/17/25. Source: Polymarket, Bloomberg, Macrobond, RBC GAM
We might not have to wait long for a decision. The Supreme Court could deliver an expedited ruling before year end, if not in early 2026. But we continue to caution that the administration has other, more legally defensible tools that could largely replace IEEPA tariffs if they are thrown out by the courts.
There is a secondary question of whether the Supreme Court will order Treasury to repay IEEPA tariff revenue – in excess of $100 billion by now – if the tariffs are deemed illegal. That would be a nice cash windfall for corporate America. However, betting markets assign a relatively low probability (around 10-15%) to such an outcome.
There is legal precedent for the courts not ordering repayment. Refunds might only be issued to the few specific plaintiffs in this case, meaning other importers would have to sue for repayment. Even if broader refunds are granted, the process is likely to be arduous. Our forecast doesn’t assume any fiscal boost in 2026 from tariff refunds.
U.S. tariff rate tracking
Our latest tracking of the U.S.’s effective tariff rate is around 16%, which is more than a percentage point lower than previously. That’s largely due to the recent trade truce that reduced China’s tariff rate by 10%, and to a lesser extent food tariff relief.
As a reminder, this measure applies announced tariff policies to 2024’s import shares. That approach helps us incorporate new tariff announcements in real time. But it doesn’t account for shifting trade flows and enforcement issues, and thus overstates the actual tariff rate being levied.
Looking at monthly imports and tariff revenue collected by U.S. customs gives a better sense of administered tariff rates. Customs revenue figures are timely but import data is released with a lag and the latest official statistics have been delayed by the U.S. government shutdown.
The most up-to-date official data points to a 9.6% effective tariff rate in July. We estimate that rate increased to 11-12% in August through October. This is still well below the rate we calculate based on announced tariffs and 2024 import shares (see next chart).
Customs revenue suggests actual tariff rate is lower than expected
As at 2025-11-17. Estimated tariff rate is based on customs revenue and assumed trade flows. Source: U.S. Treasury, U.S. Census Bureau, Evercore ISI Tariff Tracker, Macrobond, RBC GAM.
We think the gap between those two measures will narrow somewhat further as enforcement improves, inventories are replenished and demand adjusts to persistently higher tariffs. But the gap is unlikely to disappear entirely due to permanent substitution away from products and countries that face higher tariff rates.
The lower administered tariff rate goes some way toward explaining why announced tariff policies have been less impactful from a growth and inflation standpoint than models suggest. We recently revised our U.S. GDP growth forecasts slightly higher reflecting less tariff damage than previously thought.
-JN & SK
Gold shines in the spotlight
Gold prices have roughly doubled over the past two years, rising to as much as $4,356 per troy ounce (see next chart). The pace of increase was so rapid that it is not surprising that there has since been a partial reversal. The short-term risk remains to the downside.
Gold prices have soared
As of 11/10/2025. Sources: Macrobond, RBC GAM
However, the medium-term story remains fairly positive for several reasons.
Historical perspective
First, from a purely historical perspective, the three prior gold price cycles of the modern era all went further than this one has so far (see next chart). The price of gold is now 253% higher than at the start of this cycle in November 2022. But the cycles ending in 1974, 1980 and 2011 rose by an average of +671% (+441%, +832% and +740%, respectively). That argues there could be considerable room to run.
Past gold price cycles have usually extended farther than this one
As of 11/10/2025. Sources: Macrobond, RBC GAM
Complicating the historical analysis, this upcycle is now 37 months old. That’s shorter than the historical average of 67 months and around the point that two of those three cycles had already come to an end (35 months, 41 months and 125 months, respectively).
It is also worth noting that gold is famous for overshooting. Prior bull markets were followed by multi-year retreats that then cut the price of gold by roughly half (an average of -52%, with specific declines of 48%, 63% and 45% over the past three cycles).
As a sort of check for whether the price of gold has become too big for its britches in an economic context, the gold price to U.S. nominal GDP ratio is currently just shy of the highs reached in 2011 and 1974. But it remains only about a third as high as at the peak of the 1980 gold boom.
Another check is the inflation-adjusted price of gold. This recently hit a new all-time high, just passing the earlier 1980 peak for the first time. If the only purpose of gold was as a hedge against inflation, then it would be overvalued. But gold also rises and falls on the back of myriad factors driving supply and demand. It may not be reasonable to think its real value should be stable over the long run.
In short, the historical data offers a mixed assessment. But perhaps the most compelling observation is that past gold upcycles have usually extended farther than this one has so far.
