With the return of Donald Trump to the White House, we’re experiencing particularly uncertain times. From a fundamental viewpoint, the U.S. economy remains resilient. Activity is expected to broaden, with investment spending likely to join the consumer in delivering healthy, trend-like growth. Other developed economies haven’t yet delivered the gross domestic product (GDP) growth recovery we expected. But there are tentative signs that this is changing — particularly in Canada. Thanks to aggressive policy easing by the Bank of Canada (BoC), robust real incomes and signs of improvement in residential construction, we expect a meaningful growth recovery in the second half of the year. We also foresee a modest improvement in Europe. By contrast, we remain relatively pessimistic regarding the economic outlook in China. Overall, the global economy has scope to deliver decent growth in 2025, with less reliance on the U.S.
Also based upon economic fundamentals, global inflation is likely to continue its gradual path lower. That said, in the U.S. there are several factors — some cyclical, related to the growth outlook, and others more structural — that will keep inflation sticky and at least several tenths above the U.S. Federal Reserve’s (Fed) 2% policy target throughout 2025. Putting the pieces together, a combination of decent growth in the U.S. and slightly elevated inflation likely mean we’re closer to the end of the Fed’s rate-cutting cycle than its start. By contrast, we expect the BoC and the European Central Bank (ECB) to keep reducing interest rates for longer than the Fed. Decent economic growth can drive corporate earnings higher and deliver another year of positive equity returns. Bonds look attractive too, given the relatively high level of starting yields. They also serve as a source of purposeful portfolio diversification, which is always an attractive feature. This is particularly true in a world like today, with heightened uncertainty and a broader range of possible outcomes for the economy and markets.
There are always risks to any forecast, and this is certainly the case today. Our constructive fundamental view assumes an increase in tariffs imposed on U.S. imports from China, as well as some tariffs on a limited set of Canadian exports, amongst other countries. At the beginning of February, the validity of this assumption came into question when the U.S. announced far more stringent tariffs than expected on both Canada and Mexico. As of February 3, 2025, implementation of these tariffs was postponed for one month. Tariffs are equivalent to a tax hike and are negative for growth. This is true for Canada. And because of extensive integration between American and Canadian supply chains, an extended period of punitive U.S. tariffs will likely also inflict pain on the U.S. economy — including auto producers and consumers. Tariffs would also likely cause a temporary boost in U.S. inflation. Under the risk of more significant tariffs, the U.S. dollar is likely to gain further strength, while the Loonie would likely come under additional pressure, pushing it well below current levels.
Because of their painful economic — and political — consequences, we expect that the majority of any U.S. tariffs ultimately levied on Canadian goods will be short-lived. This means the negative hit to Canadian and U.S. growth could be limited, and our constructive fundamental view for the global economy and financial markets could prevail relatively intact. That said, the policy environment is highly uncertain and far less predictable than usual. Unfortunately, a heightened tariff risk will likely remain for the foreseeable future. In this context, it’s particularly important for investors to stay disciplined and focus on long-term objectives. Attempting to time exposure to markets often proves to be unhelpful for long-term investment results. In periods like these, we expect to benefit from having prepared portfolios by maintaining a well-diversified asset allocation that encompasses a purposeful mix of asset classes, geographies and styles.
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