Questions? We've Got Answers 

Q1. How to judge a forecast with tariff whiplash?  

The global economic outlook has weakened to 2.8 percent (vs. 3.0 percent penned in March). Although we thought conservative tariff assumptions were applied in the prior forecast round, the Trump administration pumped up the volume on breadth and depth, particularly against China. While early negotiations have already led to a temporary reprieve on the China tariffs, considerable uncertainty remains. The forecast avoids a global recession only because we deem the situation unsustainable for America to persist on a path that endures a domestic trade price shock never experienced in history (Chart 1). We expect the Trump administration will continue to negotiate with its trading partners and cut deals with countries over the next 60-90 days, helping to further reduce today’s lofty tariff levels, but never return to the pre-Trump world of tariffs. 

U.S. tariff policy assumptions are the biggest wildcard in our forecast and is also why disagreement among forecasters expanded following the April 2nd "Liberation Day". It sets the line between those calling for a recession versus those, like ourselves, who perceive an offramp to a negotiated path. This widening dichotomy among private sector forecasts is captured in Chart 2. 

Since February, we've emphasized the backdrop requires an assumption-based forecast for this very reason. Our assumptions have evolved more than a few times since then, as U.S. tariff policy has demonstrated a case of whiplash. Here's where we stand today:

• Tariffs on China, set at 145 percent in April with some exemptions, will be temporarily reduced to 30% as of May 14th (i.e., 10% reciprocal + 20% IEEPA fentanyl tariffs from February) for 90-days. We assume an agreement is eventually reached, but the end result still leaves the tariff rate on China close to today’s level, which is more than double that prior to the Trump administration. 
• Tariffs on Canada and Mexico, which average around 12 percent today, will fall to an effective rate of 5% by year-end, mostly through exporters making their goods compliant with USMCA. 
• Tariffs on other countries will be lowered from 10% to 5%, which also remains around double the effective rates that predated Trump's current administration. 

Under these assumptions, the weighted average effective tariff rate on U.S. imports is shown in Chart 3. The peak level occurs in the second quarter of this year, and edges down after that. It is this pattern that limits the risk of recession within our forecast framework.

Based on the developments over the weekend between China and the U.S., events are evolving largely in line with our assumptions and perhaps are even going to be more front-loaded on the timeline. 

To make sure we're on the non-recessionary path, we're keeping our eye out for a handful of markers. 

1. The tariff whiplash must end. The administration must get to a "steady state", even if tariff levels remain on the high side. Businesses require a trustworthy and transparent operating environment. A necessary condition of success requires an understanding with China and the European Union, while settling the dust with the highly integrated economic markets of Canada and Mexico. 
2. The clock is ticking, trade deals can't be overly complex. It took over a year and a half to negotiate the USMCA during Trump's first term, as did the U.S.-China Phase One Trade Agreement. Given broader and more crippling tariff levels, the administration will have to move faster to limit a deepening in supply chain disruptions and the passthrough to higher prices. We're looking for broad strokes on potential commitments around export controls, buy-America, tariff (or tax) reductions, prevention of Chinese trade diversion through their ports, and greater market access of US businesses. 
3. Deals are not typically one-sided. We wouldn't be surprised if countries have some demands of their own, like requiring limits on the U.S. administration in applying future tariff escalation in order to maintain confidence that a deal is long lasting – once bitten, twice shy. 

Are some of these pieces already coming into focus? It is encouraging that there have been not just gestures towards negotiations, but concrete indications of what the EU and China may be willing to put on the table. For example, EU negotiators have already floated the possibility of an agreement that mirrors that with China in President Trump's first term, in which the removal of tariffs is accompanied by an agreement to increases purchases of certain U.S. products. The EU's pre-negotiation communication has floated some sticks as well as that carrot – over $100bn in U.S. exports have been threatened with retaliation if negotiations do not result in a "mutually beneficial outcome and the removal of U.S. tariffs". Targeted exports include primarily agricultural and industrial products, suggesting those are the areas where the EU sees itself as having leverage. 

The U.S.-UK deal on May 8th also provides some guidance for future deals: the UK was able to obtain lower tariffs on specific sectors in exchange for accepting quotas, but it was not able to achieve a baseline tariff below 10% on all its products. This affirms the assumption in our forecast that the U.S. is likely to maintain a higher baseline tariff rate as part of future agreements.  

