Macro & Strategy - April 2025

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Going down (in a blaze of glory)

In recent months, investors and economic forecasters have become increasingly concerned about the exceptionalism of the U.S. economy.

The concept of U.S. exceptionalism has been a cornerstone of investment strategies for more than a decade, driven by the country’s dominant tech giants and robust consumer spending. That said, recent developments suggest that this era may be coming to an end. A recent string of disappointing economic data and heightened policy uncertainty have cast doubts on the resilience of the U.S. economy. Trade policy uncertainty and a series of soft economic indicators have sparked concerns about a potential growth slowdown.

As other developed markets show signs of recovery, the narrative is shifting. The euro zone is expected to grow closer to its potential by late 2025, benefitting from ECB easing and fiscal support in Germany. Similarly, rising real wages in Japan are set to boost domestic spending.

Investors have sharply re-evaluated the case for U.S. exceptionalism, pushing the main U.S. indexes into correction territory in March, against a backdrop of escalating global trade war rhetoric. The end of U.S. exceptionalism may herald a new era when global equities outperform under the impetus of fiscal stimulus and favourable interest rate differentials. This trend is clear in the latest global fund manager surveys, which indicate one of the steepest falloffs in sentiment toward U.S. equities and a sudden attraction to European and Chinese assets.

The vital question as we close the first quarter of 2025 is: What are the odds that the U.S. economy slides into recession?

Although robust GDP forecasts and steady earnings growth continue to signal expansion, persistent inflation and uncertainty over President Trump’s trade policy have sown doubt about the durability of this growth. In the following pages, we explore whether these conflicting signals point to an impending recession, examine key drivers of consumer and business behaviour, and consider how these factors affect the United States and Canada.

Finally, we present a scenario analysis outlining potential outcomes in the near-to-medium term.

The end of U.S. exceptionalism?

Economic data since late last year have remained firm, and forecasters continue to expect solid growth, albeit at a slower pace than in 2024. But, beneath the surface, signs are emerging that growth could slow more quickly than is currently expected.

The U.S. economy faces an intriguing challenge: Inflation continues to run well above target, forcing the Federal Reserve to maintain its restrictive stance, keeping borrowing costs at elevated levels. Even though the U.S. economy has thus far coped well with high interest rates, consumer spending and business investment could slow over time, as higher financing costs weigh on decisions by households and firms alike.

Perhaps the most disruptive element is the ongoing uncertainty over U.S. trade policy. With an April 2 deadline looming for the announcement of reciprocal tariffs, markets have reacted not only to the tariffs themselves but also to the pervasive uncertainty they create.

The expectation of more aggressive trade measures has caused consumers and businesses to adopt a wait-and-see approach. Instead of going ahead with large purchases or capital investments, they are deferring decisions until the policy landscape becomes clearer. Such caution could ultimately dampen economic growth—even if the underlying fundamentals remain sound.

Shifting confidence: consumers and businesses

Consumer confidence is a key gauge of economic health. Recent surveys from the Conference Board and the University of Michigan have documented a noticeable decline in optimism about the economic outlook. Despite ongoing income growth, households are increasingly wary as inflation erodes their purchasing power. Rising costs, coupled with uncertain policy signals, have prompted many consumers to delay major purchases in favour of saving. If sustained, this shift in behaviour could weaken consumption—the primary engine of U.S. economic growth.

Although the current administration has buoyed business sentiment with promises of tax cuts and deregulation, the uncertainty surrounding trade policy is beginning to overshadow these positives.

Early indicators from the Conference Board’s Survey of Business Confidence suggest that firms are becoming increasingly cautious. With aggressive trade policies on the horizon, many businesses are reconsidering their investment and hiring plans. A reversal of business optimism could further compound the slowdown, as the impact of delayed capital expenditures ripples through the economy. Moreover, multiple surveys show that price pressures are building, partly because of tariffs. These pressures could cause businesses to slow their activities or pass higher costs on to consumers, even as inflation still has not returned to target.

