6 Key Takeaways: RBC Expert Talks Tariffs, Recession and Looking Forward

As a Canadian investor, you’ve had a lot of potentially market moving news to digest lately.
To help make sense of it all, Cynthia Leach, RBC’s Assistant Chief Economist sat down with Dimitri Busevs, President and CEO of RBC Direct Investing and InvestEase, to talk tariffs, recession and what’s next.

Here are six key takeaways from their discussion.

1. Uncertainty and the possibility of recession
Over the next three quarters, Leach said she doesn’t expect to see much growth in the Canadian and U.S. economies because of the tariffs the U.S. is imposing on its major trading partners. Following the U.S. tariff announcement on April 2, RBC adjusted it’s U.S. growth estimate downward to 1 per cent from 1.6 per cent. While Canada is projected to experience a similar slowdown in economic growth, a stronger-than-anticipated close to 2024 should help the country weather the downturn.

“You have this uncertainty aspect from the tariffs because we don’t know exactly where this policy is going,” she said. “We may not experience a technical recession in Canada, but it might feel like one.”

2. It’s unlikely the tariffs will go away any time soon
Embedded in RBC’s latest forecast is the idea that U.S. tariffs on the rest of the world will hover around 10 per cent over the next six months. That time period is a conservative assumption, explained Leach, with trade uncertainty expected to remain an ongoing issue.

“At the height of the 25 per cent reciprocal tariff talk, we ran some downside scenarios to see what a 25 per cent blanket tariff, permanent for three years, would mean,” Leach said. “We saw about a 5 per cent recession over two years, which is pretty significant. But there’s policy room available on the fiscal side – and even on the monetary side – and it’s survivable.”

3. The worst could be over for the Canadian dollar
Prior to the tariff announcement, the Canadian dollar was losing value relative to the U.S. greenback. That’s been largely reversed, partly because of the divergent interest rate outlook between the two countries. Before April, RBC expected the U.S. Federal Reserve (Fed) would hold off on any interest rate changes, while the Bank of Canada was projected to announce a few more cuts before the end of the year. Now, the Bank of Canada is expected to hold off on any interest rate cuts. “In general, that favours the Canadian dollar,” Leach explained. “Our forecast for the end of the year is that we’ll see USDCAD at $1.37 and next year we’ll see it at $1.35.”

4. Inflation is expected to rise
With about 10 per cent of U.S. consumer goods expected to be affected by the tariffs, U.S. inflation is projected to rise by 4.4 per cent by the end of the year. That’s going to give the Fed pause, Leach explained, because U.S. inflation is already higher than they would like to see at this point.

At its last meeting, the Bank of Canada said monetary policy is not the best tool to fight tariff shock. “Overall, the inflation picture will be much more muted in Canada,” she said.

5. Consumer sentiment is falling
Consumer sentiment is currently sitting lower than it was at the start of the pandemic, Leach explained. While RBC is still looking to see how that uncertainty could trickle through the economy, Leach noted there are some early signs that the negative sentiment is weighing on the housing market and discretionary spending. In the near term, at least, Canada is looking a little better than a lot of the U.S.’s other trading partners, she explained. The good news, she added, is that we know that some of the U.S. tariffs can be rolled back as quickly as they appeared.

6. Canada is more aligned than ever
If there’s any other optimism to be found, it lies in the fact that Canada’s political parties seem largely aligned on the need to knock down barriers to interprovincial trade.

“Now we’re talking about public infrastructure, ways to promote more business investment and further targeting our immigration policy toward the most highly skilled and innovative workers,” Leach said. “All of these things are on the table because they’re so important and there seems to be a lot of momentum behind them.”