By almost every measure, the United States economy is showing impressive resilience. Despite the concerns raised when President Donald Trump initiated a global trade conflict, predicting economic slowdown, price increases, and a decline in global trade, the current scenario paints a different picture. Stock market performance is hitting record highs, employment rates are solid, the economy is on an upward trajectory, and the anticipated inflation surge has not materialized.
Similarly, Canada’s economy has defied expectations by demonstrating unexpected strength. Recent data shows an uptick in consumer spending and a decline in unemployment rates. Economists remain cautious, uncertain about whether the initial impact of tariffs was overestimated or if the worst is yet to come. The fragile resilience seen in both countries could easily be disrupted if the trade war escalates.
BMO’s chief economist, Douglas Porter, attributes the recent U.S. economic resilience to two key factors: the lack of significant retaliation from other nations and the protection of U.S. consumers from the tariff impacts. Surprisingly, American businesses have absorbed the costs of tariffs without passing them on to consumers. Despite General Motors reporting a significant decline in profits due to Trump’s tariff policies, they have refrained from raising prices.
Although there have been volatile market sessions with sudden sell-offs upon tariff announcements and rallies following exemptions, both the Canadian and U.S. stock markets are performing well, hinting at sustained resilience. The delayed impact of tariffs is a concern, as businesses rushed to export products to the U.S. before the tariffs took effect, resulting in a backlog that has shielded American importers from the full brunt of the tariffs.
While concerns linger about the potential future effects of tariffs, Canada’s economy has shown unexpected strength. Although economic growth contracted slightly in April, the decline was minimal, and recent data suggests a rebound in consumer spending. Despite challenges in sectors like auto, steel, aluminum, and lumber, Canada has managed to secure exemptions for CUSMA-compliant products, mitigating the impact of tariffs.
However, there are worries that these exemptions may not last, leading to job losses and price hikes. The delicate balance of importers absorbing costs, exporters adjusting prices, and countries refraining from retaliation could be disrupted if the trade conflict intensifies. While some in the Trump administration may view the relative resilience of the U.S. economy as a reason to escalate punitive tariffs further, such actions could have adverse effects on both the U.S. and Canadian economies. Maintaining this delicate balance is crucial to avoiding further risks in the ongoing trade dispute.