Examining the data: a bottom-up analysis of economic growth

The role of consumption

Consumption is the critical driver of U.S. growth. It comes from income, which is still robust, and credit, which is slowing. Income can also be saved – especially in an environment of higher interest rates and economic uncertainty. Early signs indicate that this is happening, with the savings rate increasing to 4.6% in January, but it is too early to discern a trend. This behavioral shift could be particularly significant, given that even minor changes in consumption patterns can have outsized effects on overall economic momentum.

Moreover, inflation expectations are on the rise. As households expect further price increases, their willingness to commit to major expenditures diminishes. Even in a scenario where incomes continue to rise, a preference for saving over spending could stifle the consumer-driven growth that has powered the recovery over the past decade.

Another factor affecting consumption is the wealth effect: Individuals tend to consume more if they are richer, and vice versa.

There are two channels through which the wealth effect can affect consumption patterns: the stock market and the housing market. Although housing is holding up well, the current stock market correction could be cause for concern, although it is probably too small at the moment to have a material impact on spending decisions.

Lastly, the key for consumption is the state of the labour market. If workers are confident about their job prospects, they’re likely to keep spending. Here the news is mostly good: Layoffs remain low and job growth is strong. Some surveys point toward mounting worries about job security, because many headlines concerning the Department of Government Efficiency (DOGE) and trade policies are negative. That said, the concerns aren’t backed by data, yet. As long as the labour market holds up, the United States isn’t likely to see a recession.

Investment trends amid uncertainty

Investment is equally crucial for sustained growth. Although corporate credit conditions remain supportive, the uncertainty stemming from potential trade policy shifts is causing many firms to postpone or scale back capital expenditures. This cautious stance affects not only the broader corporate sector but also residential investment, where high interest rates have already begun to cool the housing market.

Even though businesses continue to have access to capital, the delay in investment projects suggests that the current uncertainty may have longer-term implications for productivity and growth. In an environment where even strong fundamentals are tempered by caution, the risk of a slowdown becomes more pronounced.

Fiscal policy and government spending

Government spending has historically provided a cushion against economic shocks—particularly in recent years, when the effects of Covid-19 and higher interest rates were cushioned by a higher deficit.

Yet the outlook for fiscal policy is shifting. The Trump administration’s focus on reducing the federal deficit suggests that, as we move further into 2025, government spending may play a more neutral—or even contractionary—role in GDP growth.

As fiscal support wanes, the burden of sustaining growth will increasingly fall on private consumption and investment, both of which are vulnerable to the prevailing uncertainty.

Net exports: a mixed picture

In the short term, net exports are likely to suffer as businesses attempt to front-run impending tariff increases, leading to strong import growth. That being said, there is potential for a medium-term rebound if a combination of lower imports and a weaker dollar eventually boosts export competitiveness. This potential recovery, though, hinges on a resolution to the trade tensions that are undermining confidence.

Over all, this bottom-up approach leads us to conclude that recession risks in the U.S. are increasing but remain low. We expect to see some sort of slowdown in growth unfold in the coming months, possibly leading to a sharp revision of the current consensus and a sustainable loss of risk appetite from investors during part of the year.

But much depends on the ongoing issues surrounding trade policies, meaning that our current view is subject to ample uncertainty.

The Canadian perspective: high exposure and high risk

Even though many of the same factors are at play on both sides of the border, the Canadian economy is particularly sensitive to trade-related uncertainties. With a higher dependency on international trade, Canada faces a more abrupt slowdown if trade tensions escalate.

The momentum observed at the end of 2024 may provide temporary support for Canada into early 2025, especially when combined with tariff frontrunning by businesses. But if trade disputes intensify, this momentum could evaporate quickly. Canadian sectors that are highly exposed to global trade dynamics, such as manufacturing, are especially vulnerable to aggressive tariff policies. As businesses adjust to a more hostile trade environment, the risk of layoffs and of reduced investment increases, pushing Canada closer to recession territory.

As in the United States, the confidence of Canadian consumers and businesses is being eroded by uncertainty. The latest readings from CFIB’s Business Barometer suggest that the confidence of small Canadian firms has plummeted to the lowest level recorded since the index’s inception 25 years ago.

