January 21, 2025
The Empire Club of Canada Presents
Financial Outlook 2025 A Post-Inauguration Look at Canada’s Place in the Global Economy in 2025
Chairperson: Jenna Donelson, President, Board of Directors, Empire Club of Canada
Moderator
Kevin Carmichael, Journalist, The Logic
Panellists
Frances Donald, Chief Economist, RBC
Steve Verheul, Principal, GT and Company Executive Advisors and President, Verheul Consulting Inc
Head Table Guests
David Skurka, Executive Vice President & Co-Head of Global Corporate and Investment Banking, National Bank Financial Markets
Heather Torrey, Partner, FGS Longview
Welcome Address by Jenna Donelson, President, Board of Directors, Empire Club of Canada
Good afternoon, everyone. Welcome to the Empire Club of Canada’s first event of 2025. I’m Jenna Donelson, chair of this historic organization, and your host for today’s event.
To formally begin, I want to acknowledge that we are gathering on the Traditional and Treaty Lands of the Mississaugas of the Credit, and the homelands of the Anishinaabe, the Haudenosaunee, and the Wendat Peoples. Toronto also remains home to diverse First Nations, Inuit, and Métis peoples. I encourage you all to continue to learn more about the Traditional Territories on which you live and work.
I’d also like to begin by recognizing our sponsors. The Empire Club is a non-profit organization, and our sponsors generously support the club, and make these events possible, and viewing complementary, for those of you who are online. So, I’d like to offer a big thank you to our Lead Sponsors, National Bank Financial Markets, and FGS Longview. Thank you. Thank you, as well, to our VIP Reception Sponsor, McCarthy Tétrault. Thank you. And I’d like to thank our Supporting Sponsors, the Canadian Bankers Association, KPMG, and Tories. Thank you, for your support. And I would be remiss if I did not offer a very big thank you to our Event Partner, TMX Group. Thank you for your partnership another year in a row, John. And we also deeply appreciate the ongoing support of our Lead Season Sponsors, Bruce Power, and Hydro One, and our VIP Reception Season Sponsors, Waste Connections of Canada, and Ellis Don. Thank you for your ongoing support of the Empire Club. And finally, thank you to our Media Partner, the Toronto Star, and our AV Partner, Bespoke Audio Visual. Thank you for your support of us, as well.
If you have a question for our speakers, please scan the QR code found in your program, or for those of you online, use the Q&A function. If you are online and you need help, please start a conversation with our staff, using the chat function, and they will be there to help you.
Today’s discussion comes at a moment of fast, transformational change for Canada, and our world. Between our last Empire Club event in December, and this first meeting of 2025, we’ve certainly seen that in spades. In December, Prime Minister Trudeau hadn’t announced he was stepping down, and now, we’re watching a full-blown leadership race to replace him. In December, no one was talking about annexing Greenland or Panama, or Canada becoming the 51st state. But here we are. It’s easy to view these times as altogether unprecedented. But in the Empire Club’s 122-year history, we find some conversations not too unlike the ones that are dominating our discussions today. In fact, the very first speech delivered at the Empire Club’s podium was about Canada’s relationship with the United States. And in that speech, William Clark said, “You may be on very good terms with your neighbours, without having them live in your house or, you living in theirs. And just as I esteem one of my neighbours, so in the same way I respect the United States, without desiring to be one of them.”
When I read those words, I am reminded that though some things change, they also stay the same. There are many things about today’s economic and political climate that are unique, and that is why this conversation matters. These conversations matter, because they help us navigate these turbulent, if not wholly unprecedented times. And thankfully, we have John McKenzie here, to deliver a keynote that will highlight the importance of this moment that we’re in, and a seasoned panel to help guide us through it.
So, without further ado, it is now my pleasure to invite one of today’s lead event sponsors, David Skurka, Executive Vice President and Co-Head of Global Corporate and Investment Banking from National Bank Financial Markets, up to the podium, to say a few words, and introduce our keynote speaker, John McKenzie. Please join me in welcoming David Skurka to the stage.
Opening Remarks by David Skurka, Executive Vice President & Co-Head of Global Corporate and Investment Banking, National Bank Financial Markets
Good afternoon, everyone. Thank you for joining the Empire Club’s Financial Outlook, a post-inauguration look at Canada’s place in the global economy in 2025, and beyond. National Bank Financial is a proud sponsor of today’s luncheon, where we’ll hear from a very esteemed group of experts on markets, economics, and policy matters. National Bank is proud to be fiercely Canadian, serving businesses, financial sponsors, and governments, wherever they may take them, and their ambitions as well. Given the topic today, and it being the day after President Trump returned to the White House, this session of the Empire Club will be the greatest session of the Empire Club in the history of the Empire Club, forever and furthermore. I’m glad you’re all here to make the Empire Club great again. In all seriousness, the Empire Club is a fantastic organization that brings together thought leaders on a wide range of topics that are important to Canadians and the world beyond.
In light of the historic and sweeping changes to industrial policy, climate policy, immigration policy, threats of territorial expansion, both in this world and in space, and renaming of landmarks, all on the first day, not to mention upending decades of cooperation between the U.S. and Canada, through the threat of unilateral tariffs, all of this as we face a leadership interregnum in Ottawa. To quote the late, great Gord Downie, “This couldn’t come at a worse time.”
