Speaker 1:
On May 29th, BMO hosted a discussion with industry experts to discuss the current economic and trade landscape and learn best practices on managing your international supply chain. Let's take a listen.
Speaker 2:
Welcome to Markets Plus, where leading experts from across BMO discuss factors shaping the markets, economy, industry sectors, and much more. Visit bmocm.com/marketsplus for more episodes. The views expressed here are those of the participants and not those of BMO Capital Markets, its affiliates or subsidiaries.
Steven Jensen:
Welcome and good morning. Welcome to Leading Through Uncertainty, BMO's speaker series dedicated to bringing in different perspectives and providing ideas and ways to spark and share best practices for our customers and the business community to come up with strategies about how to manage the current uncertainty and the current environment. This is an ongoing series and I'm really excited about today's conversation. We have Shelly Kaushik, one of BMO's Senior Economists on the line, along with Mayu Saravan, Managing Director and head of BMO's Global Trade Team and Gord Scharf, a special guest from Partnerships Director at EDC. Welcome to Leading Through Uncertainty, and really excited to get into the conversation.
I know every time I start this conversation, there's a headline in the news and I have customers trying to decipher what's going on. The purpose of today is really about sharing those best practices and providing market insights, and I couldn't think of a better group to come together today. So I'm going to kick it off, we only have 30 minutes, so I want to start with you, Shelly, and maybe just kind of set the placemat, set the landscape of the Canadian economy and we'll build from there. Over to you, Shelly.
Shelly Kaushik:
Sure, thanks Steven, great to be here. Hi everyone. Now as Steven mentioned, there are a lot of headlines on a daily basis, on an hourly basis really, but as we look through all of those headlines, all of that noise, I think there's one important thing to remember here. We do seem to be past the point of peak uncertainty. Now, I say that because the latest actual moves on trade have actually marked a meaningful deceleration from those heated, heated discussions that we were experiencing over the last few months.
So for example, the US-China trade deal was a major signal that the two largest economies in the world aren't necessarily looking to decouple from each other, which is where effectively they were for most of April. So it doesn't look like we'll get back to that extreme, which is certainly good news for the global economy. And I'll just point out that late yesterday, the US Court of International Trade also struck down most of the broad tariffs including the reciprocal tariffs, the baseline 10% tariff and those original fentanyl tariffs on Canada, Mexico, and China. Now, it has given the government 10 days to comply, but the US administration has already filed an appeal, so we'll see where that goes.
Now on net, I would call this latest decision about neutral from an uncertainty perspective. Yes, it is good that those broad tariffs are being challenged and challenged legally, but the government does still have a number of avenues that they can pursue to still impose meaningful tariffs. There are now then more questions on exactly what they will use, what tariffs will apply, when they will apply, and exactly how much. So, again, on net about neutral for the broader uncertainty picture.
But the good thing is that for Canada, we're actually not as far into the spotlight anymore, which is certainly good news for us. We are still dealing with tariffs, so we still got those 25% on steel and aluminum, we've still got 25% on autos, although effectively not so much on parts that are under USMCA, and at least for now we've still got those original 25 or 10% tariffs on non-USMCA compliant goods. Now, that last piece, those fentanyl tariffs, they don't look to be very much at all. We do expect that most of what we send to the US is already compliant under USMCA, and so that's why this court case doesn't meaningfully impact our outlook, at least for Canada.
Now, in fact, for Canada, we've actually upgraded our economic outlook fairly recently. Now, we're still looking for contractions in the second and third quarter, and that does technically mark a recession, but it is a lot milder than we were expecting even just a few weeks ago or a month ago. And we are looking for the economy to start recovering starting at the end of this year. Now, for the full year, we do have growth penciled in at 1% for 2025 with a couple tenths acceleration to 1.2% in 2026. A lot of these upgrades were driven by a bit more stability both on the political front and on the trade front. Now, on the political front, we of course are now passed the election. We do have a minority government in place, but it's a pretty strong minority and there is enough overlap between the parties platforms that we don't really think that the fact that the government is a minority government is really going to affect policymaking.
I will point out that we do not have a budget expected for this spring, which is a bit unusual, so we're not going to have a clear idea really, of the government's immediate priorities at least until the fall. So until then, we will likely be seeing a little bit more in terms of ad hoc measures like that recent one percentage point, so-called middle class tax cut, that will take into effect in July.
