Economic Update Q1 - 2025

Welcome to our first economic update of the year. The global economic and geopolitical landscape has entered a period of renewed uncertainty. Recent developments, including significant shifts in U.S. trade policy and ongoing geopolitical tensions, have created an environment that demands caution, discipline, and clarity. While the seas may feel rougher than usual, it's important to remember that these are not uncharted waters for us. Our team has successfully navigated through past periods of volatility—always with a focus on protecting and growing your capital. Today, just as before, we remain confident that our disciplined and informed investment decisions will continue to shield your portfolio from instability and position it for long-term strength.

Geopolitics & Global Shifts: U.S. Trade Policy Overhaul

On April 2, 2025, President Donald Trump announced sweeping new tariffs, including a baseline 10% tariff on all imports to the United States, with higher rates targeting key trading partners such as China, the European Union, and Japan. China faces a total tariff of 54% on its exports to the U.S., while the EU is subjected to a 20% tariff. These measures, described by President Trump as a "Declaration of Economic Independence," aim to address perceived trade imbalances and revitalize American manufacturing.

The immediate market reaction was negative, with significant declines across major indices. The S&P 500 fell, reflecting investor concerns about escalating trade tensions and potential economic fallout.

For investors, the implications are clear: the coming months may be marked by increased market volatility, especially in sectors sensitive to global supply chains and trade exposure. However, we view this environment as one where risk can be managed effectively through strategic diversification and active oversight.

Tariffs and Economic Consequences: Risk or Opportunity?

The implementation of these tariffs has led to widespread speculation about their global impact. Historically, aggressive protectionist policies have triggered inflationary pressures by raising import costs, thereby squeezing household purchasing power. At a macro level, these dynamics can slow growth and raise unemployment if not offset by strong domestic demand or productive investment.

However, a more optimistic scenario—one we continue to favor—is that negotiations will prevail over confrontation. Should the U.S. reach agreements with key economic partners, the feared inflationary spike could be subdued, global supply chains preserved, and confidence restored in the broader investment landscape.

North American Outlook: Recession Risks Materializing

While we had previously maintained a cautiously optimistic view, recent economic data has led us to revise our outlook. We now believe that a recession is likely on the horizon in the United States, with clear signs of softening consumer demand, tighter credit conditions, and weakening business investment. The lagged effects of prolonged monetary tightening are increasingly visible, and while the labor market remains relatively resilient, momentum is fading.

In Canada, the situation has already shifted more decisively (Chart 1). We are currently experiencing what we characterize as a “soft recession”—marked by two consecutive quarters of negative growth, subdued retail activity, and a slowdown in housing-related sectors. Inflation has moderated, but growth remains under pressure, particularly in regions heavily exposed to interest-rate-sensitive industries. We are closely monitoring the situation, as Canada could also go into a deeper recession with prolonged effects.

Fiscal and monetary authorities retain tools to support the economy, and much of the weakness remains cyclical rather than structural. For investors, this means maintaining a defensive posture while remaining alert to selective opportunities that emerge as the cycle matures.

Geopolitical Hotspots: Ukraine, China, and Strategic Risks

The war in Ukraine, now entering its fourth year, remains a destabilizing factor in Eastern Europe and broader energy markets. Recent reports indicate that Russian forces occupy approximately 18.6% of Ukrainian territory, with limited advances in recent months. Meanwhile, speculation about a potential move by China on Taiwan continues to hover over Asia-Pacific markets. While there is no imminent threat, the strategic rivalry between the U.S. and China is evolving into a longer-term realignment of global power.

Our approach remains one of vigilance and scenario planning. We monitor geopolitical developments closely and have already taken steps to reduce direct exposure to regions and sectors vulnerable to sudden policy or military shifts.

Canada’s New Political Chapter: Mark Carney at the Helm

Closer to home, the recent transition in Canadian leadership—with Mark Carney assuming the role of Prime Minister—adds a new dynamic to our domestic economic landscape. Carney, a seasoned central banker with international experience, is expected to bring credibility and stability to economic policy, particularly in managing cross-border trade tensions and monetary coordination. In response to the U.S. tariff announcements, Prime Minister Carney has been actively engaging with Canada's premiers to formulate a strategic response, emphasizing the importance of protecting Canadian interests and maintaining strong economic ties.

Whether his leadership becomes permanent remains to be seen, but for now, markets have responded positively to his appointment, seeing it as a counterbalance to the unpredictability south of the border.

Portfolio Strategy: Discipline, Protection, and Patience

Our investment strategy remains anchored in three core principles: protecting your capital, maintaining flexibility, and positioning for long-term value. In this environment, we continue to favor high-quality assets, strong balance sheets, and sectors that demonstrate resilience in both inflationary and disinflationary cycles.

We are also holding a prudent level of liquidity. This not only provides downside protection but also positions us to act swiftly when attractive opportunities arise. Should market conditions deteriorate materially, we are fully prepared to shift toward greater defensiveness.

Conclusion

We recognize the complexity and pace of change in today’s environment. But it's precisely in these moments of turbulence that experience, discipline, and strategic clarity matter most. Our team remains laser-focused on managing risk and identifying the right opportunities for your portfolio.

Your trust is the cornerstone of everything we do. Should you have any questions or wish to review your investment plan, we are always available. We thank you for your continued confidence and look forward to navigating the months ahead—together.

The particulars contained herein were obtained from sources we believe to be reliable, but are not guaranteed by us and may be incomplete. The opinions expressed are based upon our analysis and interpretation of these particulars and are not to be construed as a solicitation or offer to buy or sell the securities mentioned herein. The opinions expressed do not necessarily reflect those of NBF. I have prepared this report to the best of my judgment and professional experience to give you my thoughts on various financial aspects and considerations. The securities or sectors mentioned in this letter are not suitable for all types of investors and should not be considered as recommendations. Please consult your investment advisor to verify whether the security or sector is suitable for you and to obtain complete information, including the main risk factors. Some of the securities or sectors mentioned may not be followed by the analysts of NBF.National Bank Financial - Wealth Management (NBFWM) is a division of National Bank Financial Inc. (NBF), as well as a trademark owned by National Bank of Canada (NBC) that is used under license by NBF. NBF is a member of the Canadian Investment Regulatory Organization (CIRO) and the Canadian Investor Protection Fund (CIPF), and is a wholly-owned subsidiary of NBC, a public company listed on the Toronto Stock Exchange (TSX: NA).