Global markets power through persistent volatility.

SEI’s domestic view

In our last outlook, we expressed growing concern about the intermediate-term outlook for the Canadian economy, given the Trump Administration’s global trade war against a backdrop of slowing domestic economic growth and rising unemployment. We remain concerned, but hard economic data (primarily economic growth, inflation, and unemployment) have yet to deteriorate meaningfully. While that’s encouraging, it’s early days yet and those risks are still clearly in play. This puts businesses, households, economists, central bankers, and investors firmly in wait-and-see mode as we head into the second half of the year. 

While economic surveys tend to be somewhat unreliable in terms of predicting actual future behavior, it is important to note that both business and household surveys are indicating significant anxiety around U.S. tariffs.¹ The Bank of Canada (BOC) is in a similar place. While first-quarter economic growth surprised a bit to the upside and inflation has looked fairly tame, final domestic demand was flat—trade data likely distorted these figures as businesses and consumers tried to get ahead of U.S. tariffs—and the BOC’s preferred measures of inflation remain stubbornly at the high end of its desired range. 

As the BOC put it following its decision to hold its policy interest rate steady in June, “the outcomes of these [trade] negotiations are highly uncertain, tariff rates are well above their levels at the beginning of 2025, and new trade actions are still being threatened. Uncertainty remains high…The Bank’s preferred measures of core inflation, as well as other measures of underlying inflation, moved up. Recent surveys indicate that households continue to expect that tariffs will raise prices and many businesses say they intend to pass on the costs of higher tariffs. The Bank will be watching all these indicators closely to gauge how inflationary pressures are evolving. With uncertainty about U.S. tariffs still high, the Canadian economy softer but not sharply weaker, and some unexpected firmness in recent inflation data, Governing Council decided to hold the policy rate as we gain more information on U.S. trade policy and its impacts. We will continue to assess the timing and strength of both the downward pressures on inflation from a weaker economy and the upward pressures on inflation from higher costs.”² This aligns closely with views being expressed by monetary policymakers in some other countries. 

Canada’s labour market is also in a similar spot to many other countries. While there have been clear signs of softening from the strong-labour-demand period that followed the reopenings of national economies after the initial waves of COVID-19, employment conditions in many regions have eased to more normal levels, and labour markets have yet to show signs of significant unravelling. While the duration of unemployment has been worsening in Canada³, job vacancies have actually increased in three of the first four months of 2025, and the job-vacancy rate has been holding steady at around 3.5%—well below the COVID-19 reopening years of 2021-2022, but in line with historic levels outside that period. 

While we remain concerned about the trajectory of unemployment, the Canadian economy has managed to avoid recession thus far barring any significant future revisions to economic data. (Official economic growth estimates are revised on a regular schedule but aren’t finalized until nearly three years after the fact. ⁴)

As with trade policy, there’s still a fair amount of uncertainty around fiscal policy in Canada. The Liberal-led government has released its initial spending plans and “main estimates” of appropriations (also known as the Blue Book), but it doesn’t plan to submit an official budget until this fall. Based on initial figures, there could be a meaningful government spending impulse in 2026, similar to a number of other countries. But the specifics of those spending plans and what they might mean for employment, inflation, and Canada’s longstanding productivity challenge are not yet clear. 

In the fog of a trade war, trade flows occupy a more prominent place in economists’ minds. Beyond the obvious concerns about what will ultimately be tariffed and at what rates by the U.S. (and counter-tariffed or taxed by Canada and other countries), it’s interesting to think about how trade flows will adapt to the various measures and countermeasures. We have a couple of observations to offer. 