The next thing that would help confirm that the U.S. is on a non-recessionary path is a pivot to the pro-growth Trump agenda. Two main items define that outcome. First, the U.S. Congress securing tax cuts beyond the extensions of the TCJA, discussed in greater detail in Question 5. This would support growth, even if they raise questions about fiscal sustainability. Second, the administration has telegraphed a broader agenda around deregulation of the energy, tech, and finance sectors. Attention and firm details here would help move past the risk of a tariff-triggered recession in 2025, into an economy that has a solid investment tailwind in 2026. 

Q2. Where does the U.S. economy currently stand?   

The outlook for the U.S. economy has darkened since Liberation Day, reinforced by a collapse in sentiment indicators and broad tightening in financial conditions. Our forecast for 2025 stands at 1.5% compared to 1.9% in March. That magnitude of markdown is representative of revisions occurring on the "street".  

However, this top-line figure does a disservice to the complexity of the day. It's still early days under the new administration, and data show both sturdiness and fragility. For instance, where it matters most in the hard data, jobs and prices, the story remains largely positive. While inflationary pressures had shown signs of heating up at the beginning of the year, the March reading came in on softer side. Meanwhile, the labor market has not shown signs of buckling. Job growth remained strong through April, adding 177k jobs last month, or roughly 20k more than the three-and-twelve and month averages. At its current pace, payrolls are still running slightly above what's required to hold the unemployment rate steady. It's hard to say whether this trend will continue, but our gut feel is that things are likely to slow over the coming months. But even if job growth were to turn lower, layoffs are likely to remain small compared to prior downturns. Constraints in labor supply will likely limit any knee-jerk reductions in the workforce. This should keep any downturn shallow in nature, perhaps acting as a catalyst for the administration to move faster on implementing its tax cut and deregulation agenda.  

In other corners of the economy, trade tensions are already leaving a mark. Real GDP recorded a small contraction in the first quarter, snapping three-years of steady expansion. Much of the drag came from a surge in goods imports, as businesses rushed to stockpile ahead of tariffs. A 41% surge in imports resulted in net trade shaving nearly five percentage points from GDP growth. Since the post-war era, there were only two other times when net trade shaved more than three percentage points in a single quarter (Chart 4). But it wasn't only suppliers front-running tariffs, as companies also ramped up purchases of equipment, including computers, communication, and medical equipment. It was a similar story for households, where there was surge in new vehicle sales. This rush to spend created an illusion of a still-resilient domestic economy. Private sales to domestic purchasers – the best gauge of underlying economic activity – rose by a healthy 3%, matching Q4's gain. But this influence will be temporary, evidenced by a collapse in shipping containers that would have been caught in the tariff-trap by the time they docked in port. 

Economic forecasting is a humbling exercise at the best of times, and today's heightened uncertainty adds a whole new layer of complexities. But it's usually safe to assume that there will be some economic costs to bear from the sharp erosion in consumer and business sentiment. The clock is ticking for the administration to secure influential trade deals and some good news for Americans in budget negotiations to turn the dial firmly in the other direction.  We think they’ll succeed on this front.      

Q3. Are we at the dawn of a weaker-U.S. Dollar era?

The recent pace of the dollar’s decline has been striking. In just four months, the trade-weighted dollar has reversed over a quarter of the 16% gain accumulated from 2021 through 2024. The reason – a spike in economic policy uncertainty driven by the Trump administration’s erratic tariff announcements. Investor confidence in the U.S. growth outlook has taken a hit as recession fear rise.

That puts the Federal Reserve in a difficult position. With the policy rate at 4.5%, there's room for a few precautionary cuts (see Question 4). Futures markets are already pricing in three quarter-point cuts this year, which is in line with our base case. If that pricing holds, we estimate the trade-weighted U.S. dollar could fall another 3% from where it sat at the end of April by year-end.

This is where fundamentals butt heads with other risks. Beyond interest rates, fiscal developments could add a new source of pressure. The proposed budget framework agreed by House and Senate Republicans is estimated to expand the deficit between $2.8 and $5.8 trillion. The upper end of that range exceeds the pandemic-era stimulus and would be largely unfunded absent cuts to big-spend areas like social security, Medicaid and Medicare – deemed untouchables. The financing gap could limit investor appetite for Treasuries, further exacerbating bond market volatility. 

The current fiscal stance has revived comparisons to the U.K.’s 2022 mini-budget crisis, which triggered a spike in Gilt yields and forced a Bank of England intervention. Some of this risk-premium is already embedded in the greenback and bond yields. The term premium on 10-year Treasuries peaked near 84 basis points in late April, resembling the move in the Gilt crisis, before narrowing to 56 basis points (Chart 5). That moderation signaled some market reassurance. And the U.S. is not the U.K.  – a sovereign-debt-crisis-style disruption is not a baseline for the world's core bond market unless political risks become significantly more amplified. 

