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Economic Impact

To keep you informed and stimulate your thinking, Stéfane Marion and Denis Girouard take a look at economic news and share their perspectives in our monthly informative videos.

Welcome everyone, today, April 15th, 2025 Economic impact videos. We've been reaching out to you for the past five years. Today's a special day, marks our five-year anniversary. We started these in April of 2020, just at the beginning of the pandemic and today we're in the middle of a tariff war. It's important. We are a financial institution. We reach out close to 8000 of our clients on a monthly basis. We have a responsibility. We need to share our opinions, our views on the economy. Today are unprecedented times. We are facing an American administration that is trying to change the world, which brings all sorts of challenges and concerns over the world. So, these are a way for us to reach out to you to tell you what we're seeing, our opinions. So, we're going to keep doing these. But today's a special day, five-year anniversary. And I'm going to pass the mic to Denis Girouard, who's been doing this for the past couple of years, and our Chief Economist, Stéfane Marion.

Thank you, Laurent. So Stéfane, where are we on those tariffs now?

And by the way, I need to thank Laurent too, you know, remind us that we're five years older after all of this. It's action-packed Denis, just like it was five years ago for different reasons. So, tariff structure on its way up, way up, way, way, way up. So.

They keep moving though.

They move all the time. It moves all the time. So, we went from 2 to 5 to 10 to 36 to 32. Now we're at 26 as of April 15th. If you want me to give you some historical perspective on this, you have to go back to 1901 to see 26% effective tariffs on U.S. imports.

Well, with those tariffs, there's an impact on an inflation expectation.

Oh the U.S. consumer is so much bigger than it was in 1901. So therefore 2/3 of the economy, tariff structure 26%, while consumers are concerned, and it clearly shows in the numbers, inflation expectations. It doesn't mean it will be realized, Denis, but consumers are potentially fearing the worst inflation since the 1980's, 6.7%.

Yeah. And because of that, the consumer sentiment is way, way low.

There's one thing you can do to really make consumers feel mad is it's inflation. We've seen it during the pandemic, right? Case and point. We have consumer sentiment right now as low as it was during the pandemic. Again, this inflation thing really is annoying to consumers. So that does not necessarily bode well for the US economy in the months ahead.

Consumers are not happy, but also the equity market.

Well, yeah, if you're, if you're going to hit 2/3 of U.S. economy, you're going to hit financial markets, and U.S. equities are being hit big time. The S&P 500 went as low as 19%, so we did not enter a bear market territory, which would mean reaching- Pardon me?

-20%?

Yeah -20%. So we went to -19%, we're at -12%.

Technically, we're not there.

We're not there, but we're still, you know, in correction territory in a sense. We're still below -10%. Denis, surprisingly, people have been asking, you know, how's the Canadian stock market going to behave? We had lower valuation to start off with. So, we've been hit less hard than other places. And right now we're down 8%. So, some relative resilience if you want. Everyone's down, but some countries are down less than others.

Yeah. At the same time, the U.S. dollar also is getting hammered.

Well, that's part of the reason that Canadian sector is more resilient. People are buying into Canadian assets. We can speak to that in the next few minutes, but clearly the U.S. dollar is not very popular right now. It's not popular within central banks. It's not popular with foreign, foreign pension funds. So, there's been a shunning of the U.S. dollar. And this is very unusual. Historically, when the stock market goes down, U.S. dollar should be going up, not down. This is really a change in correlation that reflects the uncertainty created by the tariff war.

Yeah, we have the stock market being quite volatile, but also the bond market, but also the spread on the corporate credit. It's widening quite a lot in that period of time.

Yeah. So, people are shunning the U.S. dollar. They're not very happy about U.S. treasuries. But one thing they don't like right now is the corporate debt market, which is very important to, as a source of liquidity, for U.S. corporations. So right now, corporate spreads 148 basis points. Right now it's way up 150 basis points up since the start of the year. Denis that's a big deal because if you're a high-yield corporation right now, your financing costs, your effective yield. If you're going to issue bonds, you got to pay 8%.

That's a lot. OK, there's a lot of people talking about stagflation. Are we going in a recession right now?

Slow down? Definitely. So much so that we have brought back to life our Recession Risk Monthly Monitor, which is available on the website for people interested. I'll spare you the details of all of these numbers. Suffice is to say, there's a lot of yellow in here, some red. If you put it all together, odds of a recession right now is 40%. Not the baseline scenario, but clearly there are some concerns that, in the months ahead, if you don't reduce tariffs, while I think these probabilities are likely to increase. So let's be careful right now. Financial markets rebound, equity rebounds, a lot of volatility, but these odds are likely to continue to rise unless Washington decides to lower tariffs. Not the case right now on a substantial level.

And there's maybe a pleasant surprise and all those news, Canadian dollar, which is bizarrely up.