But on the trade front, by our estimates now Canada's tariffs are effectively quite low because of all of those US carve outs, we are looking at about 5%. Now, that's a far cry from where we've been over the last few years, but it is still a lot lower than the rest of the world, of course court challenges pending. And so in fact, from a US as of right now before the consequences, I guess, of the court decision come into play, we are expecting the average tariff rate imposed by the US on the rest of the world is roughly around 14%. That is down from about 20 to 25% before the trade deal with China. So you can see how big of a deal that trade deal was.
But all that to say all of this relative stability really helps the Canadian dollar, which has of course strengthened quite a bit in April and again in the second half of May. Now, typically a stronger loonie does make our imports relatively less expensive, which means it does take some pressure off of import prices and therefore off of Canadian inflation. That's especially helpful right now that we have inflation just picking up a little bit and expected to continue to pick up just with that helping hand from that direct impact of tariffs. So all of that means if we just take a step back here, things are looking a little bit better than they seem to be at the beginning of the year. Yes, confidence and investment have taken a hit and growth has slowed and may even contract, but it does look like the worst of those initial impacts are behind us, and we do have a little bit more clarity and, dare I say, a little bit more certainty out there, at least from a Canadian perspective.
Steven Jensen:
Excellent. Thank you so much, Shelly. I really appreciate these insights and it really reinforces a lot of conversations I've been having with customers across the country about the bark is bigger than the bite as they've kind of gone through the work. And also the one quote I am going to take is we're off peak tariff risk, and I think that's so important. Darryl White, our CEO, has said it very well, capital needs clarity, and I appreciate as the fog starts to dissipate and we look forward. And as that fog dissipates, Shelly, maybe if you could kind of direct the audience, some things that we should be looking at in the next 3, 6, 12 months as we gain more clarity, some cues we should be looking at and how do you see the economy unfolding?
Shelly Kaushik:
Yeah, so it's quite an interesting time right now because actually in the short term, we're now finally, finally starting to get some data on exactly how the economy is starting to fare going into the tariffs. Now, I did mention that inflation was a bit sticky in April, and we might continue to see some upward pressure on that front over the next few months on tariffs, but I do also want to highlight that we'll be getting Q1 GDP tomorrow, that's May 30th. And we are expecting to see decent growth, but of course tariffs only really hit at the end of the quarter. The details on that data will really help show us the early stages of the economic impact, especially on things like business investment because it's so sensitive to confidence, it's so sensitive to clarity and just, again, given the fact that there was still plenty of uncertainty out there even before the tariffs kicked in in March.
So together both inflation and growth, that'll kind of help us weigh those upside risks on inflation versus those downside risks to growth. And that's really, really important for the Bank of Canada because whichever wins out could really help determine the bank's leanings at least for the next few months. For now, we are looking for a few more cuts this year from the Bank of Canada, but both the amount of cuts, the number of cuts and the timing are really subject to change. Again, the GDP report will kind of help us fine-tune those forecasts.
But on the tariff front, I mean, we will really have to wait and see how this court order plays through. In the meantime, we are seeing countries are still trying to get trade deals done with the US to at least limit that damage to their economies and to add some certainty out there. So far we've only really had the US signing deals with the UK and with China. It is possible that some countries are going to kind of take a step back now and see what comes out of this legal challenge to see exactly what they're negotiating against. But again, from a Canadian perspective, it's really just a question. And I appreciate that not everyone's an economist, so not everyone's spending eight hours a day looking at this, but it's really a question of waiting to see what the data tell us, but also waiting to see, of course, how the longer term tariff situation evolves.
Steven Jensen:
Yeah, excellent. Thank you, Shelly. I'd like to kind of build from that part and invite Gord from EDC into the conversation and gain an EDC perspective. EDC, as an important partner to BMO, you have access to some incredible data and interactions with businesses across the country every day. What do you anticipate will be some of the needs for the business community across Canada given this uncertainty and what are you seeing, Gord?
