In this week’s The Seven… 

• Is less bad, good? Market reaction to tariffs
• EU deal - A template for Canada?
• From the sidelines - Bank of Canada pauses for the summer
• Double header - US Fed also not budging on rates 
• Coming back - Oil production
• Next week: July jobs
• Interesting Fact #1: K-days attendance
• Interesting Fact #2: Tariffs raise construction costs
• Chart of the Week: Hey big spender! What do Albertans spend more on?

Summer doldrums? Not so much. This week featured more tariff frenzy and double header rate announcements on Wednesday. In short, interest rates are on pause, but tariffs are most definitely not. 

In this week's The Seven, we unpack the latest on tariffs, the somewhat surprising market reaction to date, and implications for the outlook. On a lighter note, we dig into some recent spending data to uncover where Albertans spend more.

Is less bad, good? Market’s muted reaction to tariffs to date

Until this morning, equity markets had been marching to a “not as bad as feared” beat. The S&P 500 closed yesterday 12% above April 2, ‘Liberation Day’ levels, partly reversed by today’s sell off (down more than 1.5% this AM as this goes to virtual print).

Interesting, given that we’re in a new era of protectionism with the highest US effective tariff rate since Smoot-Hawley. 

The latest effective tariff rate estimated by the Yale budget lab on Wednesday, is a whopping 18.5%, the highest since 1933. That same group sees the tariffs shaving 0.5% from US GDP and 500,000 from US payroll employment relative to the base case.

A few theories as to why market reaction has been muted to date. First, while a drag on growth, the level of tariffs are not as bad as envisioned back in April. Second, as shocking as it sounds, some of the policy uncertainty is also getting less bad. Third, markets may be convinced that there may be checks and balances to further escalation, whether they be legal (sweeping tariffs are being challenged as we speak) or financial (bond yields have been under pressure). Fourth, there are positive storylines the trade war coverage tends to overlook, including the ongoing AI boom and the easing of policy rates since mid 2024.  

EU deal - A template for Canada?

As I write this on August 1 (the original deadline), there is no ‘deal’ between Canada and the US and Trump’s 35% tariffs have kicked in on goods not compliant with the Canada-US-Mexico Agreement (CUSMA). This, after the deadline for Mexico was extended yesterday for 90 days.

Amid the tariff frenzy, a US-EU trade deal was struck on Sunday with a 15% baseline tariff on most EU goods (including cars) in exchange for the EU dropping its tariffs on US industrial products.

Is this a template for Canada with a new 15% tariff baseline? Maybe, but Europe is not Canada. To state the obvious, we’re next door and despite Trump’s claims, Canada and the US have a relatively balanced trading relationship. Excluding oil and gas, the US actually runs a trade surplus with its northern neighbour.

The key thing we are watching is CUSMA exemptions. If they remain in place, Canada will continue to face a lower effective tariff rate than other countries. As it stands, the provinces most directly impacted are the major steel, aluminum and auto producers - namely Ontario and Quebec. Due to lumber duties increasing, the effective tariff rate on B.C. is also relatively high.

As for Alberta, we estimate a less than 2% effective tariff rate, due to the high concentration (over 80%) of energy-related exports that are exempt through CUSMA compliance.

Entering scenario land - Base case forecasts in flux

Clearly the situation remains in flux, and it’s too early to go back to the drawing board re-running forecasts.

In the meantime the Bank of Canada told us this week what an escalation in trade tensions could look like. In that scenario, the economy contracts in the next two quarters, with annual growth coming in at -0.1% (this number is boosted by a decent first quarter). 

If things turn out better than the status quo and tensions de-escalate, we could see growth of 1.4% this year and next. That may seem promising, but keep in mind that’s lower than the pre-tariff trajectory of 1.8% in both years forecast in January.

As for our forecast, our low case (also an escalation) sees the Canadian economy contracting  0.3% this year, very close to the Bank of Canada's own low case. Alberta ekes out 0.7% growth in this more pessimistic scenario.