Gold demand
The most compelling pro-gold arguments relate to the rising demand for gold. Several of these are, in turn, connected to a falling desire for dollars:
Weaponization of the dollar: Russia’s U.S. dollar currency reserves were frozen in 2022 and the SWIFT payment system was used to further constrain the country. This prompted central banks to revisit their asset allocation, leading to the conclusion that physical gold in vaults is less risky than holding the currency of foreign nations that might someday become adversaries.
Declining U.S. dollar prestige: While the U.S. dollar remains the world’s dominant currency and still constitutes the de facto reserve currency, its luster is beginning to dull. This is in part because China is on the ascent, challenging historical U.S. hegemony. And it is in part because the U.S. itself is proving less attractive given large fiscal deficits, political polarization and antagonistic tariffs levied against other countries.
Weaker dollar itself: A weakening dollar also mechanically increases the price of gold in U.S. dollars so long as rest-of-world demand has not changed.
More generally, demand for gold may also be rising due to:
Inflation concerns: Bond market-based inflation expectations remain relatively calm. But survey-based indicators are somewhat more nervous. It is certainly the case that between the recent pattern of above-trend inflation, the inflationary effect of tariffs, efforts to politicize the Fed, and fiscal concerns, the distinct risk is that inflation remains higher than normal. Gold classically performs well during such periods given its status as a physical asset.
Global uncertainty: The most extreme U.S.-oriented policy uncertainty has fallen now that the White House has made its mark on tariffs, taxation and immigration. However, there is still a lot going on. Internationally, many other developed countries are pivoting and pursuing new fiscal and economic paths. The world’s great powers are flexing their muscles in a geopolitical context. All of this combines for an era of elevated uncertainty – an environment that arguably favors a traditional safe haven like gold.
Declining interest rates: As central banks cut rates, the relative disadvantage of owning physical assets – which lack coupon payments of their own – diminishes, favouring gold.
How are these ideas playing out in the numbers? Central banks are certainly back in the business of owning and buying gold reserves after a period of gradual decline through the 2000s (see next chart). They collectively hold between 18-20% of all mined gold.
Central banks have been increasing gold reserves in the past 15+ years
As of Q2 2025. Sources: World Gold Council, Macrobond, RBC GAM
The pace of central bank buying notably increased after Russian sanctions weaponized the dollar. However, it should be noted that this has since been slowing slightly – albeit still moving fairly quickly (see next chart). There may be a limit on how much gold central banks need to purchase, in significant part because their existing holdings have just appreciated greatly in value. This is helping them converge much more quickly than they probably expected toward their target reserve share.
The pace of central bank gold buying is slowing slightly
As of Q3 2025. Sources: World Gold Council, Macrobond, RBC GAM
Meanwhile, the demand for physical gold from private investors is much more volatile. But there has been a notable increase in ETF gold purchases over the past year (see next chart). This presumably reflects the above forces – declining demand for dollars, inflation concerns, global uncertainty and declining interest rates. While demand will no doubt continue to be fairly volatile from quarter to quarter, one can posit that it should be, on average, stronger than the average of the past decade.
There are anecdotal reports of ultra-high-net-worth individuals showing an increased interest in allocating toward goal. Similarly, major institutions are debating whether gold should occupy a larger fraction of their investment portfolios. Such entities tend to make strategic shifts slowly, such that the trend may have further to run.
ETF gold purchases have risen over the past year
As of Q3 2025. Sources: World Gold Council, Macrobond, RBC GAM
Between central banks and private investors, overall demand for gold is indeed higher, even though jewelry consumption is declining slightly (see next chart).
Demand for gold for various purposes remains high globally
As of Q3 2025. Sources: World Gold Council, Macrobond, RBC GAM
Gold supply
Of course, gold demand does not operate in a vacuum. It must be contrasted against the supply of gold. As it happens, the supply of new gold tends to be fairly stable and has been trending only slightly higher over the past three years. So this is not an impediment to higher gold prices.
That said, there is a reason that gold rallies don’t last forever. Part of this is because the fundamental forces encouraging demand are not themselves permanent. But of only slightly lesser relevance, supply forces also change. It takes 5-10 years for new mines to come online – representing a long-term counterbalance to surging demand. There are also medium-term forces at play that can prove relevant over one-and two-year timeframes.