Gordon Scharf:
Well, thank you very much, Steven. Good morning everyone, and thank you very much for allowing me to join you today. Shelly has certainly provided an excellent overview, and if we were to look at things for an export lens, and to answer your question, EDC has seen the following. Unsurprisingly, the data shows that Canadian exports are already concentrated to the US. Specifically in 2023, 76% of our goods exports, 50% of service exports and 82% of Canadian direct investment abroad went to the US. Therefore, to mitigate concentration risk, it would be worthwhile to consider diversification into other markets.
Our analysis shows that considerable opportunities in the next five years would be present in the following specific markets, which would help Canadian exporters with their planning and efforts in this area, specifically Europe with nearly 85 billion in total goods export potential by 2029, Indo-Pacific, offering more than 82 billion in total goods export potential by 2029, and finally, if you look at the combined Brazil, Chile, Argentina, Panama and Colombia, together, they offer nearly 11 billion in total goods export potential by 2029. Therefore, there are significant opportunities to be realized that BMO and EDC can help you take advantage of as an exporter.
Steven Jensen:
Thank you, Gordon. And I love the message that ultimately during times of uncertainty and pain, there is an opportunity, there's an opportunity and a need, quite frankly, about diversification. There's steps that we can take. I really appreciate you taking the time today, Gord. This is a good time to building off that to bring Mayu into the conversation, our Head of Global Trade for BMO for Canada and gain your perspective. You're interacting with customers every single day, what are some of the impacts that you're seeing right now on the ground, Mayu?
Mayu Saravan:
Sure, thanks Steven. It's a bit of a layered answer. So while obviously uncertainty around rates and the broader economy are affecting our clients, from a trade finance perspective, we're obviously seeing the impacts stemming from the trade and tariff discussions with the US. From the importer's point of view, we're seeing increases in the cost of components and raw materials, and this is especially punitive for clients who have complex supply chains that require back and forth border crossings. And more broadly, we're seeing supply chain disruptions when it comes to supply lines being reconfigured to avoid tariff charges, that could be switching to new suppliers, new routes, shipping patterns, or other means.
We're also seeing stockpiling of material to hedge against rising costs, but as you can imagine, that impacts you by tying up your cash, increasing storage costs and management costs. We're also seeing more frequent price adjustments from businesses as they're continuously sort of taking in the tariff news and adjusting prices accordingly, but that can obviously confuse and frustrate customers. On the exporter side, we're seeing their goods becoming less competitive, as you can imagine, due to increased costs, and that's lowering demand. And it sort of comes full cycle because that affects the entire supply chain from production to distribution.
Steven Jensen:
Excellent, thank you, Mayu. I'd like to push on this a little further and turn some of those impacts that you're seeing into some of the strategies that the Canadian entrepreneurs are putting into place, some of the strategies that they're using in real time to manage the risk.
Mayu Saravan:
Yeah, definitely. I would break those two strategies and the overall strategies into two larger buckets. One is expanding into new geographies and the other is improving working capital, and BMO has got a range products and services that can actually help with that.
So with the former, many exporting customers have decided to expand their business to new buyers and supplier bases, and they're expanding into geographies that they may be less familiar with but have more favorable trade agreements with. So one primary concern here is as an exporter or an importer is how you manage payment risk. So if you're an exporter, you obviously want assurance that you'll get paid when you deliver your product. And as an importer, you still have to provide that same level of payment assurance because you're establishing relationships with new suppliers that may not know your credit profile. So products such as letters of credit and documentary collections can do exactly that because they can mitigate up to 100% of the payment risk. And taking away that payment risk can make the diversification expansion far more achievable and far easier.
In the case of the latter, improving working capital, it's these same products that we're talking about so they can be leveraged to improve your cashflow. So as an exporter, once you know that payment risk can be mitigated, there's much more comfort in offering your customers 30, 60, 90 or even 180 day payment terms, especially because you know you can come to BMO to accelerate payment to you. So we can get you paid in as little as five to 10 days. And as an importer, you sort of flip that on the other side and you say, "Listen, if you know that you're going to get paid, can you provide me better payment terms?" So you reach out to your supplier and see if you can extend some of your existing payment terms, which obviously will improve your working capital.
The key here is that you don't really need to navigate this on your own, the BMO team is here to assist and we can review the unique needs of your business and give you suggestions on how to tackle some of the challenges that you're facing. And we can bring in product partners such as EDC that can come in when perhaps we might not have the appetite in certain geographies or maybe we just want to enhance the scope of the products we can offer.