Today, I have the pleasure of introducing my good friend John McKenzie, CEO of the TMX Group, for a keynote speech. John has been with the TMX for over 20 years, and CEO since 2020. John acted as the lead on many of the TMX’s most important milestones, including keeping the TMX proudly Canadian-owned, through the Maple transaction, the acquisition of the Montreal Exchange, and Trayport. John is a passionate advocate for the Canadian capital markets, new capital formation, and keeping ahead of his global competitors. John has a CPA in CMA. He has an MBA from the Edinburgh Business School, and an Honours BA from Wilfrid Laurier University. Please join me, in welcoming John to the podium.
John McKenzie, CEO, The TMX Group
Well, good afternoon everyone. Jenna, thank you. David, thank you. It’s always a privilege when you actually get to be introduced by someone you’ve gotten to work with for a long time. We’ve been friends in the industry. It’s an extra special pleasure that way. So, thank you everyone. And thank you, everyone, for joining us today. It is my distinct pleasure to, once again, represent TMX Group at the Empire Club’s long-standing Annual Financial Outlook event. And this important event, and this important yearly forum, is extremely important this year, when you think about it. So, thanks to the Empire Club for all the partnership in putting this together for such a high-calibre event, and what I think will be a high-calibre discussion.
Now, an economic outlook from the start of any year can be tricky. Now, if you think though, especially in times of deep, deep uncertainty like we’re all in now, it’s less of an outlook, and more of a look-out. You know, even what we once called normal or stable market conditions, forecasting financial markets has always been more art than science. And if the last few years have taught us anything, it’s that those life-changing, world-changing events, from global conflicts, to pandemics, to natural disasters, they come with little advance warning, and these days, seem to come a bit more frequently. And the impact of these events on financial markets can render outlook projections meaningless the next day. They replaced more uncertainty with fresh sets of unknowns. So, it is an interesting time, to say the least. It’s actually interesting, when you realize you’re actually living in a moment of history as it happens. So, the purpose of today’s discussion is to really try to cut through the politically charged noise, and examine real-world implications for Canada, provide meaningful insights to some of the themes and issues that are facing our country’s business leaders, our policymakers, our investors, both now and in the months ahead.
Now, a little bit about us, TMX. TMX occupies a very unique position at the centre of the country’s capital markets. Most people know that we operate the Toronto Stock Exchange, the Montreal Exchange, which are Canada’s premier equities and derivative marketplaces. Our founding markets are over 170 and 150 years old, respectfully, and their histories are very much intertwined with the formation of our nation. But in addition to these high-profile institutions, we also operate interconnected businesses like the TSX Venture Exchange, which is Canada’s public venture market, very unique in the world.
And CDS and CDC are clearing houses, plus a dynamic data business that provides solutions and analytics and insights to the global financial community, helping to bring more investors to Canada. Now, these are platforms for companies to raise capital. They’re venues for modern investors and traders, to pursue a wide range of strategies. And they include the payment and settlement infrastructure that makes it all work. You know, you never worry about your plumber until you have a plumbing problem, but we do the run of plumbing, too.
Now, our unifying purpose is very simple. It’s to make markets better, and empower bold ideas. And this is more than a marketing slogan or a tagline for us. It’s really our commitment to clients, and commitment to our stakeholders across this whole ecosystem. And it’s words that we have to prove every day through our actions. And as we work to ensure that the Canadian markets remain the best in the world, deep and diverse, fair and transparent, and innovative and responsive. And we take it as our responsibility, then, to champion growth in Canada, and to advocate for an environment that supports and promotes innovation and entrepreneurship, investment in Canadian companies, and sharpening our collective competitive edge on the global stage. And it’s really from that front row seat that we have, which is our position of both visibility, but candidly, responsibility to Canadian markets, that we call on policymakers to recognize the opportunity, and more importantly, the need to make our markets more competitive.
You don’t have to read beyond the daily headlines today, to recognize that we’re in a moment of extreme political and economic uncertainty. You know, the threats that we all hear about of tariffs, of economic force, things coming from the incoming U.S. administration, hang over our heads. While, unfortunately, the leadership and the direction of our federal government is currently in question. And that is why it’s more important than ever that we face this moment with that opportunity mindset. That we need to put Canada in the best possible position to confront these challenges, and seize the opportunity. We need a clear vision. We need a workable strategy to raise our collective game, and make us an even more formidable global player. Not just to fend off the short-term challenges of tariffs, but to set us on the right path for the longer term. We must be seen at home, and throughout the world, as a great place to do business, to invest, and with winning attributes. Winning attributes like clear and consistent regulation, that’s predictable. Efficient and transparent processes for getting programs and projects permitted and approved in Canada. So, there’s an assurance that when a company launches a project and investors get behind it, it can get done, and not in the 12 to 15 years it takes right now, to get a new mine into the ground.
And lastly, we need a competitive tax regime that encourages risk-taking. Entrepreneurs and investors need to be able to bet on Canada, knowing that if it turns out to be a winning bet, they’re going to be rewarded. A higher Capital Gains Tax, for example, does the exact opposite, and it lowers that potential reward for putting risk capital in play in Canada.
So, if we’re facing a crisis, as headlines suggest, and analysis, generally, supports, let’s not waste it. A crisis can be a galvanizing opportunity. A crisis forces everyone to focus on the same thing, at the same time. And an incredible amount can be accomplished quickly, under pressure. So, let’s take the necessary steps to not only weather this storm, but to set us on a long-term course that enables our collective businesses to thrive, our economy to grow, and ultimately, all Canadians to prosper.
