Chief economist outlines causes and implications as cracks begin to appear in the 'exceptional' developed economy
US economic exceptionalism has been a core theme of the post-pandemic era. While much of the developed world has struggled, and limped towards slowdowns, stagnation, and recession, the United States has been a beacon of success. US GDP growth, consumer confidence, and employment consistently surprised to the upside, even after one of the fastest and steepest rate hiking cycles in history. Now, though, cracks appear to be showing and US growth does not appear to be as robust as it once was.
Eric Lascelles, Chief Economist at RBC Global Asset Management, explained some of what he’s now seeing that could indicate a US slowdown. While Lascelles is not predicting that the US falls into a recession, he talked through some of the potential impacts of the ongoing US-Canada trade war and the heightened uncertainty that comes with it. He outlined, as well, what we might see on markets as the era of US economic exceptionalism begins to show signs of its twilight.
“The US was the exceptional economy over the last several years, and it seems to be becoming slightly less exceptional. That's partially the US economy decelerating. It is partially other countries actually picking up the pace, to some extent,” Lascelles says. “The divide that I observe between those two, can be articulated in the context of interest rates. Many other countries have been in the position to cut rates by more than the US, and so that's providing more support in the context of the exchange rates. And so the US dollar is still quite strong, and that's a headwind, and other countries broadly have weak exchange rates, and that's a tailwind as well. I think you can say, as well, just by virtue of the relative success of the US economy in recent years, there's less room to grow.”
Lascelles notes that the deceleration in US growth we’ve seen so far is largely from data that predates the onset of the current trade war America is waging across multiple fronts. He says we’ve seen deceleration in consumer and business confidence following a post-election surge. Investor confidence, as gauged by US stock market performance, also appears to be flagging. Notably, on the expectation that tariffs could support US domestic manufacturing he says that confidence in the goods sector is rising, however confidence in service sectors has declined as well. The housing market, too, appears to be cooling down in large part due to interest rates staying higher in the US than they have across much of the developed world.
The role of tariffs and trade policy have also begun to impact the US economy. While Lascelles argues that the US is likely in a better position than the countries it is imposing tariffs on, he notes that the sheer uncertainty around this policy has impacted economic actors. Decisions are being made under this pall of uncertainty, which further erodes broad confidence.
Despite all these cracks, however, Lascelles is quick to point out that he sees a slowdown in the United States, not a full-blown recession. His current forecast is for the United States to grow at around two per cent this year, which would represent the country’s slowest growth rate since the pandemic-induced recession. The tariff threat, which he describes as resulting in a ‘moderate downgrade’ in US forecasts has had him revise his risk of a full-blown US recession over the next year up to around 25 per cent from 15 per cent.
While tariffs’ impact will likely be most acutely felt in Canada and Mexico, Lascelles identifies a few key areas where US tariffs are likely to impact the US economy. The first, he says, is that persistent policy uncertainty paralyzes economic decision making. There could also be a sequencing issue as many US companies are anticipating tariffs by stocking up on inventory. The resulting surge in imports would nominally subtract from GDP growth.
While many investors had expected the incoming Trump administration to focus on economic and market growth, recent signals have shown an apparent willingness to accept economic damage in the short-term in pursuit of policy goals. Lascelles agrees that the second Trump administration appears bolder than the first and more willing to take on the risk of recession as well as market damage.
As Canadian advisors look at the changing nature of the US economy, Lascelles notes that we’re in somewhat unfamiliar territory. The US has been the dominant economic and market engine of the world for a multi-year period. This may be a moment, he says, where those leading returns can be found elsewhere.
“It does strike us that this may be a time of more muted returns in the US. And of course, it's hard to say with precision, and you've got bad tariff scenarios and good tariff scenarios and so quite a range of possible economic and thus market outcomes. But in general, as we see slower US growth and the prospect of tariffs and just a less consistent public policy, we are beginning to scale back our own US equity allocations,” Lascelles says. “Still very happy to be there. It is such a bastion of innovation and so many of the world's great dynamic companies that, of course, one has to be exposed to the US. But we are scaling back and going slightly underweight the US.”