Steven Jensen:
Excellent. Thank you, Mayu. What I really love about it is that these are fundamentals and best practices that we've been leveraging all the time. I think just the velocity and consistency and conviction of using these tools is particularly important right now, so thank you for that insight, Mayu. And I think you connect us well to our guest Gord, and I'll bring you back into the conversation, it's probably a good time to kind of talk a little bit about EDC's purpose and some of the programs it offers to Canadian exporters and how it can be a compliment to a financial partner like BMO when we're exploring all the ways to help our customers.
Gordon Scharf:
Well, thank you for pointing that out. Steven. Export Development Canada works very closely with Bank of Montreal to effectively help our joint customers. As Mayu pointed out, there's a number of solutions that Bank of Montreal has really available to help mitigate concerns and issues relating to exporters. And as we'll see, Export Development Canada has a number of solutions that would work hand-in-glove to help overall to ensure that our customers are best serviced.
More specifically, EDC is Canada's export credit agency with a mandate to support and develop Canada's export trade and capacity to engage in international business opportunities. EDC helps Canadian exporters take on the world by providing international business expertise, business connections, and a suite of financial and risk management solutions. These would include and certainly would be complementary to what Mayu discussed, more specifically, trade credit insurance that protects against the risk of non-payment by your international buyers, financing to help you grow your business abroad, and working capital guarantees that enable your BMO relationship manager to lend you more and or release assets that otherwise would've been held as collateral. All of this would be coordinated with your Bank of Montreal relationship managers. EDC works very closely with them to help you achieve your exporting goals and improve your overall working capital.
Steven Jensen:
Excellent. Thank you, Gordon. And just to make it real for all our customers on the line, what would be the profile of a business that would most benefit from partnering up with EDC?
Gordon Scharf:
Thank you, Steven. Yeah, excellent question. This would involve understanding EDC's definition of an exporter, which is actually much broader than you might think. More specifically, this would include direct exporters, which is the more traditional understanding of an exporter, which would be defined as companies who earn revenues from customers outside Canada. More nuanced is indirect exporters. This isn't necessarily always thought of, but this is defined as companies who sell into export supply chains such as automotive, mining, oil and gas, and fisheries, just to name a few. You would also include companies who sell raw material, parts, components or finished goods to another Canadian company who in turn exports the final product outside of Canada. So likely an area that would see a lot more organizations be eligible for this than you would think of initially.
Additionally, there's future exporters, and these are companies who landed their first contract outside Canada or who have a tangible export plan. So these would be considered your first-time exporters. And then finally, there's Canadian direct investment abroad. These are companies who make an investment in another country as part of their international growth plan. Some examples include setting up an office space, warehousing space, full foreign affiliate operation, or potentially acquiring a foreign business.
Now, a key point of note in all of this is that EDC focuses on the net benefit the business brings to the Canadian economy. So while the manufacturing, raw materials or labor may be outsourced outside of Canada for various reasons, for EDC, the ownership of the operations needs to be in Canada. Now. Finally, a key point is that it is also worth noting that technology and service businesses are included in EDC's definition of exporters. Even though they may never leave Canadian borders physically to do business, if they're selling to customers outside of Canada, then this would be considered an export.
Steven Jensen:
Excellent, thank you, Gordon. And maybe just give us some triggering language. As BMO relationship managers are exploring all the ways to help our customers, what would be some of the programs that you would want to highlight to help in this current environment and where that partnership can be key?
Gordon Scharf:
Absolutely. There actually are quite a number of resources available that may not be readily known. We've touched on in broad strokes the EDC-specific solutions that are available, but it's also worth noting that EDC is part of Canada's trade team, and these members work together to provide a range of complimentary services and resources to help you grow your business outside of Canada. And these would include and hopefully would provide some insight as to what to look for, which the partners would be Business Development Bank of Canada, also known as BDC. BDC offers financing advisory solutions and capital with small and medium-sized businesses. It would also include Farm Credit Canada or FCC who support the industry by providing financing and/or other services to primary producers, agri-food operations and agribusinesses that provides inputs or add value to agriculture.