So historically, if I get these probabilities to rise, you don't want to own the Canadian dollar. But, a lot of things are different this time around and Canadian dollar is actually behaving quite well, 5%. Our model says you should be 5 to 10% cheaper than what we are right now. But there seems to be some interest in the Canadian dollar or Canadian dollar assets.

Yeah. And what's really the effective rate, you know, on those tariffs in Canada? Because, you know, we have that that agreement between Mexico, United States and us, which is supposed to be at 20 something percent. And but we're all mixed up here, OK, because it's tough to follow and understand where we are.

So, there's a lot of confusion. So people are buying Canadian dollar assets because foreign investors believe that we're less impacted. Well, less impacted negatively versus other countries. So let me illustrate this and, and the confusion to try to help with the confusion. If we had no free trade agreements with the Americans, given what they have in place, we would be facing an effective tariff rate of 24%. But we do have a free trade agreement called USMCA and a lot of Canadian corporations are USMCA compliant. All the energy producers are now USMCA compliant. Put it all together right now Denis, so the effective tariff rate on Canada is 5.7%. The confusion out there is to say, well, everyone is a minimum 10%. No, not the case. If you are USMCA compliant, particularly if you're an energy producer, 5.7%. Now if more firms become, Canadian corporations become USMCA compliant, between now and the year end, we could be at 4.2% or even lower if Washington reduces tariffs on aluminum software lumber. So right now, 5.7%, you can understand that foreign players or foreign investors saying, well, I'm going to invest in the place where the tariff structure is less punitive. We are part of that group.

Then don't show that to President Trump because he wants everybody at 10%.

I think he's aware of that because he's calling the exception that he knows that if taxing Canadian energy would just make inflation expectations worse in U.S., so that's why we are where we are.

And we showed that Canadian dollars earlier that is going up, but not only the Canadian dollar is going up, but also the reserve for the Central bank are going up in Canadian dollar.

I think the central banks are partly to blame. You've got that right, Denis. And people forget that we are the 5th largest foreign currency held by central banks. We're at 3% of the total right now. We started from nothing in 2012. We're at 3%. There's more people, foreign banks or you know, investing in Canadian dollar than in, you know, in the Chinese renminbi or the Swiss franc or the Australian dollar. So at 3%. Now you might say 3% is still small Stéfane, but the dollar amount is huge to need $450 billion. It's never happened in Canadian history that central banks own such a large part of Canadian assets or the bond market if you want. So that keeps a bid on the Canadian dollar, it explains why we are stronger than we would otherwise be. But that reflects the tremendous uncertainty facing the global economy in this punitive tariff structure that could undermine the U.S. economy in the months ahead. So.

So Stéfane, you've been telling us for many months that we need to be prudent. What do we do now?

At 26%, you're still prudent. And these tariffs got to go down. They need to go down to 10%. Seriously, Denis. So, let's be careful out there. I can't justify a stock market valuation or U.S. equities that are trading at, you know, 18 times forward earnings. I think the surprise will come from a significant deterioration in corporate earnings in the months ahead. Financing costs are up. You're selling less to the rest of the world. Clearly, that's not good for profits. So again, it will be volatile again for the next few months. So, let's be prudent out there.

Thank you, Laurent. Thank you, Stéfane. Thank you to all of you for following us for all those years. Hopefully, it's going to last many months or many years. Until then, we'll see you beginning of May. Thank you.

Property Perspective

Our National Bank specialists decode the latest trends in the real estate market, including interest rates, the resale market and forecasts for the coming months.

Hello everyone and welcome to this November 28th edition of Property Perspective. Today I have the pleasure to be with Matthieu Arseneau, hello Matthieu. 

Hi Simon. 

And with Andrée Desrosiers. 

Hello Simon. 

Hello Andrée. Our topic of the day, what's best for my mortgage, a fixed or a variable rate. But before we enter that interesting discussion with Andrée, let's talk with Matthieu about recent economic news that influence the real estate market. So Matthieu, a number of events have occurred since we last spoke, all of which have an impact on the economic outlook, obviously. First, what are the implication of the Republican sweep in the US presidential election for economic growth and interest rates? 

Yes, this was a big event and there will be application for that for Canada over the next four years. Higher uncertainty, we saw that with the announcement of potential tariff on Canada. We'll see. But clearly, in my mind, the big event and this has implication for the housing market in Canada, particularly for interest rates. It's the fact that there could be much more fiscal stimulus South of the border given the promises of Trump during the campaign. As you can see on that chart, while the Congressional Budget Office was expecting roughly 6% of GDP deficit, which is already very high, it could be as high as 8% if all those promises are realized by Mr. Trump. So at the moment the Federal Reserve is trying to calm inflation in the US, calm the economy. There's government that could support growth over the next few years. So before the election, the Federal Reserve started to decline rates. They did already 75 basis points. But you can see that at the same time it didn't mean that longer term rates decline. In fact, it increased because of risk of tariffs and its implication for inflation because of stronger growth, though that's something we have to keep in mind. And the problem with that increase is given a global correlation in interest rates, when you have the largest economy in the world supporting the economy and having those rates it has an impact on rates in countries with economies not as strong as the US and has to cope with those increases. And that could be difficult for a couple of other economies in the world given the increase of those of those rates. So big implication and that has implications for Canada as well. 