As with the first Trump Administration’s trade policy, there seems to be a common-but-questionable assumption that global trade flows can only adapt haltingly and chaotically to dramatic shifts in tariff schedules. However, like some of the adjustments that occurred in response to the prior Trump Administration’s tariffs, recent theoretical work and trade-flow data seem to indicate otherwise. In a March working paper, a BOC economist argued that, rather than being inelastic or difficult to change, commercial trade behaviors (at least based on the author’s chosen data set) appeared to be highly flexible and adaptable.⁵ While interesting in its own right, recent Canadian trade data lend support to the argument. According to Statistics Canada (StatCan), Canadian exports to the U.S. declined for a fourth consecutive month in May and now account for roughly 68% of total exports from a monthly average of 76% in 2024. However, total Canadian exports to other countries reached a record high.⁶ 

Gold demand adds another interesting wrinkle to the trade data (as well as the longer-term outlook for central bank reserves and the importance of gold and the U.S. dollar in the global financial system). The gold story is fairly well known in financial market circles now—despite traditional gold-price indicators pointing down, demand, especially from a number of central banks (The People’s Bank of China chief among them), has been robust in recent years.⁷ According to the May trade data from StatCan, gold exports were a key driver of Canada’s rise in total exports. 

While Canada is a modern, services-dominated economy, industrial activity and exports still play meaningful roles. If global gold demand persists, it could provide the Canadian economy a welcome offset to trade pressures threatened by a slowergrowing, higher-tariff world. And if government fiscal impulses unfold in much of the world as we expect, perhaps we could see a rebound or at least some steadiness of energy demand and prices as well (though judging by the very short-lived runup of crude oil prices in response to the Iran-Israel-U.S. conflict, markets still view energy supplies as plentiful). While these two observations won’t turn Canada’s economic performance around by themselves, they do offer a couple of silver linings to an otherwise concerning trade and export outlook. 

What should an investor do while waiting for clarity around the many risks facing economies and markets today? Perhaps the most important thing to do is remember that investing is all about assuming risk and hopefully being compensated fairly (or better!) for it. As long as the degree of risk assumed is well-suited to an investor’s financial objectives and constraints, and the bedrock principles of diversification are adhered to, one can observe the unfolding geopolitical environment with some emotional detachment, however chaotic it might get.

¹See “How Canadian businesses and households are reacting to the trade conflict,” Bank of Canada, 12 March 2025, available at https://www.bankofcanada.ca/publications/consultations-2025-03-12/, and “Business Outlook Survey—First Quarter of 2025 Box 1: Firms anticipate additional detrimental impacts if widespread tariffs are implemented,” Bank of Canada, available at https://www.bankofcanada.ca/2025/04/business-outlook-survey-first-quarter-of-2025/#box1.

²“Bank of Canada holds policy rate at 2¾%,” available at https://www.bankofcanada.ca/2025/06/fad-press-release-2025-06- 04/.

³While the current trend of long-term unemployment looks similar to prior recessions, the Canadian economy appears to have escaped recession thus far. Like a number of other historically reliable recession indicators (such as inverted yield curves), the reliability of this measure may also have been undermined by the many distortions associated with the COVID era. 

⁴See “Revisions to Canada’s GDP,” Statistics Canada, 29 February 2024, available at https://www150.statcan.gc.ca/n1/pub/13- 605-x/2024001/article/00002-eng.htm. 

⁵Lu Han, International Economic Analysis Department, Bank of Canada, “The Mutable Geography of Firms’ International Trade,” Staff Working Paper 2025-11, last updated 21 March 2025, available at https://publications.gc.ca/collections/collection_2025/banque-bank-canada/FB3-5-2025-11-eng.pdf. 

⁶“Canadian international merchandise trade, May 2025,” The Daily, Statistics Canada, 03 July 2025, available at https://www150.statcan.gc.ca/n1/daily-quotidien/250703/dq250703a-eng.htm. 

⁷See, for example, “Gold & S&P 500 Earnings,” Yardeni Research Morning Briefing, 2 July 2025, available at https://yardeni.com/wp-content/uploads/mb_20250702.pdf, or Martin Lynge Rasmussen, “Gold and China,” Money: Inside and Out, 22 February 2025, available at https://moneyinsideout.substack.com/p/gold-and-china.

Important information

SEI Investments Canada Company, a wholly owned subsidiary of SEI Investments Company, is the Manager of the SEI Funds in Canada.