Our economic outlook for 2025

Sébastien: Hello everyone. Welcome to the “In Your Interest!” podcast. My name is Sébastien Mc Mahon and today we're following up on where we left off over the last few weeks with my colleague Marc Gagnon. We were discussing the year 2024, the economy and the markets, but now we're turning towards 2025 with two episodes. This first one here will be on the macroeconomic side of things. So again, I'm joined by my colleague Marc Gagnon. So hello, Marc.

Marc: Hello, Sébastien.

Sébastien: Pleasure to have you again.

Marc: Pleasure myself.

Sébastien: And a new guest on the podcast, David McCulla. Hello, David.

David: Hello!

Sébastien: So, your full title, so I don't miss it.

David: Senior Director, Portfolio Manager, Fixed Income.

Sébastien: Okay, so we'll be discussing equities with Marc and fixed income with David, here. So, when we covered 2024, we were talking about how markets were very solid, how the US economy outperformed our expectations. The Canadian economy also, which we were expecting a recession. We didn't get it. But now the question is: “Okay, where does that leave us for 2025?” And of course, we cannot discuss 2025 without discussing Donald Trump. So Trump 2.0, what does that mean? You know, on the economic side, Trump ran on a campaign where he said his priorities were regulation, regulation and taxes. So, of course, pro-growth measures. We do look at the numbers and think that maybe it's going to be a wash on growth, but still be inflationary. But, you know, there's going to be some winners, some losers. It's kind of hard to predict how the movie will unfold. So if I start with you, David, what does Trump 2.0 mean for you in 2025?

David: Well, I think the first thing that comes to mind is just uncertainty. And there's going to be a lot of noise. There's going to be a lot of Trump tweets that are going to cause volatility, as they did during Trump 1.0.

Sébastien: Yeah.

David: And I think from an investment perspective we're going to have to separate the noise from the actual policy changes.

Sébastien: Yeah.

David: I think what else comes to mind is his America-first or protectionist platform. I think we're going to see less regulation and extension of the 2017 tax cuts. And certainly, tariffs have been front and center in the news. We're going to see plenty of tariffs or the threat of tariffs. And I think on the margin all this should result in slightly higher US growth and inflation.

Sébastien: Okay. And of course with Trump comes more deficits. And we are already at the level where the deficit is high. So how do you see the story unfolding there?

David: Well, you look at the deficit. So we've gone from -4% of GDP in 2022. We're sitting around -7%. So, it's gotten worse in an environment where the economy has actually been pretty good. So certainly it can't continue on this trajectory. Something's got to be done. I think he's got the right person in place. Scott Bessent, he's the nominee for Treasury Secretary. He's got a nice plan. He's calling it 3-3-3. Reduce the budget deficit to 3% of GDP is one of the threes. Boost GDP growth to 3% and then increase US energy production by 3 million barrels a day.

Sébastien: Yeah. And reducing the budget deficit to 3% of GDP, of course, this is a restrictive fiscal policy. So it holds the economy back. At the same time, he wants to boost GDP growth to 3%. So it's going to be hard to handle those two at once. But Marc being the resident energy expert, increasing US energy production by 3 million barrels per day, is that doable?

Marc: That's going to be hard because the actual production has already been growing for several years. It's around 15 million barrels, if I'm not mistaken. But what I heard recently is that unemployment for workers specialized in the energy industry in the US, I think it's 1.8%. So you will need people, and these people that are highly specialized, it's hard to find.

Sébastien: Yeah. It's always about the labour scarcity, you know, in those sectors. So of course, it's good to put measures in place and spend the money on boosting capacity, but you need to find the workers.

Marc: Yeah. And if he does that and it creates a lot of inflation in the sector, you know, what he wants to save with lower prices will be lost because the margin of the producer will be lower and it won't produce more if it doesn't make more money.

Sébastien: So, there's a lot of willingness there to, you know, make America great. So, to push the US economy higher. Of course, you know, it comes with trade policies that will be impactful elsewhere around the world. So that brings us to Canada. So of course, as we're recording this, we're just a day removed from the resignation of Finance Minister Freeland. And, you know, there's a lot of uncertainty about the next steps for the Canadian government. The conservative government is likely to come in, is likely to be more fiscally responsible when they do, when they come in 2025. Big question mark to when will the election happen. But we know that we need to have an election in the country in 2025. But if we focus on Canada now, Marc, the Trump impact, Trump tariffs, you know, how do you expect the Canadian economy to absorb this?

Marc: Well it's going to depend, you know, how carved they are. If we talk about blanket tariffs, that could be quite, you know, negative for the Canadian economy. We have also to wonder if it's going to be 10 or 25%. There's a huge difference because for example, the Canadian dollar can probably offset a good part of a 10% tariff. But 25 is going to be a little tougher. So there's a lot of unknowns at this point. The good thing about that, though, I suspect that when Trump will come in power, it's not going to take long before we know exactly what he has in mind. I think he's really ready. We talked about a revengeful Trump last episode. I think that's going to be the case. He is going to act very quickly.

