In this week’s The Seven… 

• Canadian GDP - Better, but weakness under the hood
• New chapter - Legal challenges to Trump tariffs
• Keep your eye on the bond - U.S. fiscal concerns take centre stage
• Wildfire watch - New fires threaten oil production
• Tough call - BoC could cut, but likely won’t next week
• Interesting Fact: Alberta’s labour market - More diversified than you think
• Chart of the Week: The largest economies in 2075

"That's a big-time play. There's only one person in the world that can do that in that moment, and we're very fortunate to have him on our side."  

—Leon Draisaitl commenting on Connor McDavid’s spectacular breakaway goal, May 29, 2025

Why did the Edmonton Oilers advance to the Stanley Cup finals again last night? I’m not a hockey analyst, but I saw them aggressively playing on their toes—not reacting, but making things happen on the ice.

Canada should steal a page from the Oiler’s playbook. The new federal government has talked about building Canada into an “energy superpower” and “the strongest economy in the G7.”

The challenge is clear—private capital needs to return to Canada. In my recent ATB Business Summit speech, I highlighted that Canada has an investment per capita problem, not so much a GDP per capita problem.

The Oilers also capitalize on their strengths—superstar athletes like McDavid and Draisaitl complemented by depth down the line.

Canada has a superpower in its resources, as highlighted by the new federal Energy and Natural Resources Minister Tim Hodgson’s speech at the Calgary Chamber of Commerce:

“This is basic economics: comparative advantage. We’re better at energy, forestry and mining than most of the world. We do it cleaner, safer, and with stronger labour standards and Indigenous rights. Let’s be proud of that. And let’s use the revenues to strengthen our economy, fund public services, and build the next generation of Canadian prosperity.”

Put it all together, and Canada will need to find a way to get things done on major projects in its areas of comparative advantage.

The federal government has promised a “Major Federal Projects Office” providing a single window to expedite things, with more details expected next week. The western premiers have recently called for federal support for an economic corridor connecting the northwest coast to Hudson Bay and support for arctic security.

As we wait for more details, there is cautious optimism that the right signals have been sent and action will be taken on these issues.

Canadian GDP - Better than expected, but ‘meh’ under the surface

Canada’s economy performed better-than-expected in the first quarter and the advance reading for April (+0.1%) points to resiliency. This report significantly reduces chances of a Bank of Canada rate cut next week (see below).

Real GDP rose at an annual rate of 2.2% quarter-over-quarter, beating the Bank of Canada’s April forecast of 1.8%. Importantly, this was enough to reverse Canada’s downward trend in GDP per capita for the second straight quarter.

But delve into the components and it gets less flattering.

Much of the gains can be attributed to front-loading effects to get ahead of the tariffs.  Exports jumped and businesses accumulated inventories.

Consumer spending grew at a slower rate, and confidence readings have soured, pointing to weakness ahead.

Business investment improved in the first quarter, lifted by machinery and equipment, but again we can’t rule out front loading effects.

Taking the longer-view, the business investment trend in Canada has not been favourable. At the risk of sounding repetitive, this component of GDP needs to turn around to get the Canadian economy going again.

The government and consumers have already done the heavy lifting.  It will be tough for indebted consumers to drive the next leg of growth. Interest rates are falling, but nowhere close to pandemic levels as inflation pressures loom. Exports also need to get going, but that too requires more investment and will be held back by trade uncertainty.

Looking ahead, the big question is will Q2 turn negative?  Moreover, will Q3 also be negative, leading to a shallow ‘technical recession’. Our view is that this is likely. Exports will fall as front loading effects are reversed, business investment should step back, and the consumer will limp along. For the year, given the decent first quarter, we’re now tracking 1% annual growth for Canada (up from 0.6% in March).

New trade war chapter - Legal challenges to “liberation day” tariffs

A panel of the U.S. Court of International Trade ruled on Wednesday that the Trump administration's ”liberation day" tariffs were illegal, saying the President overstepped his authority. Then, yesterday, the Court of Appeals put the ruling on hold pending further review.

Feeling whipsawed? You’re not alone.

A positive interpretation of this week’s events is that there are real legal constraints to the President's tariff authority and broad-based tariffs may be less likely.

A negative view is that the President may explore other avenues (similar to what the U.S. administration has done with steel, aluminum and autos) to impose tariffs, and that this only reinforces the ’on and off again’ uncertainty that has characterized this trade war.

From tariffs to budgets - U.S. bond market uneasy

In the early 1980s, during a period of high inflation, economist Ed Yardeni coined the term “bond vigilantes.” He was describing investors who sold bonds to protest against irresponsible fiscal and monetary policy, putting pressure on the government to act.

Vigilantes or not, bond investors are nervous and recent events point to an erosion of the U.S.'s "exorbitant privilege" of borrowing at ultra low rates.

Following April 2 “liberation day,” long-term yields jumped as investors sold off bonds (along with stocks). Then, following Moody's downgrade of U.S. debt and the passage of the expensive “One Big Beautiful Bill Act,” the 30-year yield breached 5% earlier this week.

Why is this important? The spike in yields is something that is widely believed to have contributed to the President’s 90-day tariff pause on the escalating tariffs. Trump admitted after “liberation day” that bond investors got “a little queasy,” and there’s good reason to believe he’s keeping a close eye on it today. The U.S. administration can ill afford a prolonged stagflation scenario. Borrowing costs are rising, and the One Big Beautiful Bill Act will add an estimated $US 2.4 trillion in debt between 2025-2034.

Bottom line: Two important constraints to Trump tariffs have emerged: the bond market and legal rulings. Our view is that we are entering a new chapter in the trade war: a  de-escalation trend, one-off country ‘deals’ with occasional tariff threat bursts. But the tariff induced uncertainty will drag on, and with it the dampening effects on the economy.

Chart of the Week: Canada’s economic ranking in 2075

It’s hard enough to forecast one year out, let alone 50 years. But economists at Goldman Sachs have given it a shot. Long-term projections attempt to see through economic cycles, and focus on the trend—something economists call “potential output,” That is, what the economy is capable of growing based on three factors: 1) productivity; 2) capital; and 3) people. They do this for all the countries and then rank the size of each economy in U.S. dollars.

Their conclusion is that Canada will move from 8th largest economy in 2022 to 14th largest in 2050 to 19th largest in 2075, with faster-growing emerging markets pulling ahead. One big story is that India will continue to climb the ranks to second largest economy by 2075.

While Canada is moving down the ranks, it also speaks to the opportunity for Canada to expand its exports to these fast-growing economies.

Answer to the previous trivia question: There are 1,358,077 businesses with employees in Canada.

Today’s trivia question: What city is home to the headquarters of the investment bank Goldman Sachs?