In this week’s The Seven…

• Spoiler alert - Looming tariffs threaten Canadian rebound
• Not so fast - Underlying challenges persist
• Grain of salt - Investment intentions positive, but only a guide
• What’s your call? Prediction market says tariffs are coming
• Back to normal? Yield curve no longer inverted
• Interesting Fact: About Red Deer
• Chart of the Week: Chemicals investment reaches new heights

“Distinguishing the signal from the noise requires both scientific knowledge and self-knowledge: the serenity to accept the things we cannot predict, the courage to predict the things we can, and the wisdom to know the difference.”

—Nate Silver, The Signal and the Noise

Another wild week with ‘on and off’ again tariff talk. What to do with all this noise? In the spirit of Silver, our goal is to find the signal—stay up to speed, and keep you up to date on material developments that could impact the outlook.

The latest (as of this morning) is that Trump is proceeding with the proposed 25% tariffs on March 4. This comes after suggestions that the tariffs would be delayed until April 1. Also this week, Trump renewed calls to get Keystone XL built. While this would provide significant upside to the outlook (pipeline constraints are a limiting factor to production growth), there are major roadblocks to regain private sector interest. For now, we keep this as potential upside for our back pocket (but not factor into our outlook).

The looming tariffs will hurt government revenues. Yesterday’s provincial budget included some form of tariffs in its base case forecast, weighing on economic growth and Canadian energy prices.

Spoiler alert - Economy warming just as tariffs threaten to cool it down

Don’t look now, but the Canadian economy has actually revved up just as tariffs threaten to slow it down.

Today, we got a better-than-expected GDP report. Turns out the Canadian economy had more momentum in the back half than previously thought.

Fourth quarter GDP growth firmed to 2.6% growth annualized - exceeding market and the Bank of Canada’s expectations of a 1.8% gain.

The consumer did much of the heavy lifting, with a 5.6% annualized gain, while housing investment chipped in with a 16.7% jump. These are interest rate sensitive components, so clearly BofC cuts are working their magic. The GST holiday came in mid December, so it can’t explain the big Q4 consumer rebound.

It doesn’t stop there. Third quarter growth was revised from 1% to 2.2%, bringing the 2024 overall gain to 1.5% - better than our tracking and ahead of the Bank of Canada’s January forecast of 1.3%.

Not so fast

But before we get ahead of ourselves, there are some more structural challenges heading into this looming trade war.

Business investment - While non-residential business investment bounced back in Q4, the longer-term trend has not been great. Real business investment fell last year, and last quarter was 18% below the 2014 peak.

Exports - Merchandise exports picked up in the fourth quarter, but this could be a front-loading effect as companies try to get ahead of the tariffs. Real goods exports last quarter were only slightly (0.6%) above the pre-COVID peak. As we’ve discussed, energy (the largest export category) has been doing much of the heavy lifting, with oil production rising amid new market access from TMX. Ex-energy, real merchandise exports fell last year and remain below pre-COVID levels.

The general point is that it can’t just be about lower rates lifting consumers, especially given elevated levels of household debt. Longer-term, the Canadian economy will need to see higher levels of investment and productivity.

This bleeds into the next topic. What the Bank of Canada can, and perhaps more importantly, cannot do to address these challenges.

Blunt instrument - BofC clear on its limitations

Have you noticed a theme in governor Tiff Macklem’s speeches following the latest Trump tariff threats? There have been two speeches since the February 1 executive order.

Let’s start with the February 6 speech in Mexico:

“If significant broad-based tariffs are indeed imposed, they will test the resilience of our economies in the short run and reduce long-run prosperity. Tariffs mean economies work less efficiently. There will be less investment and lower productivity. That means our countries will produce less and earn less. Monetary policy can’t change that [emphasis ours].”

And last week in Ontario:

“What the Bank can do is help the economy adjust. With inflation now back around the 2% target, we are better positioned to contribute to economic stability. However, with a single instrument—our policy interest rate—we can’t lean against weaker output and higher inflation at the same time.”

In other words, the BofC can only do so much.

The BofC’s job during the inflation fight was more straightforward. It would raise rates to fight high inflation and then lower rates as inflation eased.

It’s more complicated now. Tariffs add to inflation, but a slower economy has the opposite effect.  Our view is that the Bank will put more emphasis on the latter by accelerating rate cuts in the event of a trade war.  That is, we think it will ‘see through’ an increase in inflation as long as it's viewed as temporary and longer-term expectations remain anchored close to 2%.

What’s clear is that something else will need to do the heavy lifting countering this shock. While the Bank is careful not to tread outside its inflation mandate, Macklem’s last speech briefly touched on the need to bolster productivity and strengthen Canada’s economic union. The Bank has talked about ways to bolster productivity in the past (improving business investment, regulatory certainty, scaling of companies, etc.) but in this speech Macklem took the opportunity to discuss the importance of free interprovincial trade - something we’ve also been talking about as of late.