If you ask me today, I still think our June base case (1.9% growth for Alberta, 1% for Canada) is a reasonable planning scenario, balancing the current downside risks with a stronger-than-expected first half to the year. If things escalate, we’ll lean more towards the downside and keep you posted. 

But don’t forget about the upside. If there’s anything we learned in this trade war it’s the resilience of the economy to trade shocks.

Side note: our June forecast is very close to the Bank of Canada’s base case forecast. The Bank’s “current tariff scenario” has the economy growing pretty much in line with our own Canadian forecast: a touch over 1% in both 2025 and 2026.  

From the sidelines - Bank of Canada pauses for the summer

What has the Bank of Canada been up to this summer? A lot of ‘wait and see’ on the trade front with a heavy dose of scenario analysis (you can see the smoke from their economic models all the way from Alberta).

One thing they haven’t done is budge on the policy rate. This week’s decision to pause yet again was anticipated by us, and pretty much everyone else. 

What’s interesting is the next move. We’re in the camp that they will cut two more times, and the ‘dovish’ statements reinforced this view. If we get two friendly inflation reports, we feel they could pull the trigger in September. 

Far from fretting about inflation, the Bank of Canada said things like…“Boiling it all down, there are reasons to think that the recent increase in underlying inflation will gradually unwind.”  Moreover, their ‘current tariff scenario’ forecast has inflation exactly on target. 

But let’s not get carried away with rate cut talk. That’s old news - the big rate cuts are already behind us. 

Governor Macklem is stuck with a pretty blunt instrument to tackle the problem at hand - sticky inflation and weak growth. This means rate cuts are nearly done, and it's over to elected officials to pull levers to get the economy going (think trade deals, fast-tracking major projects, freer internal trade). 

Double header - Fed also presses pause

What a treat for central bank watchers! A double header, as the Federal Reserve in the US also made a rate decision on the heels of the BoC announcement. 

Much to the disappointment of President Trump, who later criticized the decision, the Fed paused again. The Fed said inflation is still running too hot for comfort, with tariffs adding to pressures, though Chair Powell was somewhat guarded on the impacts: "Higher tariffs have begun to show through more clearly into prices of some goods but their overall effects on inflation and the economy remain to be seen." However, today’s softer-than-expected July jobs report may boost the odds of a September rate cut, especially if concerns around weaker employment persist.

Interest rate markets currently expect the Fed to lower its rate 2-3 times by year end.

Coming back - Oil production rebounds from wildfires

Output contracted in the oil and gas sector in May - the combination of wildfire disruptions and maintenance. Fortunately, the latest Alberta Energy Regulator (AER) data showed oil production back to normal in June, and for the first half of the year we’re still up 3.3%. This is roughly in line with our forecast, which has real oil and gas exports rising 2.5% this year. Compared to previous May wildfire disruptions, the impact was relatively small on Canadian oil and gas output. The largest, by far, was the 2016 Wood-Buffalo fires which at one point pulled more than 1 million barrels per day off line.

What do Albertans spend more on? Pretty much everything. A detailed review of the data shows that Alberta households had higher average spending across all spending categories.  This makes sense. Most goods are what economists call ‘normal’, meaning as income rises spending goes up. In percentage terms, the largest gap was for spending on recreation (20% higher than national average), housing and utilities (13%), and dining out and accommodation (11%).  

Recent Alberta trends. Spending per household grew only 2% last year (less than inflation) following much stronger growth coming out of COVID. More was spent on housing, but Albertans cut back in other areas like clothing and home furnishing, weighed down by higher interest rates. Alberta had similar levels of overall spending growth (5.4% vs 5.3% nationally), but that was due to more households being added (spending per household rose faster in the rest of Canada).

2025 has started on a more upbeat note, with spending accelerating to 3.5% y/y growth in the first quarter (latest data).

Answer to the previous trivia question: The IMF was established in 1944 and currently has 191 member-countries.

Today’s trivia question: A normal good is one in which demand increases as income rises. What do economists call a good where demand falls when income rises?