Market nerves were briefly tested when the Fed’s independence was questioned by offhanded remarks made within the administration – 10-year yields rose nearly 10 basis points, while the U.S. dollar fell by over half a percent in a single trading day. Although markets were quickly reassured when Trump explicitly noted he wouldn’t fire Chair Powell, the over arching theme remains: markets can no longer take Fed independence for granted, particularly given the appointment of a new Chair in 2026. That tension is reinforced by the whispers still circulating on the so-called Mar-a-Lago accord – despite not being endorsed formally or publicly by the Trump administration. Yet, many analysts still felt compelled to review the report that laid the groundwork for a weak dollar. It relies on a cooperative Fed willing to backstop liquidity as markets digest unconventional measures (see report). At the core of this policy is a flawed theory that U.S. trade deficits are primarily driven by foreign demand for dollar reserves, a view that isn't supported by actual capital flow dynamics. The proposed measures range from pressuring allies to hold century bonds to imposing a “user fee” on foreign official holders of US Treasuries. Naturally, any resurrection of this theory would inject explicit credit risk into what is supposed to be a “risk-free” asset.

The dollar’s role as the world’s reserve currency rests on deep, liquid markets and credible institutions, both of which are increasingly being tested. The dollar's depreciation is helping to return the value closer to fair value, but holding there hinges less on traditional rate differentials and more on whether investors continue to trust the institutional and policy frameworks that underpin U.S. financial markets.

Q4. How do we think the Federal Reserve will navigate inflation vs. growth?

The Federal Reserve could soon find itself stuck between a rock and a hard place. Inflationary pressures have been sticky even before the administration started implementing its tariff agenda. The Fed's preferred core PCE Inflation metric has been holding within a range of 2.6 to 3.0 percent for 14 months. And Respondents to the Fed's Beige Book have noted that price pressures are building across supply chains, with costs likely to be passed to the consumer over the coming months – albeit the magnitude and timing remains uncertain. 

Provided inflation expectations remain well anchored, protocol would be for the Fed to look through the inflation shock as a one-time increase in the price level. But they've been burned before on that thinking in the years following the pandemic. And there's another wrinkle to consider – the labor market. So far, the jobs market has remained incredibly resilient. However, the latest employment survey was conducted just days after the April 2nd reciprocal tariff announcement, which was too soon to show whether corporations were getting nervous on hiring intentions. Since that survey was conducted, ISM surveys have shown hiring intentions remain weak, while Indeed job postings have drifted lower– suggesting some softening in the labor market is likely to materialize in the coming months. 

Déjà vu! A higher unemployment rate and rising inflationary pressures would be the worst combination for the Fed. In that scenario, policymakers would assess how far each of its mandates are from their long-run goals and adjust policy accordingly. The prospect of the Fed being caught in this difficult situation has pressured long-dated treasuries, pushing term premia to match some of the highest readings recorded in recent years. But we're not there yet. We anticipate the labor market will start to deteriorate through the summer, allowing policymakers to deliver a few insurance rate cuts to support the economy. However, the Fed will be hard pressed to entertain anything beyond that if inflationary pressures are inching higher. The economy needs to weaken more than expected to win over that case.

Q5. Where do things stand on U.S. tax cuts and budget developments? 

The administration has maintained that its upcoming tax bill will provide a more-than-sufficient boost to economic growth to offset the near-term downside risks of trade policies. However, at this time, we only have a broad outline of what the Republican tax bill will look like as Congress goes through the somewhat arduous process of passing a reconciliation bill. Using the reconciliation process bypasses the filibuster rule in the Senate, meaning it can be passed with a simple majority, but it needs to meet certain requirements like not increasing the fiscal deficit beyond the ten-year budget horizon.

This can become a sticking point when trying to pass a multi-trillion tax cut package that requires equally large spending cuts. There are several tax cut proposals under consideration by Congressional Republicans, including a full extension of the 2017 Tax Cuts & Jobs Act (TCJA) and eliminating taxes on social security, overtime pay, and tips. These have been core considerations, but additional measures include reviving the deductibility of auto loan interest and enhancing capital cost deductions. In total these provisions could cost $4-5 trillion over the next ten years – creating a tall order for spending cut offsets.