Very interesting Matthieu, so the ability to lower the prime rate in the US now looks more limited. What about Canada?

In Canada, so we saw that in fact for investors expectation for the policy rate in the US, it was expected at 3%. Now it's much more closer to 4% by the end of next year. So clearly investors revised their optimism for rate cuts in the US. In Canada, the situation is clearly different in our view when you look at the labour market here, I'm showing the jobless wait for the prime age workers, the 25-54, it has continued to increase over the past few months. And that's diverging with the US and it's now its highest since 2017. And we don't see stabilization over the next few months given the hiring intention of corporations. So for us that's a sign that the economy has cooled significantly and this is reflected in inflation. When you look at services, core services excluding shelter in the US, it's running at 4.4% because they didn't have that weakness that we got in Canada, it's so it's running at 1.3%. So clearly inflation is under control here. So yes, we expect the Bank of Canada to continue to decline rates. Prior to recent announcements, we were expecting policy rate as low as 2% by the end of next year. But given the transfer that was also announced by the federal government, it could lead to upwardly revise a bit. We'll see if it will be implemented. But clearly as you can see on that chart, while Bank of Canada is declining rates, 10 year rate is increasing and is essentially in its last two years average at this point. So not that much relief for long term rates. So that's something to keep in mind. But for that reason, perhaps it's another reason for the Canada to try to push down those rates by having short term rates very low. So that's our expectation at this time, OK.

Matthieu, the government has announced recently an additional break on population growth for the next three years. What are the implications of this new announcement on the real estate market?

We talked about it very often over the past few months. Housing shortage is still very acute in Canada. We see that in the rental market with rent still increasing at a tepid pace. Same thing for first time home buyers. It's where affordability is still a problem. So I think it's the good decision to calm down population growth. In fact, with the recent announcement about the declining non permanent resident to 5% of population over a 2 year. Reducing permanent resident temporarily, that will lead for— when you look at the five year period, when we look in 2028, the pace for the next 5 years will be similar to what we had prior to the pandemic level, much more sustainable and much more in line with our capacity to welcome. So, I think it's a good decision at this point given housing shortage. And we have to keep in mind newcomers have problems to integrate the labour market in the current context. So let's fix that situation and get back to normal after this three-year period of slow growth and we will be able to get back to the model we had that was benefiting the Canadian economy prior to the pandemic. 

So finally good news. Thank you, Matthieu for your very interesting comments. Let's now discuss with Andrée, hello Andrée. In the context of the anticipated drop of the interest rate by the end of this year and obviously in 2025, should we go with a fixed rate or variable rate for our mortgage?

Very good questions Simon and indeed very relevant. The choice between a fixed rate and a variable rate for a mortgage depends on several factors, especially in the context of falling rates. Our risk tolerance, financial situation and short and mid economic outlook are key, you know, considerations to look at. We must first understand the bearish rate context, however, When the Bank of Canada lowers its prime rate, financial institutions typically adjust, you know, their mortgage rates in response to that downsize. Variable rates will generally follow primary fluctuations and become particularly advantageous in the short term. Fixed rates, although often higher than variable rates at the time of subscription, offer protection against potential future increases. We must however remember that they usually follow the interest rate on long term bonds and not the Bank of Canada prime rate. Therefore, a quarter point drop in the prime rate does not mean that fixed rate will fall by the same amount. 

OK. We must therefore understand this context carefully before making our decision. You're right, Andrée. Many people assume that when there's a drop in the prime rate, all rates fluctuate in the same way. However, as we have just seen, that isn't the case since different rates are influenced by different factors. With that in mind, Andrée, what are the advantages of one or the other? 

Yeah. If we look first, you know, at the variable rate, you should consider that rate if you believe that interest rates will continue to decline or stay low for an extended period of time. You can also choose the variable rate if you're comfortable with some level of risk and can handle or afford, you know, potential payment increases if rates rise. Also if you want to benefit from lower penalties, if you decide to pay off your mortgage early or switch lenders. Also, some variable rates loans offer the option to switch to a fixed rate if rates increase. On the other hand, you should consider, you know, a fixed rate if you prefer stability and want to avoid uncertainty, if you think rates might rise in the midterm and again, if your budget cannot accommodate sudden increases in monthly payments.

