Could the trade war trigger a recession?

Transcript

hello everyone and welcome to Market weekend review for the week ending March 28th 2025 my name is Ban Lyn I'm a senior investment strategist and head of Canadian strategy here at Russell Investments on this week's Market we can review we have three topics to discuss first the ongoing tariff situation and what investors should know second some key watch points for the upcoming us and can Ian labor market reports and finally what investors should know about the upcoming q1 2025 us earnings season so first let's begin our discussion by talking about tariffs and I know that tariffs are a subject we've talked about before at length but this week we did get some additional announcements at the start of this week there were some hints that perhaps the reciprocal tariffs that were originally scheduled to go into effect on April 2nd next week might be somewhat less than what people had originally been thinking and as a result of some of that positive speculation we saw the S&P 500 rallies significantly on Monday but by the middle of this week we saw a bit of a shift in investor mindset that came as a result of some additional announcements from the US government that they were going to go ahead with the imposition of tariffs on automobiles and automobile parts as of a pro second now originally investors have been thinking that perhaps there might be a delay in the imposition of automobile tariffs until after the reciprocal tariffs take place but now it looks like both sets of tariffs might be scheduled to take place on the same day now I do want to caution that the situation Still Remains very Dynamic very fluid and things could continue to change right up to the last minute and there's certainly a lot of UN answer questions on investors Minds for example on April 2nd when the reciprocal tariffs go into effect which countries are going to be impacted is it only a subset of the countries or is it going to be more broad based across many different countries what are the Tariff rates going to be like is it going to be low or is it going to be high is there going to be room for countries to negotiate are we potentially going to see some tariff deals where some of those tariffs ultimately get reduced or conver firstly do we see a further escalation of tariffs with other countries imposing retaliatory tariffs on the US the magnitude ultimately of the final tariff rate that gets applied as well as what countries and what types of products these tariffs apply to can impact the magnitude of the impact onto the US economy our base case for now remains that we think the US economy should be able to avoid recession but we do continue to also think that recession risks are somewhat above average still next I want to discuss the upcoming us and Canadian labor market reports we're going to get one for each country next week and there's a few important things to look at one is of course the unemployment rate in particular I'm very much focused on the unemployment rate for Canada because we know that the Canadian job market has been less robust than the US and additionally we've seen that Canadian small business confidence has been much lower than us small business confidence we saw a big drop off in small business confidence in the month of March in Canada as a result of tariff anxiety remember we've been thinking that the tariffs if they were to exist for a protracted amount of time could impact Canada more than the US and so we're going to be carefully watching to see how much of that business anxiety might have gotten translated into overall job creation and overall unemployment rate I think if the unemployment rate in Canada were to continue to go up then it would bolster the case for the Bank of Canada to cut rates again in April even though we might see some Upper price pressures from retaliatory tariffs on the US side of the equation I'm also going to be looking at the overall unemployment rate in the US the unemployment rate has been relatively lower compared to the unemployment rate in Canada I'm also going to be looking at the composition of job creation and the composition of where we might be seeing job gains or job losses with a focus on the government sector so far we've been seeing that the layoffs in the government sector haven't really had a significant impact of the overall job creation data but we're going to see if overall labor markets can still continue to remain resilient in the US that's going to be a key watch point for us finally with respect to the earning season for the upcoming q1 earnings season the industry consensus is now expecting around 75% year-over-year earnings growth that is a bit of a step down compared to Q4 but I think it's also important to remember that sometimes companies can actually beat these earnings expectations and indeed that was the trend that we saw in the past several quarters where companies on average tended to beat the initial start of quarter estimat so we're going to be carefully monitoring the overall earnings growth rate see how broad-based it is and then also looking at what the consumer facing companies are saying about their plans to potentially adjust pricing as a result of some of these tariff announcements how much of that will they absorb through their profit margins versus how much of that would they pass along to Consumers thanks for tuning in and we'll see you next time on Market weekend review hi I'm Sophie Anto head of portfolio and business Consulting at Russell Investments if you like what you just saw and heard consider subscribing to our YouTube channel or check us out on LinkedIn thanks for tuning in

Key takeaways:

Tariff uncertainty is continuing
Canadian small-business confidence fell sharply
7.5% earnings growth is anticipated for U.S. Q1 earnings season

On the latest edition of Market Week in Review, Senior Investment Strategist and Head of Canadian Strategy, BeiChen Lin, discussed the latest tariff developments. He also revealed key watchpoints for upcoming U.S. and Canadian employment reports and finished with a preview of U.S. first-quarter earnings season.

Unanswered questions

The week began on an optimistic note after hints that the United States’ reciprocal tariffs—slated to go into effect April 2—might be smaller in scope. This led to a significant rally in the S&P 500 on Monday, Lin said, before a midweek announcement on U.S. auto tariffs caused stocks to drop again.

“Originally, investors were thinking these tariffs might not be implemented until after the reciprocal tariffs take effect. Instead, it looks like the auto tariffs will only lag the reciprocal tariffs by one day,” he remarked.

Lin stressed that the tariff situation remains very dynamic, with the possibility that things could change up to the last minute. There’s also a lot of uncertainty about how these tariffs will be applied, including the countries and products that might be taxed. In addition, other nations might retaliate by slapping their own tariffs on U.S. imports, Lin said.

Because of all these unknowns, it’s unclear how the tariff situation could impact the U.S. economy. “Our central scenario is that the U.S. should be able to avoid a recession—but we do think recession risks are still somewhat above average,” Lin stated.

Unemployment watch

Turning to the labor market, Lin said both Canada and the U.S. will publish employment reports for March next week. In Canada, the unemployment rate will be a big focus due to the country’s weaker jobs market relative to the U.S., he said.

Confidence among small businesses in Canada has plummeted in recent weeks amid anxiety over U.S. tariffs, Lin noted. This is because Canada will probably be more negatively impacted than the U.S. if the tariffs remain in place for a while, he explained.

“I’ll be looking closely at the March report to see how much business anxiety weighed on job creation and the unemployment rate. If the unemployment rate comes in higher, this could bolster the case for the Bank of Canada to cut rates again next month,” Lin commented.

In the U.S., the unemployment rate and the sectors where jobs are being created and lost will both be of interest, he said. The government sector in particular will be a key watchpoint due to the recent layoffs, Lin noted.

“So far, government layoffs haven’t had a significant impact on overall job creation numbers. This next report will show if the U.S. labor market remains resilient,” he remarked.

Earnings expectations

Lin wrapped up with a peek at the upcoming first-quarter earnings season, which kicks off in mid-April. The industry consensus is for 7.5% growth on a year-over-year basis, which he said is a bit of a step down compared to the fourth quarter of 2024. However, Lin stressed that companies sometimes beat initial earnings expectations.

“This has happened a lot in recent seasons, so it’s worth watching. I’ll also be looking at what consumer-facing companies are saying about their plans to potentially adjust pricing due to recent tariff announcements,” Lin said. He concluded by emphasizing that how much companies absorb price increases through their profit margins versus how much they pass along the increase to consumers will be a key focus.

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