When gold prices are high, mines can marginally increase production by extracting lower grade ore that would not otherwise have been viable. Of even greater relevance, the supply of recycled gold can be fairly elastic as jewelry owners respond to the incentive of high prices. Recycled gold normally constitutes about a quarter of the total supply, but that share can rise during price spikes to 35-40%. This can effectively increase the supply of gold by 10—15%.
Gold bottom line
There is evidently a lot going on with gold. Despite some short-term weakness, gold still has medium-term upside given the potential for structurally robust demand. But it is worth keeping in mind that gold upcycles don’t last forever. Eventually the supply response erodes earlier price enthusiasm.
Investors in Canada are already indirectly participating in the gold rally, as the precious metals sector is now a whopping 12% of the TSX (Toronto Stock Exchange).
-EL
Why are oil prices so low?
Oil prices have trended materially downward over the past three years. At approximately US$60 per barrel for West Texas Intermediate (WTI), prices are within grasp of the lowest level experienced since the start of 2021 – a period of nearly five years (see next chart).
Oil prices have declined
As of 11/12/2025. Sources: Macrobond, RBC GAM
The current market fundamentals are broadly supportive of these relatively subdued prices. While the U.S. Energy Information Administration (EIA) forecasts rising global oil demand over the next few years (see next chart), the recent surge in the supply of oil (see subsequent chart) is expected to provide enough capacity to more than handle future demand. This suggests that OECD crude oil inventories will continue rising, from already ample levels to the highest level recorded in the past quarter century –outside of a brief moment during the pandemic (see third chart).
World oil demand rising slightly
As of October 2025. U.S. Energy Information Administration (EIA) forecast to December 2026. Sources: EIA, Macrobond, RBC GAM
Rising world oil supply expected to exceed demand
As of October 2025. EIA forecast to December 2026. Sources: EIA, Macrobond, RBC GAM
Global crude inventory projected to increase
As of October 2025. EIA forecast to December 2026. Global oil inventory reflects Organisation of Economic Cooperation and Development (OECD) commercial crude stock and consumption. Historical average since 1993. Sources: EIA, Macrobond, RBC GAM
What is prompting the expectation that oil supply will continue to materially outpace oil demand? A few things.
Oil demand
On the demand side, global economic growth is advancing somewhat less quickly than normal as tariffs and policy uncertainty have weighed on activity. This limits the growth in oil demand.
There may also be structural changes afoot, on several fronts.
The ongoing shift from a goods-oriented economy towards a service-oriented one has long meant that the oil intensity of the economy is in perpetual decline. That continues.
The rise of electric vehicles also promises to cap oil demand. Ground transportation currently constitutes 40-50% of the world’s oil usage, so oil prices are highly sensitive to this transition. Even as the pivot seemingly comes less quickly than once imagined – especially in the U.S. – it is still happening.
China buys 56% more new cars per year than the next closest country (the U.S.). Of these, over half are now electric and the proportion is rising (see next chart). In turn, Chinese oil demand stopped growing a few years ago (see subsequent chart). However, note that this metric excludes petroleum liquids. Chinese demand for these products is expected to continue rising for some time.
Half of new cars bought in China are electric – and growing
As of September 2025. Sources: China Passenger Car Association, Macrobond, RBC GAM
China’s oil demand now stabilizing from 2023 after nearly two decades of increases
As of September 2025. Sources: Bloomberg, RBC GAM
Oil demand peaked in Europe way back in 2005-06. It can also be argued that U.S. oil demand is peaking. EIA forecasts the barest of +0.05% growth from 2025 to 2026. This still leaves U.S. oil consumption a hair below the 2019 level. In contrast, emerging-market demand ex-China continues to rise as those countries become richer.
There is admittedly quite a range of possible scenarios when one attempts to forecast oil demand out over the medium run and beyond. The International Energy Agency (IEA) now generates two main forecasts.
The first assumes that stated government environmental policies will be enacted with the implication that global oil demand peaks around 2030 before gradually declining.
In contrast, the second scenario – a new initiative – assumes that current policies instead prevail and global oil demand continues to rise right through the end of the forecast horizon in 2050. It should be noted that growth is fairly muted in this scenario at just +0.4% per year. That’s slower than the rate of growth over the past decade and since the turn of the century, but still growth.
We find it unlikely that none of the promised policies will be implemented, but equally recognize that not all of them will be. As such, the most likely path lies somewhere between these two scenarios. We anticipate oil demand will continue to grow at least into the early 2030s, but level off over time. Still, the main point is that oil demand growth should be relatively weak in the future, constraining prices.