So once again, Andrée, the choice does not automatically go towards one or the other. Even if we are in the context of falling rates. As you mentioned, we must make sure to take other elements into account in our decision. You are very right Simon. And we must also not forget that some lenders offer mixed rate mortgages, you know, part fixed, part variables. So this approach allows you to balance the advantages of both options and reducing risk while still benefiting partially from falling rates. So in summary, you know in a falling rate environment, a variable rate may seem more advantageous in the short term, but it remains a bet on future rate trends. If you're comfortable with some uncertainty, a variable rate could maximize your savings. However, if peace of mind is your priority, a fixed rate is the safer choice. It all depends like usual on your financial profile and financial goals. To help you in your choice as usual, do not hesitate to consider or consult a mortgage specialist to assess your personal situation and provide you the right advice for that choice. 

Thank you Andrée for sharing your insights. As you suggested, having a discussion with a mortgage specialist will help make the right decision. There's no point about that. So thank you all for watching and join us again very soon for our next edition of Property Perspective.

5 • 4 • 3 Market Outlook

5 minutes, 4 graphs, 3 key takeaways! Discover a fresh focused quarterly review of markets, the economy and investments with expert Louis Lajoie from our CIO Office.

Hello everyone. Today, March 6, we're going to try to assess in just a few minutes a rather complex and constantly changing economic backdrop and what this could all mean for markets going forward. 

And to start with, I think it's important to understand that according to some indicators, we are actually facing the highest degree of uncertainty from an economic standpoint, economic policy standpoint for at least the past 25 years. So, we shouldn't be surprised to see equity markets’ volatility pick up against such an uncertain backdrop as markets try to assess what is the ultimate outcome and setting in terms of tariffs policy coming from south of the border. 

But as you can see here, the reaction is anything but exaggerated, so far, relatively muted, although we have seen indeed a pickup in volatility, maybe because markets have been conditioned not to overreact to uncertainty after a decade that has seen its fair share of historical events. But nonetheless, for the S&P 500 U.S. equity market, this marks a substantial shift in mood and sentiment compared to the optimism that prevailed following the last presidential election, the equity market now being slightly negative since the start of the year. 

And everybody's trying to assess where this may be headed going forward. But one thing is clear. If you take a big step back and look back at the last few weeks and months, that is the importance of diversification, which holds true when you think in terms of trading between countries, but definitely true when they think in terms of portfolio management.

And case in point, if you actually take a globally diversified equity portfolio in Canadian dollars, as you can see here, indeed there's slight gains still here today, large part due to substantial rebound in equity markets in Europe. But most importantly here you see that the path has been much narrower, much less volatile given these diversification effects. One very important being the impact of the Canadian dollar by depreciating helps returns when you bring them back home. So, diversification is somewhat working within equities and also working across asset classes with bonds having a rather good start to the year in the face of concerns over global growth, such that if you look at a very plain vanilla 60%-40% balanced portfolio, again, you see quite a narrow path in terms of volatility and very little damage so far in 2025.

Now, I want to be clear here, we've got to be cautious because there's definitely downside potential when you look ahead. And to give specific numbers here, the Bank of Canada actually tried to assess what could be the impact on our economy in the broad, a very extreme global trade war scenario. And the takeaway here is it's not a scenario that looks like anything like the [2008] global financial crisis or the pandemic but nonetheless could halt essentially growth in Canada in 2025 and ultimately create some problems for inflation as well.

But if there's one thing clear here though from the last few months, it's that the U.S. economy is anything but immune from a tariff shock, again being self-inflicted here by its own government. And specifically, we've actually seen a bit like the stock market consumer sentiment, which initially picked up post-election, now reversing course and coming down over the past two weeks, which definitely reflects concerns over inflation in the face of uncertainty about tariffs, consumer inflation expectations and that very survey usually don't move all that much, but have recently reached their highest level in in 20 years. So, this is something that we must keep a close eye on over the coming months because again, the U.S. economy may not be very much export-led, but it's definitely consumer-led. So that is very important.

Three takeaways for today. Again, there is a tremendous amount of uncertainty, which for now, markets have been essentially holding their breath, waiting some clarity as to how this all going to be evolving and what will be the ultimate impact on the economy. Technically, there's definitely downside risk for growth, especially in a country like Canada, but there's also upside for inflation in the U.S. So, we'll have to see how this all plays out. And in terms of markets, this means that we are likely going to be facing substantial volatility as we have seen since the start of the year, but maybe even more so going forward as we see these effects in the economy. And as such, we think that the mindset that investors should have against such an uncertain backdrop is one focused on the diversification, which has worked again since the start of the year, much more than one, very much focused on any specific views one may have on a U.S. president that again here, is very unpredictable.

That's it for today. Thank you for listening and we will talk again in June.

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