Momentum interrupted - Alberta’s economy hitting a speed bump

Under the category, ‘don’t look now’, Alberta is a great example of an economy with momentum heading into the trade war. In the fourth quarter, employment rose by 29,400 (mostly full-time positions), and the unemployment rate has finally moved in line with national trends. Interprovincial migration to Alberta shows no signs of slowing, and home construction is booming.

This week, we reported on capital investment intentions for the province. Under normal circumstances, these results would have been celebrated, pointing to strong momentum going forward. But with tariffs looming, we need to take these survey results with a grain of salt (the data were collected from September 2024 to January 2025 before President Trump’s Executive Order of February 1). The survey intentions point to a 10.2% jolt in private sector investment this year to their highest level since 2015, lifted by oil and gas extraction, chemical manufacturing and information and cultural industries.

Even with tariffs on the horizon, the survey still has value. Much of this investment is in lumpy projects that will proceed anyway - take Dow’s Path2Zero project under construction for example, which has put chemical investments to new heights (see chart of the week).

But there are downside risks should Trump proceed with his proposed tariffs. In our latest tariff scenario,we see a pullback in investment and only 0.5% real GDP growth this year and 1.3% next year

What’s your call? Prediction markets weigh odds of tariffs

This week, President Trump suggested broad-based tariffs on Canada may be delayed further to April 1. Then later in the week, Trump clarified the tariffs are back on for March 4.

Confused? You’re not alone. The uncertainty is off the charts.

How does one navigate this uncertainty, finding light in the fog?

No one has a crystal ball, but we can always turn to the prediction market. It’s one thing to make a call, it’s another to put money behind it.

The prediction market allows participants to bet on a wide variety of outcomes. This became popular during the U.S. election, and outperformed the polls in calling for Trump’s election victory. In one poll, Polymarket, the largest prediction market, asks: will the Trump tariffs on Canada be in effect on May 1? The notes to the poll clarify that these are general tariffs targeting Canada, akin to Trump’s February 1 Executive Order. The last trade before this Seven went to print had the odds at 65%, way up from 30% early in the month.

Back to normal - Yield curve no longer inverted

It’s time to talk about the yield curve!

When short-term interest rates are higher than long-term interest rates, the yield curve is downward sloping, or inverted. It’s often considered a leading indicator of a recession, under the assumption that interest rates will need to fall in the future as the economy slows.

In Canada, the yield curve was inverted for about 2.5 years. The Bank of Canada cranked up its short-term rate to control inflation. This pushed the two-year bond yield higher than the 5-year, as the market was expecting that near-term rates would need to stay high and then move back down to more normal (or neutral) levels.

But something new happened. Starting in mid-December, the 5-year nudged slightly above the 2-year. This upward shape is considered normal, as lenders typically require compensation for bearing risk over longer periods.

So what? To us, this signals that the Bank of Canada is near the end of its cutting cycle. There is still room to cut, but it’s already done most of the heavy lifting - though we do see the need to trim deeper in a trade war. Second, longer-term interest rates have come down, but not near as much and we shouldn’t expect them to move as much going forward. They are anchored on where the market expects rates will land in the future (the neutral rate consistent to keep inflation near 2%).

Interesting Fact: About Red Deer

My journeys through the province landed me in Red Deer this week. A Census Metropolitan Area (CMA) of over 112,000, Red Deer is a central hub in the Calgary-Edmonton corridor. The CMA has seen strong population growth over the last two years. Last year, Red Deer grew by 3.5%, with gains in international, interprovincial and even intraprovincial migration.

Chart of the Week: Investment in Alberta’s chemical industry reaches record high

Alberta has never seen this level of investment in its chemical industry. In 2025, recently announced capital spending intentions point to a record high for the province - at least in nominal (non-inflation adjusted) terms. The largest driver is Dow’s Path2Zero project now under construction. In the chart of the week, we’ve applied the growth from the intentions survey data to the investment data reported in the Provincial Accounts (a longer time series).

Alberta is a major producer of petrochemical products, taking natural gas liquid feedstock like ethane and converting it into ethylene and polyethylene, used in the production of plastics and a variety of consumer and industrial applications (such as batteries). A key advantage in Alberta is abundant, low-cost natural gas feedstock.

Answer to the previous trivia question: The word plastic comes from the Ancient Greek word plastikos which means capable of being shaped or molded.

Today’s trivia question: Who wrote: Our new Constitution is now established, and has an appearance that promises permanency; but in this world nothing can be said to be certain, except death and taxes?