In this week’s The Seven… 

• Game changer - Canadian LNG
• The race - for AI data centres 
• Cover up - U.S. AI boom offsets tariff drag
• Change of tune - U.S. Fed likely to cut
• Tariff toll - Canada GDP contracts in Q2
• De minimus what?  Tariff exemption ends
• Interesting Fact: How about $250 Million? The AI talent war
• Chart of the Week: Counter-tariffs and inflation

“Can you hear the horses?

'Cause here they come

The dog days are over, oh”

—Florence and the Machine, “Dog Days are Over”

As summer winds down and the days get shorter, can we say we’ve turned the corner in the trade war? That would be premature – we don’t have a trade deal with the U.S., and high sector-specific tariffs are in place. At the same time, there is a lighter touch on U.S. tariffs via CUSMA exemptions than previously feared, and there is less fear and uncertainty than back in the spring.

We have entered a new protectionist normal and the focus now turns to: 1) getting a longer-term trade deal; and 2) getting projects built in Canada.

PM Carney toured Europe this week, sending signals around building out ports in Canada and shipping LNG across the Atlantic. Now we wait for shovels in the ground, and the list of ‘fast-tracked’ projects under the Building Canada Act (we’re told soon?). Late breaking: a federal major projects office headquartered in Calgary has just been announced.  

Following my summer economics refresher last week, a newish development is that the federal government dropped many counter-tariffs (see the Chart of the Week below). This provides some modest upside to our forecast and likely welcome news for the Bank of Canada, which is waiting for underlying inflation to cool.

Our natural gas view is closely linked to the AI data centre boom. Like Swift and Kelce, we have paired them together for this Seven.

Don’t be fooled by the price I got - LNG is a game changer

It’s been a mixed year for the energy sector.

On the one hand, oil prices have dipped amid demand worries and new supply, while natural gas prices remain weak.

On the other hand, we are in year 2 of a secular shift towards greater market access, with TMX (2024) and LNG Canada (2025) expanding exports to the Asian market.

Related to that second hand, our energy analysts at ATB Capital Markets are closely tracking progress on LNG Canada, which started commercial operations June 30. It’s still not at full capacity, but there has been notable progress.

The time between shipments has been cut in half to 5 days. Using pipeline flows and the most recent ship loading time, Patrick O’Rouke, analyst at ATB Capital Markets, estimates volumes of >700mmcf/d in late August, more than doubling from the start of the month.

Bottom line: Despite some short-term pricing weakness, you cannot lose sight of the longer-term game. The industry has long suffered from an oversupplied North American market without a Canadian overseas outlet. Taking the longer-term view, we see natural gas volumes and prices marching upwards amid this improved takeaway capacity. While prices are expected to remain subdued this year, we forecast the AECO to pick up to average $3.3/MMBtu next year.

Start me up - Alberta in the AI data centre race 

It’s not just LNG driving natural gas demand. Data centres are an important factor as well.

AI needs energy, and Alberta has plenty of that in the form of abundant and relatively low-cost natural gas and renewables, alongside a deregulated market and lower cooling needs (yes, there are advantages to being cold).

There are 33 data centres in Alberta, and more to come. Here are a few projects we’re tracking:
eStruxture has a $750-million data centre under construction in Rocky View County; Beacon AI Centers is proposing to build six AI data centres in Alberta; Crusoe AI is proposing multiple AI data centres in Alberta with a total planned investment of $3 billion; Wonder Valley is a proposal to build the world's largest AI data centre industrial park in the Municipal District of Greenview No. 16; and Woodland Cree First Nation is working to acquire a partially-completed power plant site to convert into a data centre.

One of the challenges is grid capacity, although data centres can also generate  their own power. According to the Alberta Electric System Operator (AESO), 28 proposed data centre projects have applied to connect to the grid, representing 18,420 megawatts (MW) of demand. The province has set aside 1,200 MW in phase 1 of the AESO plan.

This may not be oil sands level type impact, but it’s material. Data centres will increase demand for workers (think electricians and HVAC), support natural gas demand and prices for the upstream gas sector, and potentially boost tech-adjacent industries looking to reduce latency and increase data processing speeds.

The province has a goal of $100 billion in data centre investment by the end of the decade.

With or without you - Would the U.S. be in a recession without AI?

It’s a funny question, given fears that AI could replace humans resulting in unemployment. But these days, the AI investment boom is propping up the U.S. economy in ways never seen before, helping offset the drag from tariffs. The stock market has benefited as the Magnificent 7 stocks continue to power the S&P 500 higher.

According to Stanford’s Artificial Intelligence Index Report, global private investment in AI exceeded $US 150 billion in 2024 - a whopping 44.5% increase from 2023. Stanford estimates that US$ 109 billion comes from the U.S. alone, with China a distant second at US$ 9.3 billion (Canada is fifth at US$ 2.9 billion). Much of this growth has come from generative AI (see chart).

The AI boom  is continuing into 2025, with one estimate indicating that AI-related spending added 0.5 points to GDP growth in the first half (about half of the 1.1% growth reported).

