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Very early in the new Trump administration, tensions emerged as the president threatened to place sizable tariffs on Canadian imports not covered by the Canada-US-Mexico free trade agreement (CUSMA). President Trump has increased tariffs on non-CUSMA-compliant goods from Canada from 25% to 35%, effective August 1.
It is currently estimated that roughly 80% of Canadian exports are CUSMA-compliant, headed for 89% in the coming months. This has kept the lid on the overall tariff burden. In June, 77% of Mexican imports met the trade pact’s country of origin criteria, up from 42% May. Fitch rating service estimates the compliance proportion will rise to 83%.
In addition, there is a 50% tariff for all countries' exports of steel and aluminum into the US. There is a 10% tariff on non-CUSMA-compliant potash, oil, and gas products. And a 50% tariff on some copper products.
Most important for Amazon shoppers, the US eliminated the de minimis treatment for low-value shipments. Goods valued at $800 or less are now
subject to all applicable duties (effective August 29).
Other tariffs are on the table. These include tariffs on Canadian lumber, which would be in addition to the existing 14.7% tariffs, as well as on Canadian dairy products. Semiconductors and pharmaceuticals are also under consideration for tariffs, though no details have been provided.
Reflective of Canadian resiliency, the Canadian services sector is holding up relatively well, but the export-heavy industries such as manufacturing and transportation are bearing the brunt of the impact.
The burning question for the Bank of Canada is how inflationary these tariffs will be. Indeed, some of the tariffs will be passed off to consumers. While theoretically tariffs lead to a one-shot uptick in prices, they don’t necessarily cause inflation—a continuous rise in the general price level.
But, as the latest data for July suggest, while headline inflation remains muted at 1.7% year-over-year, the Bank of Canada’s favoured measures of inflation average 3.05%--too high for comfort. Unless the August CPI data show a marked slowdown in core inflation, the Bank will likely retake a pass on September 17.
On the same date, traders are now signalling that the Federal Reserve will cut rates. I’m not so sure. The US economy is too resilient, and inflation is not close enough to 2.0% for Fed officials to muck around with easing. The widespread expectation that they will ease anyway in September is lifting stocks, and the actual event may cause a stock market melt-up.
The Fed left policy rates unchanged on July 30 for the fifth consecutive confab over the past seven months. The statement’s economic assessment
was slightly more downbeat, in line with the data on the ground. The risk assessment didn’t refer to uncertainty as having “diminished”, with the August 1 tariff announcements looming. And, Governors Bowman and Waller dissented in favour of a quarter-point rate cut. The vote was 9-to-2, with Governor Kugler absent and not voting. (Two days later, Kugler announced her resignation.) In the press conference, Chair Powell said: “We see our current policy stance as appropriate to guard against inflation risks. We are also attentive to risks on the employment side of our mandate.
Another key determinant of central bank policy is the strength of economic growth, as reflected in the employment data--a far timelier indicator than the GDP data. For example, while we still haven’t seen the number for second-quarter GDP growth in Canada, we have monthly employment data through the end of July.
This and other leading indicators, such as the stock market, suggest that the slowdown in economic activity has been more moderate than many feared. The layoffs are growing in the hardest-hit sectors—steel, aluminum, autos and parts—the jobless rate for July was steady at 6.9%.
So, the BoC is likely to have another ‘wait and see’ meeting. But the one sector that has declined significantly in the past year is housing. This provides a golden opportunity, especially for first-time and move-up buyers.
Home prices have fallen, and in many regions (GTA and GVA), sellers are motivated. Supply has increased sharply, and multiple-bidding situations are rare.
All potential buyers should be out there looking for bargains because
everything is on sale (as well as for sale). Finally, mortgage rates are low—yes, low.
We will not see a return to two-handle mortgage rates, barring another global pandemic. And, even then, the central banks would know better than to take rates down so much, for so long.
The July data showed an uptrend in housing activity. We are likely looking towards a relatively strong Fall marketing season.
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