Summary
Highlights
The US economy is in a serious downturn, with business confidence plummeting by 47% in Q2, compared to 8% in Q1. High energy costs and supply chain disruptions are significant contributors. The labor market is also showing warning signs, with 31% of companies planning workforce reductions. Wage increases are failing to keep up with inflation, leading to a real-term pay cut for many Americans. While ordinary citizens face stagflation, the wealthy are seeing their asset values rise, contributing to a K-shaped economic recovery. Companies like Space X and Entropic are pushing for high-valuation IPOs before the market fully comprehends the economic reality.
Canada has entered a technical recession, with two consecutive quarters of negative GDP growth. This is a significant shock, as many economists had predicted growth. The combined impact of US tariffs and the war is hitting allied economies hard, with Canadian inflation on the rise. US tariffs have severely damaged Canadian exports, particularly in wood, aluminum, steel, and the auto industry, leading to billions in declines. Canada's financial sector is also struggling with rising borrowing costs due to higher global bond yields.
The US plans to end waivers on Russian oil exports, which could lead to a global supply collapse and higher inflation. Jeff Curry of Goldman Sachs predicts a physical supply squeeze, emphasizing that oil cannot be printed like money, and a lack of supply will force demand and economic activity to collapse. The US Treasury continues to announce seizures of Iranian cryptocurrency, which, instead of deterring Iran, is signaling to other countries that their assets are not safe within the Western financial system, pushing them towards alternatives like the Chinese financial system and gold.
Canada, being overly dependent on the US consumer market, is diversifying its export base. Canadian exports to the US have fallen significantly. China has offered to double its imports from Canada, strengthening the economic ties between the two countries. This pivot is largely driven by Trump's tariffs on Canadian goods. The entry of affordable Chinese electric vehicles into Canada poses a significant threat to the US auto industry, as Canadian consumers may choose cheaper Chinese alternatives, potentially leading to a collapse in US auto exports to Canada.
The aggressive US sanction strategy is accelerating a global trend away from dollar assets. Central banks are reducing dollar holdings and increasing gold reserves, reflecting a preference for assets that cannot be confiscated. The world is buying fewer US treasuries, forcing the US to sell over $500 billion in short-term debt, leading to rising yields. As Canada and China deepen their trade, they aim to settle transactions in local currencies, further hammering dollar demand. This situation, combined with potential Fed rate hikes, could push 10-year Treasury yields to 5% or higher, potentially collapsing the bond market. The current economic climate is a defeat for the US from multiple angles.