So how can Republicans pay for this? The simple answer is that they can’t, not fully anyways. To get around this, Senate Republicans have outlined a plan to use an unconventional method to calculate the net deficit impact of the reconciliation bill, referred to as the ‘current policy’ scoring method. Using this method, the bill would assume that existing policy continues in perpetuity. In the context of the current bill, this would mean allowing the 2017 TCJA to be extended without affecting the assessment of the reconciliation bill’s net deficit. 

This would wipe roughly $4 trillion off the scoresheet, bringing the tax cuts roughly in line with the proposed $1.5 trillion in spending cuts outlined by House Republicans in their budget resolution (Chart 6). At this time, it's unclear whether this would be permissible under Senate rules, but if so, it would go a long way in narrowing the gap between the cost of the tax cuts and spendings cuts proposed to pay for them in the budget resolution. However, this creative accounting trick would not change the actual impact on the deficit, nor the associated increase in debt issuance. It's uncertain how bond markets would react or whether the term premium would rise to account for a further deterioration in the nation’s fiscal position. 

The House and the Senate still need to agree on the final details of the tax cuts. Congressional Republicans initially intended to pass the bill by Memorial Day, but that now appears too ambitious with the deadline shifted to July 4th. Given the inherent complexities involved in this process, a more realistic timeline would be mid-to-late summer for the final passage. Barring that, the expiration of most of the provisions of the TCJA at the end of the calendar year creates a natural stopping point to ensure the bill is passed, as failing to do so would result in an average tax liability increase of $1,900 per household according to the Brookings Institution. 

Q6. Canada: Tariffs and elections and recessions, oh my! 

A "new" government is taking the reins in Ottawa, but the country's economic problems remain the same: trade uncertainty, low productivity, and stretched housing affordability. Facing a daunting to-do list, Prime Minister Carney's policy prescription during the campaign included: facilitating large public investments, building more housing, and passing small tax cuts.

Top of the list is the relationship with the United States. Resolving the trade disruptions is unlikely to happen quickly. However, a pathway to cooling the temperature would help put a floor under business and consumer confidence. Any improvement could breathe some life into an economy that has started to sputter under the confidence shock (Chart 7). But going back in time is not an option. The incoming government will attempt to deepen ties for Canadian corporations within other global markets, particularly those with established free trade agreements, like the European Union. At the same time, an emphasis has already been placed on greater east-west domestic trade flows by reducing regulatory and other barriers. While all positive and long overdue, progress is a 2026 story and beyond. There will be limits to mitigating near-term economic pain in 2025.

Accomplishing a rotation in industrial orientation requires bold investments in transportation and trade infrastructure. Parliament is set to return in late-May, with a budget promised by the end of June. On the spending front, the proposals may seem ambitious with a Liberal platform adding ~0.5% of GDP to the deficit this year (and 0.8% next year). But considering the scale and scope of pivoting the Canadian economy from a multi-generational deepening in the U.S. economic relationship argues that the commitment may not go far enough. For instance, the proposed Nation Building Project fund to help finance items like critical health infrastructure, investing in digital infrastructure and east-west electricity transmission, is allocated $5 billion over the next two years. The Trade Diversification Corridors fund, for ports, railways, airport, and other transportation infrastructure is $4 billion over those two years. These are large amounts, and in many cases are meant to be complemented by provincial funds. But it took $30+ billion in total costs just for a single project: the Trans Mountain pipeline. And a single hospital in Ontario carried a price tag of $1.7 billion in construction costs. The platform budget may have been undersized for public buy-in on the financing commitments but is probably not consistent to the scale of commitments. Speeding up approval times and attracting private capital will be part of the plan but delivering a true shift to non-U.S. markets will likely cost more – and take more time. 

This requires a surgical and thoughtful approach. Proposals like dropping the lowest tax bracket by one percentage point carry a large price tag of nearly $6 billion per year. Despite having some appeal within the voting base, it is unlikely to deliver a meaningful near-term lift to consumer spending. If the goal is to stop-gap a consumer and business confidence shock for three-to-six months while the government organizes complex infrastructure programs and rollouts, then other measures can deliver more bang-for-the buck in the economy. These typically reflect measures that "pull-forward" spending, such as tax credits on housing retrofits for climate resiliency, time-limited tax holidays to compel spending within segments of the economy and so forth. How to spend that near-$6 billion price tag in year one of this transition will be key to putting a floor under the economy.

Q7.  Which Canadian industries are poised to outperform in this environment, which will lag?