Sébastien: Okay. What about you, David?

David: Yeah, I would agree. I think that the tariff is the biggest cloud of uncertainty overhanging our economy from a Trump effect right now. It's interesting. You look at Trump 1.0 versus Trump 2.0. He's already made tariff threats against 11 different countries, Canada being one of them. And this marks a bit of a shift from his trade strategy in his first term. So, he's increasingly linking tariff threats to non-economic measures, not just economic ones. So with Canada, with Mexico it's “Hey, tighten up your borders, or else I'm going to hit you with a 25% tariff.” And like Marc said, big difference between 10% and 25%. If he goes with the 25%, severely negative for our economy. I think one of the things that is the balancer would be our exchange rate. So I think with a 25% tariff, our currency dollar, CAD, moves in that sort of 1.50 or 1.60 range to the US dollar.

Sébastien: Okay!

Marc: So that would be that would be quite a move, eh!

Sébastien: Yeah, that would be quite a move, for sure.

Marc: Let’s forget about vacations in the US!

Sébastien: Ha ha ha! And now, if we turn our sights to China. China is in a relatively weak position, now. They're dealing with a deleveraging shock. There has been a bubble in real estate. Households are indebted. Businesses are indebted. Local governments are indebted. So there is a lot that needs to be done. We're looking at structural reforms on how governments or local governments are getting financing. We're talking about helicopter money. That is government sending money to households to get them spending because monetary policy has become inefficient. You know, we could and we should do a whole episode on that actually. But, you know, China, that means that it's exporting disinflation or deflation. So, this is very important for markets. We're seeing inflation coming down around the world. And it's mostly coming from China right now. But also China has some very, very important impacts on things that matter to us, like risk appetite, but also commodity prices, demand for our Canadian exports, you know, the price of exports. So maybe if I start with you, David, when you think about China and you look forward in 2025, what are the risks or how do you see things unfolding?

David: Well, I think the biggest risk and the biggest thing for China is growth. And you've got a huge disparity between what the government is reporting, suggesting growth is close to 5% and what independent Chinese economists are saying, it's closer to 0%. To me, it's no surprise that China is looking to unleash the strongest wave of both fiscal and monetary stimulus we've seen in years to spur their economy. We know that a large part of the Chinese economic growth depends on exports. What's interesting is we also know that Trump is going to be looking to minimize Chinese imports in the US. So I think one thing that's going to be very interesting for 2025 is how does that economic sort of war unfold? We've certainly seen in the past Chinese export deflation through low-priced exports. And historically, that's been a very much a tailwind for bonds globally.

Sébastien: Okay. How about you, Marc, when you think about China?

Marc: Well, I think like David said, that, you know, they have a growth problem. That's certain. And although the last efforts they have done on the real estate markets seemed to start to stabilize it, you know, if tariffs are added to that, the situation won't be easy. We hear that they have some leeway in terms of firepower to do some other fiscal measures. And that's really, really important. What I would bring though is we often talk about what Trump will do, but what will be the retaliation? What will be the impact of other countries, also, looking at the US and saying “Okay, you want to put tariffs on that, then I'm going to put tariffs on that too.” So, sometimes you know you can't help to wonder there will be a negotiation process, at one point. Maybe things will flare up at first, but I think that it's not going to take that long that people will realize that we have to come to some sort of agreement and that I think will be positive for China.

Sébastien: So I think what you just said here kind of sums up the view that we have for 2025. There's going to be lots of uncertainty. Trump and his threats will be all over the place, but likely there will be some deals that will help us avoid, you know, the worst scenarios here. But likely China will be facing more tariffs than other regions. You know, there's also Europe, which we’re going to be covering in the next episode. For Canada, let's say that we're able to negotiate our way out of tariffs because as you said, David, there are some things that are linked to tariff threats right now where I feel like it's easily fixable for the Canadian government, like to tighten up the border, spend some more money. You know, some things that we could see unfolding in 2025. And if we avoid these, we could have a pretty decent year overall. It’s just, you know, that the dispersion here of the scenarios is pretty wide. So yeah, I would say “cautiously optimistic,” maybe. Would that be the term?

David: I think that's fair.

Sébastien: Okay. All right. So thank you to both of you. So I'm keeping you for the next episode where we'll dig into what all of this means for markets and for investors. So thank you very much, David.

David: My pleasure. Thanks for having me.

Sébastien: Thank you Marc.

Marc: My pleasure too.

Sébastien: All right. And we'll be back again next week where we'll do a deep dive in the markets in 2025. So, stay put and thanks for listening.