Now, it was a little over 20 years ago that there was much in the public discourse around Canada being a Northern Tiger. So, what I ask today is we find the fortitude to reawaken the Northern Tiger again. With that, I’d like to turn to our panel. The timing of this event is not an accident. A new U.S. President was sworn in yesterday, and brings with him a new era in Canada’s relationship with our biggest trading partner. Our guests have deep experience navigating the issues of the day. And while the headline crisis is of course top of mind, what I’m looking forward to, personally, is hearing from the astute panel, as to some of the ways we can better position Canada’s economy for that enduring success.
Steve Verheul has had a number of senior-level positions in the federal government, including Assistant Deputy Minister of the Trade Policy and Negotiations Branch at Global Affairs Canada. And as Canada’s Chief Trade Negotiator, he led the negotiations that resulted in the Canada-U.S.-Mexico Trade Agreement, and the negotiations between Canada and the European Union that led to the Comprehensive Economic and Trade Agreement. He is a Principal with GTE & Co., Executive Advisors, and a Fellow of the Public Policy Forum.
Frances Donald is a Chief Economist at RBC, and leads a team of economists who deliver economic analysis to help both inspire and empower informed decision-making in an evolving world. Frances is a leading voice on economic issues, and is highly sought-after by clients, government leaders, policymakers, and media in the U.S. and Canada, for her deep insights on the macroeconomic environment, and financial markets in North America.
And today, moderating our session, Kevin Carmichael, Economic Columnist and Editor-at-Large at The Logic. Kevin has spent more than two decades writing about economics, business, and finance, for national and international outlets, including Bloomberg, the Globe and Mail, the Financial Post, where he was also Editor-in-Chief. So, please, if we can welcome the panel to the stage, welcome Kevin, Frances, and Steve. And Kevin, I will turn the panel over to you. Thank you.
Kevin Carmichael, Economic Columnist & Editor-at-Large, The Logic
Thanks very much, John. I’ll do a quick reminder to everyone to send in questions. I drew mine up yesterday, on the train in from Montreal, so I’m sure they’re all out of date, so I could use your help in anything that’s more relevant to current events. Look, Steve, let’s start with you. I’m sure most of the room wants to hear from you first, given those extraordinary events. First, you getting much sleep?
Steve Verheul
Not a lot.
Kevin Carmichael
Not a lot. I didn’t think so. Look, I think a lot of us have decided we understand how Trump thinks. We’ve either read “The Art of the Deal” or read about “The Art of the Deal,” watched some of “The Apprentice,” and we all think we have this idea of how Trump operates, but you’re a pro. So, how did you absorb the information, the events of the last 24 hours, or so?
Steve Verheul
Well, it did have some ups and downs, and twists and turns. We were certainly on what seemed to be a fairly reasonable track, when we saw the Executive Order. A number of issues in there that were of concern to us, but I think they are all in the kind of rubric of an April 1st deadline to deliver recommendations and assessments. So, we were on that track for a little while, and it didn’t look too bad. And then, we got the surprise later on, when Trump was in the Oval Office, and just in response to a question from media talked about applying 25% tariffs against Canada and Mexico. I’m not even sure that was thought of, beforehand. It seemed to come off the top of his head. It is in contradiction to the Executive Order he signed, not that much later. But I think we’re in a situation now where we’re facing that, potentially, as early as February 1st. So, you know, we’ve got to get our act together and get moving towards that.
Kevin Carmichael
Before I get to you, Frances, how do we get our act together, then? What’s your one or two bullet points on what we need to do, then, given this February 1st deadline, whether it’s real or imagined?
Steve Verheul
Well, there are a number of things we have to do. First of all, we have to try to unite Team Canada, because we’ve got a bit of a challenge there. We’re going to be much weaker, if we don’t have a united Team Canada. We’ve got to finalize our approach on how we would react to those tariffs coming into place. There’s been a lot of talk about retaliation. We need to have that in place and ready to go day of, ideally. But I think in the broader sense, with this kind of signal, we’ve really got to focus on strengthening Canada, strengthening Canada’s economy, because we’re going to need to be on that kind of track, as all this comes at us.
Kevin Carmichael
Okay. Hold that thought. We’ll come back to that for sure. Frances, the extent that I have a goal for this conversation is to maybe leave the room—I hope it’s not selfish, because I’m certainly looking for ways and tips on how to think about these events. I assume most people in the room are looking for help in how to process these events. It’s one of your main jobs, right? As a Chief Economist at the country’s biggest bank. The bank, your clients, count on you to provide them with something of an anchor, through forecast advice. My understanding of how you do your job is you take historical events, data, run them through your models, make a best guess based on that. There’s not a lot of precedent for what you’re dealing with today. Things are shifting in real time. So, how do you process swerves like the one yesterday, threats of tariffs that could be as wide as 25% down to 10%, maybe something even less? How do you think about that? How do you process all that?
