There’s no doubt that the U.S. trade agenda and current global trade war is “complicating the economic outlook” for Canada, says Luc de la Durantaye, head of asset allocation and currency management at CIBC Asset Management.
If you pull back and think about how we got here, he says, it’s worth considering that “reducing the U.S. trade deficit and protecting U.S. intellectual property are valid objectives, particularly against China.”
However, due to “the way the U.S. will pursue these two objectives and the intensity at which they will [do so], the reaction of the trade partners is still very uncertain at this stage.”
On July 1, Canada introduced retaliatory tariffs on $16.6 billion of American exports.
On Friday, tensions between China and the U.S. rose as both countries imposed tariffs on billions of dollars of each other’s goods. The U.S. has imposed duties on US$34 billion of imports from China (and the total of targeted Chinese goods could potentially reach US$550 billion in the coming weeks). Chinese officials continued to reject accusations that they steal or force the sharing of technology.
Based on the U.S.-China dispute, forecasters were calling for reduction of global growth of as much as 0.5 percentage points in the next year.
De la Durantaye, who manages the Renaissance Optimal Inflation Opportunities Portfolio, expects trade tensions across the globe to grow over the summer months. “The U.S. will want to show determination to change the trade relationship it has with its trading partners. It will also want to gain political support ahead of the [fall] mid-term election,” he says.
However, if mounting trade tensions have “a very detrimental impact on the U.S. economy and on financial markets,” says de la Durantaye, the tables could turn. Along with the U.S. administration, the Chinese, European and Canadian governments “will be very responsive to that, and will go back to the negotiating table,” he predicts.
While there is more potential for turbulence as the U.S. changes its trade relationships, he adds, “they will not do it at the expense of the global economic expansion. At the end of the day, if we go back into a recession, that might hurt their chances at the [mid-term] election.”
Canada, U.S. growth expectations
In a July 4 report, CIBC forecasts U.S. GDP growth will drop from 4.1% in Q2 to 2.1% in Q4. For 2019, the country’s real GDP is expected to expand by between 1.3% and 1.7% over the four quarters.
For Canada, the bank expects real GDP growth of 2.4% in Q2 versus 1.9% in Q4. Next year, across the four quarters, it forecasts GDP growth won’t exceed 1.6%.
A separate CIBC report, also released July 4, says an “all-out trade war” across North America became a certainty when Canadian autos and parts were hit “with heavy U.S. tariffs,” and when Ottawa struck back.
The report says Canadian economic uncertainty in the Trump era is worse than expected following his 2016 election, and that retaliatory tariffs could have blowback effects on employment and factories.
As such, the bank suggests the Bank of Canada should take a cautious approach in the coming months—its next rate decision will be released July 11, and a hike is widely expected—while the feds should provide “support for firms and workers adversely affected by tariffs” during trade negotiations.
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