Digging deep into the U.S. Census Bureau construction data, I found something similar.  Investment in U.S. data centres this year is averaging $38 billion (annualized) in the first half, up a staggering 36% from 2024. And that’s not including related investments in software, R&D, etc.

I normally don’t get too fussed about sources of growth. So what if U.S. growth is being led by AI? The drivers of the economy always change. The reason we should care is that it begs the question about sustainability. Is AI truly game-changing technology that will yield high returns? If so, this could turn out to be a sustainable driver of growth. If returns don’t materialize, then it could self-correct (a bubble? that’s like saying Voldemort).

Weaker job market may force Fed’s hand

With U.S. job growth slowing to a crawl, Fed Chair Jerome Powell is now musing about interest rate cuts. After Powell’s speech last Friday at Jackson Hole, odds of a September cut have jumped to 85+%.

The Fed is in a bit of a pickle, as the job weakness points to cuts, even though stubborn inflation says pause. Toss in the political pressure to cut (including the attempted firing of Fed Governor Lisa Cook), and it’s not business as usual at the Fed.

In the end, President Trump may get what he wants - a lower policy rate - but for the wrong reasons - a slowing economy.

Just because the Fed cuts its target rate doesn’t mean borrowing costs will fall. A dicey fiscal situation and ongoing inflation worries have already pushed up long-term (20-30) Treasury yields since April.

Canadian contraction - GDP dips in Q2

Tariffs are wreaking havoc with the economic data. In the first quarter, GDP jumped 2% (annualized) as businesses raced to get ahead of tariffs by front-loading exports and building inventories.

Now, with the arrival of today’s GDP data, we see a complete reversal with GDP contracting 1.6% in the second quarter. Exports have plunged under the weight of U.S. tariffs, and business investment contracted.

Were we surprised? Not really. We viewed the early GDP estimates from Stats Can with suspicion, and remained cautious with only 1% GDP growth for the year. The latest reading is consistent with that view, and we see weakness persisting into the back half. In particular, consumers will pullback after front-loading their purchases (particularly of vehicles).

The Bank of Canada won’t be surprised either, as their July forecast was -1.5% for GDP in the second quarter. We believe the jobs and CPI report for August will carry more weight than this report - softness on both fronts could lead to a September cut. Our call is two more rate cuts from the BofC and then holding. 

De Minimis - Tariff exemption ends today

The tariff analysis these days falls under the ‘it’s complicated’ category, with on-and-off tariffs, sector-specific tariffs, and special carve outs.

One of those carve outs that is ending is something called the U.S. de minimus rule, which until today allowed shipments valued at US$800 or less to enter the U.S. duty-free. This will be particularly challenging for small and medium-sized businesses and e-commerce merchants.

In theory, tariffs could be avoided by demonstrating compliance with the Canada-US-Mexico Agreement (CUSMA), but that may be a burden for smaller businesses. The current tariff rate applicable to non-CUSMA goods (outside targeted sectors) is 35%.

While the vast majority of exports will not be impacted, that does not mean the impacts will be small for smaller exporters. One estimate is that $500 million - $1 billion in Canadian food exports fall under de minimis exemption out of the more than $40 billion in agri-food exports.

Interesting Fact: AI talent arms race

AI may replace some jobs, but right now Big Tech is dolling out record cash to buy the top humans in the AI business.

Meta has reportedly offered compensation packages to top-tier AI researchers, with some reportedly reaching as high as $250 million over several years. These professional athlete-type pay packages typically include a base salary, a signing bonus, and significant stock grants that vest over time.

Food for thought: Is AI an equalizer?

When you think of disruptive technologies, what comes to mind?  For many, it’s replacing humans with machines, disproportionately hurting lower-skilled workers.

However, some studies show that it’s actually lower-skilled workers that may see the largest productivity gains. This is what Stanford researchers call the ‘equalizing effect on workplace performance’.  

Chart of the Week: Counter-tariffs and inflation

Last Friday, the federal government dropped counter-tariffs that are CUSMA compliant, excluding steel, aluminum and autos.

We can debate the merits of such a move, but one thing is clear - it will put downward pressure on inflation.

We did a deep dive into the goods subject to counter-tariffs and found that, unsurprisingly, they saw larger price increases (on average) than other CPI categories.

Consumer prices for certain categories like coffee pods and jewelry increased by approximately 20% year-over-year in July, while others, such as clothing and vegetables, experienced less of an impact.

Of course, prices can rise or fall for a variety of reasons beyond tariffs. Even the tariff impacts can be muted due to retailers absorbing tariff costs to maintain consumer demand, consumers choosing alternative products, substitution to local or other imported goods, and the selling off of pre-tariff inventories.

But, overall, based on our Chart of the Week, it’s pretty clear that the counter-tariffs were putting upward pressure on prices, and their elimination will do the opposite.

Answer to the previous trivia question: The workers in the Toronto Typographical Union who went on strike in 1872 were asking for a nine-hour workday.

Today’s trivia question: When was the Google web page launched?