Frances Donald
Well, that’s how we used to do the job, but we can’t do that so much. So, for example, even comparisons to Trump 1.0, we saw the average tariff rate rise from 1.5 to 3. 25% tariffs across the board would raise that to 12.5%. So, we’re in orders of magnitude that are 10 times larger than what we’ve seen. So, we can’t even use Trump 1.0 as a prophetic way to get a sense of what’s happening. But the way you asked your question, Kevin, I really appreciate this, because just about everyone emails me and they ask me what to think, whereas your question is framed around how to think. And this is really critical. We get a lot of requests coming through, can you neatly summarize the impact of a tariff threat into a percentage point hit to GDP? And we do have to do that. That is part of the job. 25% across the board tariffs would be a three-year-long recession in Canada. Pretty deep and problematic, for a variety of reasons. And yet, I think this is false precision. The trickier, messier truth is that a tariff weaves its way, rather insidiously, through the Canadian economy through many, many channels. And a lot of them are very difficult to predict, and very difficult to throw assumptions on.
And every single economist that you’ve seen apply a percentage point hit to the economy has made massive assumptions. I’ll give you some examples. The first thing that happens when we hear about these Trump threats is actually, even before we’ve heard about the tariff, there’s an uncertainty shock on your economy. And businesses expressed this in the Bank of Canada Business Outlook Survey, too, just for the last three months. So, growth slows even anticipation, because businesses don’t know what to do. We also historically see inventory stockpiling. So, if you had a favourite thing, do you have a favourite thing? Like, maybe a chocolate bar, or a sports equipment piece?
Kevin Carmichael
I like suits.
Frances Donald
Suits. So, your favourite suit is going to go up in price. You would, naturally, stockpile it. You might buy two or three, because you know they’re going to go up in price, put them away, and that would actually rev up the economy. So, we could see that trade in anticipation, although if it’s February 1st, there’s not a lot of time for this, actually ramp up, and goose trade statistics. Then you see the price increase. Well, guess what? If the currency offsets, if the Canadian dollar weakens by as much as the tariff, the Americans don’t really feel much of a change in their price. Who are the tariffs being applied upon? Producers. Do they have a profit margin that’s enough to absorb them? Consumers. Do they have the income to come through? Retaliatory tariffs. You’ve got to make assumptions about those.
And I’m not finished, Kevin. We have to assess the secondary impacts. So, if you think about a small manufacturing plant, it gets demand destroyed. Well, the workers that are working there, maybe they lose their jobs, they don’t go to the movies, or the restaurants. So, you see it filtering through, over a period of years. And then how will your central bank respond? The Bank of Canada response function is another assumption you have to make. So, the how is really important, because I don’t know that what Canadians need is a neat and tidy decimal place number on GDP impact. They need a playbook for how this would filter through, over a period of years. That’s what’s going to help Canadians most. So, I really encourage this room, and those watching online, to pivot away from the what to the how should we think about this. And RBC will have a report out later this week, that will also assist.
Kevin Carmichael
All right. We’ll look for it. Steve, what kind of questions are you getting from your clients? And maybe comment on that flow of question, to flag some things that maybe people are wasting their time thinking about, or misinterpreting, or some things that maybe we’ve gotten a little bit wrong, in how we interpret what’s going on in the U.S.
Steve Verheul
Well, I think in terms of interpreting what’s going on in the U.S., I think we are almost entirely focused on tariffs right now, understandably. So, people want to understand why the tariffs are being imposed. Trump has talked about the border issues, fentanyl, illegal migrants. I don’t think it’s about the border issues at all. Canada doesn’t really contribute to that problem. And in any event, countries are supposed to take care of their own borders, not ask other countries to manage their borders. So, I don’t think it’s that.
The trade deficit is a preoccupation. And certainly, Trump has misunderstood the trade deficit, in relation to Canada, and why that exists—and people have tried to explain that to him. But the biggest fear I have now is about what I think the real underlying reason is for him imposing tariffs, is to get companies to relocate in the U.S., get in production and investment to move into the U.S. behind a tariff wall, and in his view, that would help the U.S. prosper and expand. That’s the toughest part we have to address.
Kevin Carmichael
Okay. Do you have thoughts on how to address it, then, since we’re there?
Steve Verheul
Sorry?
Kevin Carmichael
Do you have thoughts on how to address it?
Steve Verheul
Well, yes. I think that it will all come down to, assuming we do get the tariffs, what do we do in response? And I think, clearly, we have to retaliate. And the main reason to retaliate is to start to try to level that bargaining table somewhat, so that we know it’s going to be on the U.S. side of the bargaining table. We need to put some things on our side of the bargaining table to gain some leverage, and have a more balanced discussion. If we don’t retaliate, we’ll just keep paying and paying concessions, and we’ll never know where the endpoint is. So, there’s that front. We’ve got to do that.
But at the same time, we have to try to convince the U.S. that there are actually two paths. There’s that path, where we start to drift towards a trade war, which is going to be damaging for both sides, or there’s an alternative path, where we can start to work together, facing common challenges—including China and a few other issues that are preoccupying the U.S., in particular—and deal with those common challenges.
So, that’s, certainly, another track. But I think probably the most important thing is that we need to start investing a lot in Canada, and making sure we can do more in Canada, and you know, address security issues, address resource issues, other issues, and start to put more emphasis on developing our own industry, because it’s going to take a big hit, and we need to reposition it for success, and that’s going to take some effort, some investment, and it’s not going to be done overnight, so we’ve got to get moving on that.