Oil supply
There has been a significant increase in the supply of oil lately after OPEC changed its focus from maximizing profits to maximizing market share. The organization came to realize that U.S. shale oil and other more nimble but relatively high-cost players were eating its lunch.
In turn, and recognizing that OPEC production is among the lowest cost in the world, the group appears willing to tolerate those reduced profits in exchange for a larger fraction of the future supply.
For the moment, the main implication is that the supply of oil has increased beyond what normal price signals would suggest. OPEC is implicitly targeting a lower price of oil.
Long pitted against this has been the expectation that oil companies would pull back their exploration activities in anticipation of the carbon transition. Some of that is still likely to happen. But the transition itself appears set to happen somewhat more slowly than once envisioned. Some countries – like Canada – are newly focused on extracting as much value as they can from their resource sector during a precarious economic moment. The scope for additional supply is real.
Oil price outlook
The bottom line is that fundamental forces argue for relatively tame oil prices in the immediate future. Demand is set to grow more anemically than normal and supply growth could be greater than previously thought.
Of course, there are risks to this view. These mostly tilt to the upside and are entirely geopolitical in nature:
It was not long ago that the U.S. and Israel engaged in military strikes on Iran, with the implication that Iranian oil cannot quite be fully counted on in the future.
The conflict between Russia and Ukraine continues, with Ukraine increasingly managing to disrupt the Russian energy industry with drones.
The U.S. is intensifying its sanctions on Russian energy entities and continues to put pressure on India to stop importing Russian oil (which constitutes roughly a third of India’s oil).
The U.S. is increasingly antagonistic toward Venezuela, another energy power.
In practice, the oil industry is very good at finding ways to bring oil to market, even when geopolitical shocks occur. Further, the White House’s desire to lower the cost of living for Americans should not be underestimated, including its preference for cheap gas. As such, we believe oil prices can likely remain low, but the risks around that forecast do admittedly skew more upward than downward.
-EL
A less-than-transformational Canadian budget
Canada’s federal government released its long-awaited fiscal plan – the first under Prime Minister Carney’s leadership.
We think Budget 2025 fell short of its ‘transformational’ billing. It proposes a welcome re-orientation of government spending toward more productive uses. But incremental capital spending is underwhelming (see next chart) given the scale of budget deficits which are roughly twice the size, on average, relative to the previous government’s fiscal plan.
Government CapEx push only adds ~$9B annually vs. previous plan
As of 11/05/2025. Sources: Government of Canada, RBC GAM
While large, the size of the fiscal deficits are also slightly smaller than imagined, pointing to less additional money sloshing through the economy (see next chart).
Debt-to-GDP to remain elevated amid persistent budget deficits
As of 11/05/2025. Sources: Government of Canada, RBC GAM
Highlights of Budget 2025 include:
New spending focuses on defence, local and trade infrastructure, and support for industries and workers impacted by tariffs. Accelerated depreciation incentives and efforts to expedite major projects aim to boost private investment.
The government plans to slow growth in direct program spending to 1% annually from 8% on average over the past decade. The public service is set to shrink by 40,000 workers but transfers to provinces and households are untouched by the spending review.
Deficits gradually shrink from 2.5% of GDP this year to 1.5% of GDP at the end of the forecast horizon. Debt-to-GDP is roughly stable and well above pre-pandemic levels.
For a full assessment, please refer to our post-budget review.
-JN
Will defence spending provide a fiscal lift?
Many governments are now prioritizing defence spending. This section tackles the subject from a fiscal standpoint, initially through Canadian eyes before broadening out to the world.
Canadian defence spending
Defence spending was one of the key priorities in Canada’s Budget 2025, with an additional $82 billion earmarked over five years. That includes:
• increasing military staffing and pay
• investing in defence and training infrastructure
• digital infrastructure and cyber-security
• vehicles and weaponry
• funding to develop Canada’s defence industrial base.
The government says this (finally) delivers on Canada’s NATO commitment to spend 2% of GDP on defence – a pledge the country previously fell well short of (see next chart). It also puts defence spending on track to rise to 5% of GDP by 2035, in line with NATO’s updated spending targets.
Canada previously fell short of its NATO spending commitments
As at 11/13/2025. Sources: NATO, RBC GAM
In the context of a federal government whose revenue amounts to 16% of GDP, spending an additional 3% of GDP on defence – including some defence-related infrastructure and cyber-security – represents a significant funding pledge.
Strengthening Canada’s national security is a priority in its own right. This is particularly the case in an increasingly power-based geopolitical landscape where foreign powers are more willing to exercise their economic and military might. But from an economic growth perspective, are additional funds for defence money well spent?