As Canada's growth prospects are ratcheted down amid U.S. trade policy, the impacts won't be felt evenly across industries (Chart 8). We expect Canada's oil & gas sector to be a relative standout in the year ahead, despite the energy sector being a target of Trump's tariffs. Ongoing U.S. demand and dependance on Canadian oil, tighter spreads of heavier Canadian grades to WTI, and better pipeline capacity should keep activity moving in the oil patch. Canada's tourism sector is another sector that stands to benefit in the near-term. In a wave of patriotism, early evidence suggests that Canadians are spending more of their travel dollars at home, while tourists from other countries are also diverting travel plans away from the U.S. This should promote increased activity in the food and accommodation sector as well the arts, entertainment, and recreation industries.  

It's not a leap to conclude that Canada's manufacturing industry will be on the other end of the receiving line. Accounting for almost 10% of total GDP, this industry faces the strongest headwinds. Notably, manufacturers in automotive and steel & aluminum segments are already seeing layoffs, production cutbacks, rising prices and delayed investment plans. As of April, Canada's Manufacturing Purchasing Managers' Index (PMI) dipped to the lowest level since the depths of the pandemic. Other trade-exposed industries, such as transportation and wholesale and retail trade, are likely to feel the knock-on effects this year as well. The latter may face some difficulties as Canadian consumers tighten their purse strings until there is more certainty around employment, income prospects and inflation. The Bank of Canada's latest consumer survey suggests that the negative sentiment in response to tariff-related fears has surpassed even that experienced during the pandemic, leading households to revise down their overall spending plans. 

Meanwhile, in the "mushy middle" the public sector may only see modest growth as federal and provincial operating spending scales back. Governments did however roll out hefty capital plans that will provide support to non-residential construction, partially providing an offset from weaker investment intentions within the private sector. Elsewhere, a normalization in utilities will drive some 2025 growth, while soft seeding intentions and China tariffs are assumed to restrain production on the agricultural side.

Q8. Is the Bank of Canada done with cutting interest rates

In normal times, the Bank of Canada (BoC) would be just about done. The BoC has lowered its policy rate within a plausible neutral rate range – where monetary policy isn't helping or hurting the economy. Stabilizing inflation and steady growth to close out 2024 seemed to suggest that things were playing out as well as could be expected.  

Unfortunately, normal times do not describe today's environment. The trade war has firmly slammed the door shut on a smooth landing. Uncertainty on the outlook is so high that the BoC opted to forgo presenting a traditional forecast in its Monetary Policy report, instead delivering two scenarios for how the trade war might play out. 

Governor Macklem has already stated "monetary policy cannot restore the lost supply," implying the BoC is focused on how the demand side of the economy will respond to uncertainty and the impending income shock. The ongoing softening in the labour market keeps the door open for two more precautionary cuts (Chart 9), particularly since the economic momentum that would have flowed from the previous 150 basis points in easing is now stunted by the uncertainty. 

But admittedly, the range of outcomes around the outlook are wide. We assume that progress on relieving trade tensions occurs later this year. But it's equally possible that a more prolonged period of tensions, tariffs, and supply side disruptions press inflation higher and dampen demand. This forces the Bank into a difficult situation of balancing the risk of cutting rates amid rising inflation and expectations. 

For now, we still lump this scenario as a risk event, and not the base case. But in a time of high uncertainty, it's worth staying nimble and scenario based.

Q9. Will Canada's housing market get its groove back?

This prospect looks unlikely in the near term. Canadian home sales surprised to the downside in March, with preliminary data showing little reprieve in April. Benchmark prices are also tumbling. What's more, supply/demand balances are heavily tilted in favour of buyers in Ontario and B.C., pointing to further price declines in these markets (and Canada overall) in the coming months.

The housing market is typically highly sensitive to the interest rate environment, but uncertainty has dominated sentiment to sideline buyers. This means pent-up demand is building, which was already sizeable in Ontario and B.C. even before the U.S.-Canada trade war struck. History tells us that Canadian housing markets are prone to surges in activity after extended lulls. So, if our forecast plays out and uncertainty dissipates (and confidence improves) later in the year, this market is primed for a large sales gain. We also envision a better 2026 performance, in tandem with an improving economy and favourable interest rate backdrop (Chart 10).  

The GTA condo market deserves a special call out, and not in a positive way (see report). Like the broader Canadian market, we anticipate some firming in condo sales. However, recovery to even pre-pandemic levels will likely be gradual due to weak investor demand – a key cog propping up the space in years prior. At the same time, supply remains historically elevated, and the market will have to contend with another rush of properties completed this year.