Kevin Carmichael
Okay. Frances, trade war, like the one that Steve just foreshadowed, would hit Canada like an external shock. But we’ve gotten a little used to external shocks, right? There’s a great financial crisis, led to the Great Recession. We muddled our way through that. COVID, of course, the most recent, we found a path through that. Should we assume, in your view, that we could muddle through this external shock, or is the context changed in a way that those old playbooks, or those assumptions might not apply, this time?
Frances Donald
Well, I love your optimism. So, there’s a variety of factors at play. The example I’ve been using that resonates with a few folks is, I tend to think of economies as having their natural immune systems, their ability to withstand shocks. And if you think about the American economy, it’s actually got an incredibly strong economic immune system. It’s like the guy on Venice Beach that’s got the green juice, and is pumping iron. They’re doing great. AI, fiscal spending, high productivity. Canada is a little bit more like the video game addict, who eats a lot of junk food, and does not have a strong immune system. And we know, everyone here knows those reasons why, uncompetitive tax system, no productivity, not enough industry, interprovincial trade barrier. You all know this list. The challenge is that we have this extraordinarily weakened immune system. And if you want to proxy it with something like potential growth, Canada has its lowest potential to grow by economist measures, literally, it’s in its entire history. Like, going back to the foundation or Confederation in Canada, we have never had such limited ability to grow. So, the immune system is incredibly depressed. And then we add on the daycare cold of all daycare colds, a tariff shock coming through. So, our ability to withstand this is incredibly depressed, relative to even where we were in 2020, and certainly, compared to 2008.
And there’s two elements to this shock, which I think are particularly problematic for Canada. Which is, first, it’s largely a Canadian-specific shock. Yes, China has some tariffs, and Mexico as well. But GFC and COVID were global pandemics. So, Canada had the resources globally, and wasn’t being viewed as, you know, the ugly duckling in the corner. Canada is not in that situation right now. The other one is, this is not a transitory shock. So, I’ve heard some governments talk about pandemic-type support. We can’t do that in an environment where we think this is going to last for years, and requires a transformation. Otherwise, you’re just keeping companies alive that really aren’t going to work in this new economy. So, I’d be cautious about saying we could apply these old playbooks, and recognize that they’re a little bit different.
What is relevant? And maybe one of the takeaways from 2020 is, in 2020, we had this re-evaluation. Do people need to work from home? What services can be virtual? Is anyone even going to the grocery store anymore? We all get our groceries delivered. That is the conversation that Canada is going to have now. And to Steve’s point, we can have this win-win situation, where we both improve our immune system, and also, give the United States what it wants. What’s really core from an economist’s perspective here, is what carrots does Canada have to offer the United States, that it really can’t provide for itself. Of course, we’re providing a quarter of the energy that they consume. Electricity, phenomenally important. Hydro Québec can provide up to 20% of New York City’s electricity, and it’s safe, and reliable, and eco-friendly. We’ve got uranium, we’ve got geranium—I’m like a physicist now. Or who are the scientists that do all the critical minerals? That’s me. The economist/critical minerals expert. Geranium, really critical for national defence. We are the primary provider of agriculture for 27 states. I have been doing this job awhile, and even I forgot that natural resources in Canada are just really phenomenal sources of productivity growth for us. The U.S. doesn’t have the capacity to provide. If we can drive on that side of the Canadian economy, we can both solve the cold, and also improve the immune system. That’s the angle Canada has to take right now.
Kevin Carmichael
Steve, what gets the Americans’ attention, when you’re having negotiations? Maybe you have some reflections from the NAFTA re-negotiation, from Trump 1. I ask because I’ve had some conversations with people that tell me that Canada needs to be careful about overplaying its hand. Maybe you could comment on that, whether you agree that there is some risk of us over indexing on energy, say, or autos, or whatever the case might be. What card can we play, in your view, that actually will bring the Americans to the table, to do a good negotiation?
Steve Verheul
Well, first of all, negotiations with the Trump administration, either this one or the last one, is entirely different than any previous negotiation I’ve ever done. And it really is a case where the U.S. kind of comes to the table with a zero-sum type of approach, where one side has to lose, and one side has to win. We managed to get through it the last time we had the negotiation, just by kind of grinding through all the details, and we tended to be better prepared than the U.S. was, and got a reasonably good deal. But this time around, it’s going to be different, and I think we’re going to have to go through this whole process of retaliation, and counter-retaliation, before we can move towards some kind of more normal negotiation. So, we’ve got to get through a difficult process first. The U.S. will have its demands, we’ll have some demands, and we’ll have to try and find a balance in all of that. But the whole process is going to be rocky and uncertain, throughout all that.
QUESTION & ANSWER
Kevin Carmichael
Okay. The questions from the audience and the virtual audience are starting to roll in, so my work is almost done. Frances, a good question here, wondering, noting that the COVID crisis, for example, had some disproportionate effects on service sectors, service workers, hospitality sectors, that sort of thing. Do you have a sense on the, perhaps, the industries or sectors that either are most at risk in a trade war, or perhaps immune from a trade war? Do you have a frame for that?
Frances Donald
Yeah. So, geologists do critical minerals, right? So, all Canadian economists are becoming geologists. Yes, we do know which sectors are most exposed. That’s largely manufacturing. And it’s manufacturing because of how intricately connected these two sectors are, how many times goods pass between U.S. and Canadian manufacturers. In fact, the U.S. is actually its third-biggest own importer. So, it sends widgets to Canada, to put them inside of things like cars, and then re-imports that widget. So, it actually has a deficit with itself, and that’s a component of the story. So, we know manufacturing is really exposed, and then it’s going to depend on what sectors are tariffed.