With Canada’s greater exposure to trade fluctuations, even a modest downturn in sentiment can lead to sharper declines in spending and investment. Labour-market data will be crucial in the coming months; any signs of weakening employment conditions could accelerate the economic slowdown and heighten the risk of a fullblown recession.

Overall, we estimate that, if trade policy threats become reality, the risks of a Canadian recession will be elevated in 2025 and 2026. Given the looming uncertainty on the tariff front, we are shying away from making it our base case for now but recognize that uncertainty itself will act as a major drag on growth.

Scenario analysis and policy implications

Given the high degree of uncertainty, a scenariobased approach helps clarify the range of possible outcomes. In the near-to-medium term, the evolution of U.S. trade policy is likely to be the key determinant of economic performance on both sides of the border.

Trade tensions affect confidence, as discussed above, but tariff themselves, once implemented, also have a real impact on the economy. They lead to higher costs for businesses, causing lower investment. They also lead to higher prices for consumers, reducing real spending.

Finally, tariffs, and subsequent retaliation, reduce exports. This channel is especially concerning for Canada and Mexico, with exports to the U.S. being a large part of their economies.

Conclusion: charting a course through uncertainty

The debate over whether the U.S. economy is edging toward recession is far from settled. On the one hand, strong fundamentals—a robust labour market and healthy earnings growth—suggest that the economy has significant room to manoeuvre. On the other, persistent inflation, tightening credit conditions, and the uncertainty surrounding trade policy are creating headwinds that could slow growth significantly. In Canada, the higher sensitivity to trade dynamics raises the risk of an abrupt slowdown or a recession, if policy uncertainties persist.

In the near-to-medium term, the key takeaway is that uncertainty is an inherent feature of today’s global economic landscape. A scenario-based approach can help investors and policymakers navigate this complex environment by clarifying potential outcomes and informing strategic adjustments. Vigilance in monitoring consumer and business sentiment, credit conditions, and labour-market trends will be essential. Likewise, careful attention to fiscal and monetary policy will be critical as these tools balance the need for price stability with the imperative of sustaining growth.

The risks are real, but they also present opportunities for those who can adapt swiftly to changing conditions. As we look to 2025 and beyond, the path forward will depend largely on how effectively policymakers can manage trade tensions, and how resilient consumer and business confidence remains in the face of uncertainty.

Ultimately, whether the U.S. and, by extension, Canada avoid a recession will depend on the interplay of these complex factors. The coming months will reveal which scenario unfolds, and how the pieces of the puzzle ultimately fit together.

Current positioning

Our equity positioning is evolving.

Although we are maintaining a generally overweight stance, we now favour international equities over North American, as we move away from U.S. exceptionalism as a dominant theme. Non-U.S. equities, particularly European ones, are benefitting from an improving manufacturing cycle, better fiscal support, and cheaper valuations.

Although European equities have long been cheaper than U.S. equities, recent fiscal policy shifts and growth improvements have provided the necessary catalyst. We acknowledge Europe's past disappointments and are managing risk accordingly. Despite the large year-to-date performance spread between European and U.S. equities, we believe in diversifying equity exposure outside the United States.

Our tactical view on government bonds remains mixed. High yields offer dependable a return and a hedge against equity and growth risks, but central banks are in wait-and-see mode. We expect central banks to cut rates in response to any unforeseen growth shocks, prioritizing growth support. That being said, with no immediate growth shock in sight, we prefer to overweight equities, balancing risks in favour of equities over bonds. We remain ready to adjust our allocation if the growth outlook changes.

In currencies, we are overweight the Japanese yen, viewing it as a unique opportunity. After years of depreciation, the yen is the most undervalued currency in developed markets. Persistently low interest rates have dampened its attractiveness, but nascent inflationary pressures in Japan are changing this dynamic. Recent wage settlements indicate broadening inflation, which will eventually be reflected in the Bank of Japan’s interest rate policy, improving the yen’s attractiveness. We are also overweight the Norwegian krone and the Australian dollar, both sensitive to global growth dynamics and poised to benefit from improvements in European and Chinese growth.