Through Thick and Thin, the Economy Sails On

The world remains gripped by major challenges—geopolitical tensions, trade fragmentation, technological disruptions, and polarization—the resolution of which is only just beginning to take shape in some cases. And yet, the global economy refuses to give in. Better still, North American stock markets are showing resilience tinged with sometimes unabashed optimism, as if they had already decided on a future that policymakers themselves cannot seem to pin down.

The economic landscape, however, is far from uniform. While not stalling, growth remains sluggish in most advanced economies, held back by a combination of short-term factors (pressures on purchasing power, uncertainty acting as a tax on industrial investment) and more structural trends (demographic slowdown, high public debt). Energy is driving inflation higher: the four-month conflict in the Middle East has transformed a shipping disruption into a more lasting and rather severe supply shortfall. The June 14 announcement of an agreement to reopen Hormuz caused prices to fall, though not back to pre-conflict levels. Caution remains warranted, as an announced framework is not yet an implemented one, and the physical restoration of supply will take months, while certain losses (e.g., LNG) will take years to recover. Crucially, however, the shock remains concentrated in the energy sector, without the widespread contagion to supply chains seen in 2022. For now, we are not necessarily seeing a repeat of the post-Ukraine scenario, but depending on how long it takes to return to normal, the risk remains one to watch. Meanwhile, trade uncertainty (led by the fate of CUSMA, and crucially, how much bite it retains) is weighing on investment, particularly in highly exposed sectors and countries, while the enthusiasm for artificial intelligence and technology alone is driving a disproportionate share of stock market gains and capital expenditures. These narratives are all currently coexisting, without necessarily converging.

Central banks remain caught, to varying degrees, in the uncomfortable trade-off between inflation and growth. In the United States, this dilemma is compounded by a self-inflicted credibility issue: the new Fed chairman, Kevin Warsh, has expressed support for the rate cuts desired by President Trump, even as the US economy remains resilient and inflation is rising. It is true that this resilience stems from more than just demand. Labour productivity there is rising by 2.8% year-over-year, well above the pre-pandemic cycle’s pace (around 1.5%), with gains concentrated in sectors with high AI adoption. The status quo, rather than the rate hikes anticipated by markets, could prove to be a defensible balance.

The Bank of Canada faces the inflation-growth dilemma more directly. Core inflation remains under control (core measures are close to target), but the erosion of economic capacity calls for a more nuanced interpretation of the current signs of economic weakness. Keeping the rate at 2.25% is an honest admission of reduced visibility.

In Canada, the situation is all the more complicated because the forces at play result in starkly different regional outlooks. The energy shock is deepening—at least temporarily—the fault lines that were already emerging due to trade uncertainty. Rising energy prices and increased demand from more reliable suppliers are enriching the producing provinces (Alberta, Saskatchewan, Newfoundland) through an oil windfall and improved public finance prospects, while Quebec and Ontario are importing inflation without any compensatory growth gains. On the trade front, US pressure is constant, and uncertainty itself is as much a weapon as tariffs, if not more so. There is no indication that this situation will change, whether after the July 1 date for the extension of the CUSMA or after the midterm elections.

Canada’s response centres on market diversification, rearmament, and major infrastructure projects. The direction is sound, but the timelines are long and the obstacles significant. There are some purely democratic obstacles, since these projects require trade-offs that institutions take time to resolve, but also resource constraints and the risk of causing crowding-out effects and inflation, if haste leads to poor sequencing of interventions. To quote Thomas Sowell: “There are no solutions, only trade-offs.”

Foreign investor interest in Canada appears to be strong, although it is worth noting that it comes mainly from the US and is concentrated primarily in the energy sector. This may not be a coincidence. Elsewhere around the world, what often makes Canada attractive is its access to the US market, the very advantage that current conditions are calling into question. One can no longer sell a gateway to which he no longer holds the key. We therefore need to focus on other strengths to remain attractive, especially since the financing of the US tech build-out is capturing a significant share of global capital. Critical minerals and clean energy are at the forefront of Canada’s moat, particularly in Quebec and Ontario, but they cannot replace the need to orchestrate a gain in competitiveness across the entire economy.

What Canada must achieve goes beyond the prevailing self-congratulatory rhetoric: transforming its comparative advantages (clean energy, resources, expertise) into new production capacity, which requires removing barriers to implementation as much as securing capital. It would be ill-advised to mistake current market optimism for an unconditional vote of confidence in Canada’s ability to deliver.