So, one question, if I had the time with Steve, that I’d be asking him, is are there any places that might be excluded? Energy, for example. We know the Trump administration, or what I read, tells me that the Trump administration is really looking to lower energy prices. Well, if, you know, they import a quarter of their oil from us, and their plants are heavily-focused on Canadian input that need to be redesigned, if they change their input, then that seems to me like a critical exclusion. So, right now, we know that manufacturing and anything that has a lot of trade flows is the most exposed, that puts Ontario at the centre of it. But what will depend on this is a lot of the details that come through.
Where I’d be careful, as I mentioned, that could be secondary flow-throughs to your economy. So, even though we think of goods-based economies as being most at risk, that’s just the first-order shock. And the second-order shock becomes more nefarious, and difficult to measure.
Kevin Carmichael
Okay. Steve, do you have thoughts on how to maintain unity in the country around this trade war question, around the tariff threat question? I mean, you brought it up earlier, and it’s obviously becoming a preoccupation of people. We’ve seen Alberta Premier Danielle Smith break from the rest of the premiers; I hear more and more people talking about it. Thoughts on what could be done to either bring Alberta back into the fold, or prevent others from peeling off, down the road?
Steve Verheul
Well, the easiest way to get unity in Canadian positions is if you start early enough, and you start at the ground up, and you build it up. That’s what we did the first time, within the negotiations with the U.S. We spent a lot of time with industry, with labour, with provinces, and we were all kind of brought along in the development of the strategy. So, when they all briefed up, the messages were the same, and it was much easier to do it that way. We didn’t get off to that kind of start this time, so it’s more damage control, going forward. There is a very strong sense of unity among all of the premiers, at this point, with the one exception of Alberta. I think that they’re demonstrating that they have a different perspective on this than the rest of them do. But we need to try to get them on board, too, because the fact that Alberta has gone in a different direction, through these last few weeks, has significantly undermined Canada’s position.
Kevin Carmichael
Okay. Another question for you, related. I’ve heard people say one way to preserve unity, to rescue the industries that will be most, hardest hit by a trade war, would be to establish some sort of commodity reserves, to basically, if you’re not going to be able to sell to the U.S., we’ll keep it internally. How would that work? Or is that—one, I guess, is that something that you’ve heard, or something that you think is a possibility? And two, if it is, how would that work?
Steve Verheul
Well, I have heard about it, certainly. And I think it is a, potentially, very significant weapon in the arsenal that the federal government could have. And essentially, the federal government would buy up strategic reserves, and hold them, of the product or commodity in question. And that would be held as leverage. The U.S. would know those stocks are there, and not being sold to the U.S. So, that, if we get to that stage—and this is a big step, in terms of a bit more of a radical step in retaliation, but it would be highly effective, in bringing attention to the Americans.
Kevin Carmichael
Frances, question for you. You have a remarkably nuanced understanding of fiscal policy, and the debt deficit question, based on things I’ve heard you say…
Frances Donald
Thank you.
Kevin Carmichael
…I’ve read of yours. No, it really is commendable, because you don’t take a binary view on it. So, you can explain it for people if you want. But it’s great that you’re here to take the follow up to that question is, can Canada afford to, basically, establish strategic reserves in a range of commodities, if that’s what it takes to win this trade war?
Frances Donald
So, we’re all familiar with the concept of you have to save for a rainy day, save in case something happens. This is the rainy day. This is the, the giant tempest of rainy days, that has come through. So, whatever your view is of how much fiscal room there is—which can be ideological, it can be based on various calculations—that whatever room we have should be deployed, in this situation. Because, as I said, a 25% across the board tariff is one of the most prolonged, problematic recessions that Canada has experienced. And it’s very unique to the Canadian story, specifically. So, you’re going to hear economists that will make the argument as to what that money should be used to do. Some of it is going to be to offset the virus. So, some of it has to mollify the employment impact that will come through. And some of it has to be focused on the rebuild, on the other side. So, instead of, for example, economists would say, don’t just hand out COVID cheques—maybe we have to do with some of that. But what you need to do is help people reposition and retrain for their next evolution coming forward. So, a little bit of column A, a little bit of column B.
Now, the challenge is, as I said, this is a somewhat more unique Canadian situation. The argument that I’ve always made with Canadian federal finance is that, as much as we as Canadians, we are all, I think on balance, more fiscally-conservative than we realize. Even if you’re left-leaning, you’re more fiscally-conservative than you realize. Canada is actually in a very strong fiscal position, relative to most of its global peers. Bond markets punish the weakest of the pack. Canada is very far from the weakest of the pack, compared to its peers right now. The problem is, bond markets are relative, and fiscal positions need to be thought of relative. And Canada will be one of the only of its peers that has to respond to this shock. So, I do believe that there is fiscal room, before you start to see the bond market punishing it. We need the Bank of Canada to continue lowering rates. But whatever perception you have on what should be used, now is the moment to deploy it. Because I don’t know what rainy day you’d be waiting for that wasn’t a trade war with our largest economic partner.