A recent literature review of defence spending multipliers found the short-run GDP multiplier on defence spending is typically below or close to 1. That is, for every additional defence dollar spent, economic output rises by a similar amount, if not slightly less.
Economic multipliers vary throughout different stages of the business cycle, and that seems to be particularly true of defence spending. When an economy is operating close to full capacity, additional defence spending tends to crowd out private sector activity and multipliers are low, if not zero. But when the economy has significant slack following a downturn, increasing defence outlays can boost growth more than dollar-for-dollar.
Canada’s economy has an appreciable degree of slack, so we’re inclined to think the multiplier could be relatively high today. But keep in mind that ramping up defence spending over time means additional funds will be deployed at various stages of the business cycle.
Through the cycle, defence spending multipliers are thought to be somewhat lower than other forms of government spending. This makes sense to the extent that some military equipment tends to sit idle. Defence is the one area in which low capital utilization is desirable.
Multipliers also depend on the types of defence spending (see next chart). Statistics Canada estimates the multipliers on defence services (mostly salaries), defence construction and intellectual property are close to or above 1. Keep in mind:
Increasing military pay drives more spending on goods and services.
Construction tends to be domestically focused and can have positive spillovers for private industry.
Military research and funding have been instrumental in developing widely used technologies like the internet and GPS navigation.
Economic multipliers depend on the type of defence spending
As at 11/13/2025. Sources: Statistics Canada, RBC Economics, RBC GAM
However, machinery and equipment investment has a relatively low multiplier in Canada due to its high import content. A report by the Canadian government found only 54% of defence industry supply chain expenditures accrue to Canadian suppliers. About 28% go to the U.S. and the rest to other countries. Prime Minister Carney has suggested as much as 75% of the country’s defence capital spending goes to the U.S.
As with many of its NATO allies that are increasing defence spending, the Canadian government is looking for ways to ensure more of its military equipment is procured via domestic supply chains. To that end, Budget 2025 proposes a new Defence Industrial Strategy and Defence Investment Agency to expand the country’s defence industrial base and streamline procurement. But reducing reliance on the U.S. defence industry is a tall task. We’re inclined to think the fiscal multiplier on military equipment investment will remain low in the foreseeable future.
Based on the breakdown of defence spending announced in Budget 2025, we estimate a blended economic multiplier of around 90 cents on the dollar. As such, we think the push to hit NATO’s 2% defence spending target this year might be adding 0.2 ppts to Canadian GDP, with a similar lift in 2026 as spending continues to ramp higher. We expect the fiscal impulse beyond that will be less noticeable.
We have been penciling in an overall fiscal lift of 0.5% of GDP in 2026 and defence spending is a key component of that. Overall, Budget 2025 didn’t significantly alter our expectations for stimulus next year.
Global defence spending
From a global perspective, defence spending rose consistently over the past decade. The Stockholm International Peace Research Institute estimates an inflation-adjusted average annual increase of 3.2%. Growth has accelerated recently, with a nearly 10% real gain estimated for 2024. One would imagine it has only increased since then.
The near-term trend from here will be influenced by how the war in Ukraine evolves. But somewhat faster-than-average growth seems likely in any case.
Russia, the third-largest military spender, increased its defence spending by 38% in 2024.
NATO, which accounts for more than half of global military spending, has substantially increased its spending target.
Non-NATO countries are dedicating more resources as well (#2 spender China recorded a 7% increase in 2024).
That should act as a tailwind to global growth, but some forecasters have expressed skepticism. Earlier this year, the EU relaxed its budget rules to allow member states to temporarily increase defence spending by up to 1.5% of GDP. At the time, the European Commission estimated such a pickup in spending would only boost the trading bloc’s real GDP by 0.5% by 2028 – an implied multiplier of just one-third.
It attributed the relatively modest fiscal lift to higher interest rates associated with additional spending and concerns about future tax increases. Defence spending thus crowds out some private sector activity.
It also assumed just 10% of spending would contribute to productivity gains. This corresponds to the current share of EU defence spending on infrastructure and R&D. Note that Canada’s proposed increase in defence spending tilts much more heavily in that direction (40-45%).
Separate analysis by the European Central Bank found an average multiplier of 0.93. This is much closer to our blended assumption for Canada. Still, we think the European Commission analysis highlights downside risk to the assumed fiscal impulse from defence spending if rising military outlays crowd out private spending or fail to lift productivity.
-JN