Markets Plus
Reciprocal Tariffs: Market & Economic Implications
Apr 8, 2025
Michael Gregory, Managing Director and Deputy Chief Economist at BMO Capital Markets, and Yung-Yu Ma, Chief Investment Officer at BMO Wealth Management U.S., share insights on the economic repercussions of recent reciprocal tariffs between Canada and the U.S. They discuss the potential for recession in Canada and rising inflation in the U.S., along with the uncertainty it brings to markets. The duo emphasizes the importance of cautious investment strategies and the ongoing challenges faced by the Federal Reserve in balancing growth with inflation.
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Quick takeaways
- The significant increase in U.S. tariffs has led to downgraded growth forecasts and heightened inflation expectations, creating economic challenges.
- The stock market's extreme volatility following tariff announcements indicates serious investor concern over future trade tensions and economic stability.
Deep dives
Impact of New Tariffs on Economic Growth
The recent announcement of new tariffs has significantly affected economic forecasts for both the U.S. and Canada. In the U.S., the average tariff rate has increased from below 3% to nearly 20%, prompting a downgrade in growth projections by 0.8 percentage points, bringing it down to 0.6%. Concurrently, core PCE inflation forecasts have risen to 4%, above the Federal Reserve's 2% target, creating a stagflationary environment that poses a dilemma for monetary policy. In contrast, Canada's growth forecast has faced a steeper decline, shifting from 1.6% to -0.7%, indicating a potential recession impacted by the tariffs, particularly in sectors like automotive where broader global tariffs are also affecting trade dynamics.
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