Kevin Carmichael
I’m going to squeeze in a rate question—a bit of an aside, but obviously related. You said the Bank of Canada needs to keep lowering rates. Seems right. What about the currency? It’s something people will be worrying about, in the background. It’s already kind of weak. A trade war is not going to help. Neither would a widening interest rate differential with the Federal Reserve. So, how do you think about that?
Frances Donald
Well the good news is, the currency has already incorporated a rate divergence. So, our currency doesn’t wait until the day of the announcements to weaken. What it does is, it looks out over a three-to-five-year period, and says what is the likely spread between the interest rates. It’s already incorporated over 100 basis points of spread between Canada and the United States. That’s what’s got us to 145. That’s what drove us there. But the more important question to me is not what is your point forecast on the Canadian dollar; it’s an acknowledgement that we as Canadians and business owners have to admit is that we are in a new operating range for the Canadian dollar. The Canadian dollar will be persistently weaker than where it was 10 years ago. And the way I think about it in USDCAT was we range between 115 to 125 for a period; 135 to 145 or weaker is probably the new range. And that, actually, can be helpful for Canada. It can offset some of the impact of the tariff shock. It can mean that the inflationary impact for the US is slightly less, so their demand will drop off less. So, we can continue some of those trade flows.
But the Canadian dollar concern is very real. But if we continue to ask, well how do we get back down, or how do we get back to a stronger Canadian dollar, I think we’re going to find ourselves spinning our wheels. When the best thing that businesses and Canadians can do is recalibrate to a persistent weaker Canadian dollar. And I know that’s negative, Kevin. I don’t want to say these bad things. I am a very proud Canadian, that is rooting for my country. But it is a disservice for me to say everything’s going to be fine, and the Canadian dollar can get weaker, when what we have to do is recalibrate, not just to the Canadian dollar, but the new economy that is forming in response to these trade wars. That is the best thing that we can do for Canadians, is a reality check on what the next five years is going to look for, an acknowledgement of that reality, and then a rebuild.
Kevin Carmichael
Okay. I’m going to get back to you in a second, for some policy ideas, or at least some policy areas to attack. Steve, lots of questions, actually, coming in on whether this is a moment to diversify away from the U.S. Old question. I’ve been writing columns along those lines for almost as long as I’ve been in this business, I think. Nothing really changes. And in fact, just before this latest conflagration with the U.S., our trade dependency on the U.S. was actually going back up. Can you just talk about that, a little bit? I mean, you’ve been in this game a long time. I’m sure you’ve worked for some governments, too, who wanted to, had you out trying to do trade deals with countries other than the U.S., for the express purpose of diversifying the trade mix. From where you sat in Ottawa, why did none of that hard work that you and your colleagues were putting in really yield to anything that moved the needle?
Steve Verheul
Well, I don’t think it’s ever yielded anything that was a game-changer. I think it moved the needle, somewhat. The agreement we negotiated with the European Union, ever since we negotiated the trade between Canada and the European has steadily risen, through the years. Same with the comprehensive and progressive partnership on the trade, transpacific partnership, that has also seen growth over the years. But we’re starting from a point where 76% of our exports go to the U.S. The U.S. is an easy market for Canadians. It’s right across the border, same language, same values, generally. So, it’s an easy market to get into. And so, that’s where most of our businesses that export go. It’s really difficult to move away from that. I don’t think we’ll see a big change from that, although 25% tariffs are going to make everybody think a lot more seriously.
I think where there’s a slight difference is in the energy field, and in critical minerals, where we could move outside of the U.S.; there are other customers out there, fairly easily. We need to build the right infrastructure to do that, and make a few other changes. But I think that’s where an opportunity outside of the U.S. exists, that’s the most interesting.
Kevin Carmichael
Okay. Is it something worth spending a lot of time thinking about just now, or is it a distraction, to lean into this sort of diversification idea?
Steve Verheul
Well, I think in that more narrow context of energy and critical minerals, we should pursue that for both economic reasons and tactical reasons. We should start putting a lot of effort into that. Because if the U.S. is going to be imposing these kinds of tariffs on us, then we need to develop these other markets. That’s the best way to get that started.
Kevin Carmichael
Okay. Frances, immune system. What’s the best way for Canada to boost that weak immune system, that you framed?
Frances Donald
I think the most immediate thing that we can tackle—you’re going to just roll your eyes at me—interprovincial trade barriers. No one wants to talk about this, because we’ve been talking about it for–I see it in your face.
Kevin Carmichael
No. I’m writing about this right now…
Frances Donald
Wonderful
Kevin Carmichael
…so I feel like you’re just doing this for my benefit.
Frances Donald
Well, no. So, actually, it is the chief economist of our presenting sponsor that has been most vocal on this, Stéphane Melhial, but the IMF has done work on that. So, we’re all afraid of 25% tariffs. Do you know what the average interprovincial tariff is, across Canada? It’s 21%. And it’s a pretty quick thing that a lot of politicians should be looking at, as something that could really help buffer the shock coming through. And then, of course, what are we going to do on some of the broader immune system factors? There are the old standards. We have been talking about these for forever. Could we please cut the regulatory red tape around, particularly, housing infrastructure, help get housing activity building much more quickly? Can we please simplify the Tax Code? Can we please direct money towards productivity-enhancing type of industries? These are not new ideas. No economist is going to stand up here and come up with a new idea for the immune system. But I think we also need to tilt towards what are the areas of our economy that we maybe have neglected a little bit more, and they really are in resources. Because there are new technologies, and new industries, that are coming on board, nuclear, AI data. And I make a joke about being a geologist, but I really truly believe that there are critical minerals, and a variety of resources that exist in Canada, that will help us develop the Canadian economy of the future. And not just become a reliable trade partner to the U.S., who cannot supply to the same extent themselves, but also to the global trade paradigm.
