Q2 2025 market update: Tariffs impact the world

Highlights

• The U.S. and China reached an outline for a trade deal
  • The deal still required full approval.
  • Tensions between the two countries continued. Both countries applied high tariffs (a tax on imported goods and services) on one another.
  • A finalized trade deal between the world’s two largest economies could help ease uncertainty.
• Trade issues reduce Canada’s exports
  • In April, Canada’s trade deficit widened to a record $7.14 billion.
  • Tariffs on Canadian goods drove a 15.7% decline in exports to the U.S.
  • Canadian exports dropped by 10.8% overall.
  • Canada’s manufacturing sales fell by 2.8% in April, its largest decline since 2023.
• Building Canada’s artificial intelligence (AI) infrastructure
  • BCE Inc. committed to develop AI in Canada.
  • The company said it will spend hundreds of millions of dollars to develop AI in six Canadian cities.
  • Success in the AI space may become a key aspect of wealthy economies in the future.

Tariffs are on-again, off-again

The second quarter began with what the White House called “Liberation Day.” The U.S. imposed tariffs on several foreign nations. Investors expected tariffs to weaken global economic activity and create volatility in financial markets. However, the U.S. later paused those tariffs as it tried to reach trade deals. The pause will expire on July 9.

China was among the countries hit hard by U.S. tariffs. Both countries had tariffs on one another of over 100%. Mid-quarter, the two countries met in Switzerland and agreed to lower tariffs while working on a deal. Finally, late in the quarter, both sides agreed to a framework for a trade deal. The U.K. also reached a trade deal with the U.S. Talks with the European Union are ongoing.

Canadian Prime Minister Mark Carney met with U.S. President Donald Trump after his election win. The two leaders talked about trade and Canada’s sovereignty. Despite a brief disagreement about Canada’s digital services tax, both sides were still trying to find common ground for a trade deal.

How are large economies doing?

• The U.S. economy shrank at an annualized pace of 0.5% in the first quarter (as reported in the second quarter).
• China’s economy grew by 5.4% year-over-year.
• Europe’s economy grew by 0.6%.
• The U.K. economy grew by 0.7%.
• Japan’s economy reduced by 0.2%, annualized.

Equity markets gain

• Global equity markets gained.
• Despite some volatility early in the quarter, North American equity markets rose.
• Equities in Canada, the U.S., EAFE, emerging markets, Europe, the U.K., Japan and China posted a gain.
• Global bond prices rose while bond yields were lower. Global bond yields experienced deep swings over the quarter, given trade uncertainty. Global bond investors are earning much higher income than they were pre-pandemic.
• Canadian bond prices declined and bond yields increased. Canadian bond investors earned higher interest income on their investments
• Oil prices finished lower. The Organization of the Petroleum Exporting Countries (OPEC) said it would raise production. The price of oil dropped sharply near the end of the quarter, amid expectations that tensions in the Middle East may not disrupt supply.
• Gold prices reached a new record high over the quarter. Investors found relative safety in gold amid global economic uncertainty.

Central banks taking a patient approach

Several major central banks held rates steady over the quarter. They chose to monitor the impact of tariffs on their economies. While central banks held steady, they may continue lowering interest rates longer term. Some are expected to lower interest rates this year.

• The Bank of Canada (BoC) held its policy interest rate at 2.75%.
• The U.S. Federal Reserve Board (Fed) left its federal funds rate steady at 4.25%-4.50%.
• The European Central Bank lowered interest rates by 50 bps.
• The Bank of England reduced its policy interest rate to 4.25%.
• The Bank of Japan held its key interest rate steady at 0.50%.
• The People’s Bank of China lowered its loan prime rates by 10 bps.

How is Canada’s economy doing?

Canada’s economy expanded in the first quarter, benefiting from strong exports as U.S. purchasers got ahead of tariffs. Economic data in the second quarter began to show a slowdown in economic activity. Prime Minister Mark Carney has pledged to transform Canada’s economy and make it less reliant on the U.S.

• Canada’s economy grew by 2.2%, annualized, over the first quarter.
• Canada’s economy grew more than expected given a surge in exports. U.S. customers front-loaded orders from Canada ahead of expected tariffs.
• Amid trade uncertainty, consumer confidence fell. This weighed on household spending over the quarter.
• In late April, Canadians elected Mark Carney as Prime Minister. After winning the election, he visited the White House to ease tensions.
• Prime Minister Carney promised to transform Canada’s economy. He wants to make Canada an “energy superpower” and remove internal trade barriers.
• AI will help take Canada into the future. BCE announced a large investment to help build AI in Canada. The company wants to prosper from the developing technology.
• Canada’s unemployment rate rose to 7.0% in May, its highest level since 2021.
• Canadian equities advanced, reaching a record high closing price. The Information Technology and Consumer Discretionary sectors were the strongest performers. The Energy and Communication Services sectors posted the weakest returns.
• The yield on the benchmark 10-year Government of Canada bond increased, finishing the quarter at 3.27%.

What can investors expect in the future?