The most likely scenario for the US economy is a slowdown. Although a downturn as severe as those during the pandemic or the Great Financial Crisis is unlikely, the US economy is losing momentum and is likely to fall into a recession. If economic policies lead to increased trade barriers, reduced immigration, and even larger budget deficits, long-term real GDP growth could fall below 2 per cent.
Real GDP fell 0.3 per cent in the first quarter. Most of this decline was due to efforts to front-run tariffs. Real spending on imports soared 41.3 per cent, driven by a 50.9 percent increase in goods. This sharp rise in imports far outstripped gains in inventory accumulation, business equipment spending and modest increases in consumer goods. Although these import figures may overstate the extent of economic weakness, the outlook for the second quarter doesn’t look positive.
GDP is calculated as the sum of consumption, investment, government spending, and net exports (exports minus imports): GDP = C + I + G + (X – M). Given current trends, imports are likely to plunge, but inventories will also fall as consumers and businesses scale back purchases of goods that are either unavailable or too expensive. Federal government spending is likely to be lower, with additional drag from the educational and health sectors. State and local governments may also become more cautious in response to reduced federal grants and loans. Exports are likely to weaken from retaliatory tariffs and international boycotting of US goods. Meanwhile, reduced immigration is shrinking the labour supply, which in turn is dampening consumer spending.
Taken together, these factors suggest that US real GDP will likely be very weak – if not negative – over the next two quarters.
Can US policy adjust?
The likelihood of material changes to tariffs by July 9th, when the 90-day pause on reciprocal tariffs ends, is low. Negotiating a single trade deal in 90 days is challenging, let alone the numerous agreements the US would need to finalize. We expect the pause to be extended for most countries, with a 10 per cent universal tariff remaining in place. The situation with China is more complex, and the Chinese government may want to play hardball. While an eventual compromise on the current triple-digit tariffs is likely, it may take time to reach an agreement.
It’s important to note that maintaining a universal 10 per cent tariff, along with higher tariffs on China and on certain industries, has the potential to both increase inflation and slow economic growth.
A budget bill is expected to reach the House this week and is likely to include a full extension of the 2017 Tax Cuts and Jobs Act (TCJA) tax cuts. It is also expected to include several of the President’s proposals, including cuts to corporate taxes; expanded tax breaks for domestic production; the elimination of income taxes on tips, overtime and social security; the deductibility of auto loan interest; and the restoration of state and local tax deductions.
This could inject fiscal stimulus into the economy ahead of the midterm elections. However, the impact on the deficit presents a challenge. Extending the TCJA alone would significantly affect the deficit. Concerns have already surfaced in the bond market, and there could be further negative reactions as this budget bill moves through Congress.
Amid the current turmoil, the Fed is being looked to as the one to put Humpty Dumpty back together again. While we don’t expect any change in policy at the Fed’s May 7 meeting, their next meeting on June 18 should bring more clarity on trade, taxes, and any signs that the economy is slowing. We anticipate a 25-basis point cut at that time. If economic conditions weaken into a mild recession, the federal funds rate could fall to 3 per cent or lower by year-end. However, with inflationary pressure from tariffs, rates are unlikely to return to the near-zero levels seen in past recessions.
Housing Affordability Watch
CMI monitors the latest developments and offers insights on solutions to Canada’s housing affordability crisis
Housing markets in Vancouver and Toronto are losing steam, with rising buyer hesitancy and increasing condo inventories contributing to slower sales across both provinces. However, prices are likely to hold firm, and affordability remains a challenge for many.
What factors are behind this slowdown, and what could influence the market throughout the rest of 2025?
Read our latest Housing Affordability Watch here: Vancouver and Toronto Home Sales Likely to Remain Soft in 2025 – But Don’t Expect Major Price Relief
Independent Opinion
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