So, it isn’t just—what’s the Wayne Gretzky quote, “Shoot to where the puck is?”
Kevin Carmichael
Skate to it.
Frances Donald
Skate to where the puck is going? We’re a football family.
Kevin Carmichael
It would be faster to shoot to where the puck is going.
Frances Donald
It would be faster to shoot. So, we need to Wayne Gretzky this, and say, “Where is the puck going to be?” The puck is going to be needing a variety of these core resources that Canada has, and it will take time to get them going. And these businesses need to develop, and we need to develop the infrastructure around them. But if we could Wayne Gretzky this economy, I think we would feel much more confident about where we’re going to be in 10 years.
I will say this one thing. The bulk of Canada’s problems are not fixable in a one-year horizon, or even a three-year horizon; they are a five- to ten-year horizon. So, when Steve says, you know, I’m going to summarize, “Buckle up,” I think economists also feel that the immune system will not be resolved in a short period of time, and there is no one single fix. The example that I often use is, when your house is so messy that you can’t even look anywhere without seeing clutter, my mother always said to me, “Just start in one corner. Find a corner, and then start there.” That is what Canada will have to do. But I hope it keeps an eye on where the industries in the future, we can get there. It’s just more of a five- to ten-year story.
Kevin Carmichael
Steve, a couple of minutes left, so last word to you. You, too, said that Canada needs to sort of focus on its own house, earlier in the conversation. A good opportunity to give you the last word, to let you develop that idea a little more. Frances has sort of put out her thoughts. What do you want to add to that? What do you think Canada needs to do?
Steve Verheul
Well, I think it’s really, initially, a kind of a strategic conversation. We can spend all our time focusing on the U.S., and what kind of concessions we need to give to them, and the trade war, and everything else. But while we’re doing that, and it’s some of that we have to do, we really do have to figure on how we strengthen our position by ourselves. And it’s the same kinds of things that Frances was talking about. You know, we’ve got to invest in the infrastructure, to get our critical minerals to, potentially, other customers; same with energy. And we’ve got to figure out ways to strengthen Canada, so it’s not just looking to the U.S. for so much of its economic health, but looking at what we can do on our own, to better position ourselves going forward.
Kevin Carmichael
All right. Thanks very much, Steve. Frances, thank you. Thanks, everyone. My tendency is usually to let these things spill over, but these two people have very important work to do, as you can imagine. So, I’m going to try to do a hard stop today. So, on behalf of the three of us, I’d just like to thank all of you for coming out, and listening to us today.
Jenna Donelson
Thank you, Kevin, Frances, and Steve. Let’s give them a round of applause one more time. That was a real substantive and engaging conversation, so thank you for that. It’s now my pleasure to invite to the podium Heather Torrey, partner at FGS Longview, one of today’s Lead Sponsors, to thank our panel, and deliver some remarks. Welcome, Heather.
Note of Appreciation by Heather Torrey, Partner, FGS Longview
Thank you so much to John and the panellists today, for their remarks. FGS Longview has had the privilege of working with TMX for more than a decade. Today really highlighted the valuable role that TMX plays in convening important conversations about these issues, and from a place at the heart of our markets, and the economy. At FGS Longview, we spend a great deal of time helping our clients understand the implications of these disruptions on their businesses, not just the challenges, but also finding opportunities. That will be more important in 2025, as it’s clear from the discussion this year will bring real change to the Canadian and global economies. Thank you so much for coming today, and have a great rest of your day.
Concluding Remarks by Jenna Donelson
Thank you, Heather. And thank you to all of you who joined us today. I know there were a lot of you online, as well. Thank you for joining us, and being a part of this important conversation. I want to say thank you one more time to our sponsors, because they drive these Empire Club events forward, and we could not do it without them. And I’d also like to recognize a special group of people in the room. We have our students and young leaders here today. We have them from U of T, from T of U, and of course from Queen’s University. They are sponsored by KPMG. Thank you, and welcome. We’re glad you’re here. Thank you.
For those of you who would like to stay connected with us, please subscribe to our newsletter, by scanning the QR code on your table. I hope you will join us at some of our upcoming events. Next week, I am thrilled to share that we have Prem Watsa, founder, chairman, and CEO of Fairfax Financial Holdings, coming to the Empire Club to receive the Nation Builder of the Year Award. This is a special event that will take place next Tuesday, January 28th, and we still have a few tickets left, for those of you that are interested. And on February 13th, we are proud to join together with the Ontario Chamber of Commerce, for the launch of their 2025 Economic Outlook, and Business Confidence Analysis. For those of you who joined us last year, it was a fantastic event, and we look forward to hosting them again. So, join us on February 13th.
And finally, thank you all for being here today. I appreciate that you may remember, as a club of record, all Empire Club events are available to watch and listen to on our website. And a recording of this event will be available shortly. Thank you again for joining us today. This meeting is now adjourned. Have a great day.
