…on increased recession risk

Markets are becoming more nervous about a possible recession. Forecasters have raised their recession risk, with J.P. Morgan recently giving it a 40% chance.

For the entire year, growth is still expected to be positive but expectations are falling. For example, Goldman Sachs is now at 1.7% GDP growth for 2025 (compared to an earlier forecast for the year of 2.4%), citing trade actions.

For our forecast next week, we are pegging U.S. real GDP growth at only 1.8% this year—a marked slowdown from last year’s pace of 2.8%.

Thinking twice?

If countertariffs from other countries like Canada are not enough, maybe it’s pressure at home that could cause these tariffs to come off? Would a recession be enough for Trump to relent? In a Fox News interview last weekend, Trump did not explicitly rule out a recession: “I hate to predict things like that. There is a period of transition because what we’re doing is very big.”

To get a glimpse into Trump’s motivation, Goldman Sachs published a fascinating interview with former Deputy U.S. Trade Representative Jeff Gerrish. He talks about the longer-term goals around trade imbalances, reshoring manufacturing, and national security, along with the shorter-term goals of extracting concessions. His thoughts on Canada/Mexico are that it is a negotiating tactic to secure concessions. According to Gerish, Trump is “no doubt looking to go bold and broad with respect to tariffs.”

Bank of Canada plays it right

In the aftermath of the BoC’s decision to cut its policy rate, I chatted with Mark Johnson, Managing Director of Rates at ATB Capital Markets.

Our shared view was that the BofC played this one right. Not only the decision to cut (that was our expectation) but also the messaging and information provided. With the situation changing by the hour, the Bank published leading indicators on consumer and business sentiment. A smart move, as the pre-trade war data have limited utility at the moment.

I don’t need to rehash my analysis from Wednesday, but I will reiterate that if this trade war drags on, we see more rate cuts coming. The market is now pricing in two more this year to 2.25%, but we think the BofC could move more aggressively below 2% if we get tipped into recession territory. The big caveat: longer-term inflation expectations need to remain anchored around target.

Frac sand in the tariff crosshairs

The first round of Canada’s countertariffs on U.S. products that went into effect on March 4, totaling $30 billion, are designed to cause pain in the U.S. while hopefully not inflicting as much damage on Canadian business and consumers. Take Kentucky bourbon. Perhaps Canadians could swap out for alternative products like Crown Royal whiskey or Alberta Springs rye.

But it’s impossible to design a countertariff package without some collateral damage. In Alberta, one example of a product subject to the 25% tariff that stands out is frac sand. Used in fracking operations to hold open the cracks that allow the oil and gas to flow, about two-thirds of the sand used by Canadian oil and gas operations is imported from Wisconsin. In the absence of easy sources of alternative supply,  Enserva estimates that the tariff will result in an extra $250 million in annual costs for the industry.

Tit for tat - More countertariffs

On Wednesday, the federal government announced it was imposing more counter-tariffs, matching dollar-for-dollar the steel and aluminum tariffs imposed by the U.S. administration on the same day.

This includes 25% tariffs on steel imports worth $12.6 billion, $3 billion on aluminum, and $14.2 billion on other goods (everything from food products to tires and kitchen stoves).

As we’ve noted, Alberta’s metal manufacturing and construction sectors will face higher costs due to these countertariffs. Statistics Canada data show that over $600 million in steel and aluminum was imported from the U.S. to Alberta, not including shipments via other provinces.* Last year, Alberta imported $25 billion worth of goods directly from the U.S.

*This refers to steel and aluminum products only and not the full list of products to which the Canadian countertariff applies.

Lose-lose: Steel and aluminum tariffs

What will Trump’s 25% steel and aluminum tariffs accomplish for the U.S. (doubling to 50% if the general tariffs fully kick in)? If the 2018 experience is a guide, not a lot for the industry, but negative spillovers for others.

Using results from a Federal Reserve study, economists Kaydee Ross and Lydia Cox estimate a job loss of 75,000 in manufacturing industries from Trump’s 2018 steel and aluminum tariffs due to higher costs. This compares to the Peterson Institute’s estimate of only 8,700 jobs added in the steel and aluminum industries.

In Canada, there were losses in production during the tariff period. The largest direct impacts will be felt in Quebec on the aluminum side and Ontario for steel (layoffs have already been announced in Ontario and Quebec). As for Alberta, as we have noted, although the primary production is relatively small, there will be impacts from related manufacturing industries and the construction sector.

In summary, this is a lose-lose proposition for both countries.

Andrew DiCapau from the Canadian Chamber of Commerce has done a deep dive on the 2018 episode of steel and aluminum tariffs. Check out his blog post here.

Interesting Fact: More than we thought: Alberta’s natural gas reserves revised up

A new study of Alberta’s natural gas and oil reserves commissioned by the Alberta Energy Regulator and conducted by McDaniel and Associates Consultants has found that Alberta’s proved and recoverable natural gas reserves now sits at 130 trillion cubic feet (TCF) and that the total gas resource in ground exceeds 1,360 TCF. According to the news release, “adding these new gas reserves to other provinces’ reserves sees Canada’s overall gas number more than double and results in Canada’s ranking moving from number 15 to number nine globally.”

Chart of the Week: The Canadian dollar - Same result, different path

We all know the Canadian dollar hasn’t exactly been a star performer.

A key storyline for the loonie has been that it’s been a victim of U.S. dollar strength. That is, it wasn’t just that the Canadian dollar was weak, it was that the U.S. dollar was strong against a broad basket of currencies. Canada was along for the ride, as shown in our Chart of the Week.

That story has shifted in recent weeks. The US dollar has been weakening against a broad basket of currencies. However, it has appreciated against the Canadian dollar, rising to C$ 1.44/US$ as of yesterday’s close. People who don’t trade currencies for a living often think of the inverse of this - 1.44 translates to US$ 0.69/C$.

Our interpretation is that markets see: 1) signs of trouble in the U.S. economy and are wagering more bets that the Federal Reserve will need to cut; 2) capital is moving to markets like Europe because of expected U.S. weakness; and 3) Canada will be disproportionately hit by the trade war and the Bank of Canada will need to cut further (domestic policy uncertainty with a pending federal election likely factors in as well).

Our current forecast (part of next week’s outlook) is that the CDN dollar will average 70.5 U.S. cents this year and 71.5 cents next year.

Answer to the previous trivia question: New Brunswick exported the most refined petroleum products (e.g. gasoline) to the U.S. last year at $10 billion. Alberta was second at $6.6 billion.

Today’s trivia question: How many barrels of proven (a.k.a. recoverable) oil reserves does Alberta have?