Now, some of the lesser well-known team members would be Canadian Commercial Corporation, also known as CCC. This organization supports sales to foreign governments at all levels and provides a government-to-government contracting mechanism that de-risks the transaction for both you and your buyer. And there's also Innovation, Science and Economic Development Canada, otherwise known as ISED, which helps you find and take advantage of the government programs and services you need to expand or scale-up your business in Canada and around the world. Now, this would be done by leveraging ISED's Accelerated Growth Service, which helps companies access government services, financing and exporting advice. ISED also provides help with protecting intellectual property, trademarks and copyrights.And finally, leveraging ISED's Business Benefits Finder will assist in getting information on funding, tax credits, experts advice and much more.
And the final team member is the Trade Commissioner Service or TCS, which helps eligible Canadian businesses expand globally with tailored support and a network of trade commissioners in over 160 cities worldwide. So in summary, doing business around the world can be complex and challenging, but when you approach any of Canada's trade team partners that I mentioned above, they can direct you to the right partner with the right service or program for your needs. There really is no wrong door, just call talk to us or your Bank of Montreal relationship manager for more information.
Steven Jensen:
Excellent. Thank you, Gord, that was a comprehensive overview of all the assets and venues that are available to support the Canadian entrepreneur. Thank you for that. I appreciate you giving us the time today. Shelly, I'm going to move to you as we kind of come to a close of the call. And as we wrap up, if you could just guide the audience, our customers to focus in the coming time, where would you focus a data point, a detail as we kind of look forward? What would that be as an indicator as things unfold? Shelly, over to you.
Shelly Kaushik:
Yeah, I mean, one of the most common questions I get even during normal times, of course, is what will happen with interest rates. Obviously that's a huge question. Like I said, even when times are normal and certain, but especially so just given that we have this push and pull on inflation right now.
So I would say, again, I understand that not everyone is looking at the data all the time, but do look out for inflation, whether it's hotter or colder than expected, above or below target. And the activity indicators also whether they're firmer or softer than expected. Now the activity indicators themselves, they're very mixed, there's a lot of details out there, but just to give you guys just a couple of examples. So for example, we had last week retail sales held up better than expected in March, April looks surprisingly firm, so there's still some spending momentum out there. But then just this morning we got the payroll survey that showed two straight months of job losses in February and March by that measure of payroll employment.
So I mean, it's clear the economy is slowing, the question is really just by how much. And that net answer will kind of tell us where the Bank of Canada is leaning. So if inflation is hot, of course that suggests a hawkish tilt. But then if there's a meaningful economic hit out there than we would expect a bit more dovishness. Now, like I mentioned, we are looking for some additional easing this year because we are expecting a technical recession in 2025, but things are still very much in flux as we get this data rolling in. So really, our forecasts, and ultimately the Bank of Canada's moves will be driven not by the noise out there that you see in the headlines, but really by the data. And so that's what we're focused on.
Steven Jensen:
Yeah, Shelly, I really appreciate that. I think at times your guidance there is about staying away from the guidelines and focus on the trusted advisor like you who could synthesize complexity and focusing on the data. It's so important. Shelly, thank you so much, you always do a great job of synthesizing complexity to ways that we could actually action it. So thank you so much. Mayu, I wouldn't mind looking over to you maybe to provide some tactics and share some of the creative strategies that our clients have been implementing to manage risk. I'd really love our audience to get some of those strategies in place.
Mayu Saravan:
Sure. Thanks very much, Steven. Well, we've already talked about diversification and cash flow optimization, which are, as you can imagine, some of the most direct paths to address the current situation. But we're actually seeing some more creative solutions as well. We've seen the creation of industry forums and webinars where businesses get together directly to share tips and success stories and strategies for navigating the tariffs. And these collaborative efforts help companies learn from each other and develop effective solutions and best practices. In fact, the trade finance team has hosted an event like this in the past, and we plan on doing more in the future.
We've also seen the expansion of e-commerce platforms with companies expanding their e-commerce capabilities as a means of achieving that diversification of what we talked about, so allowing them to reach new markets and reduce dependency on traditional trade routes. And we've also seen direct engagement with policymakers, with trade experts and lobbyists, actively urging government officials to revisit and reform some of the current tariff measures. The advocacy actually aims to develop a balanced framework that supports both domestic industry as well as importers. Ultimately, we're seeing many clients being really, really proactive and looking forward, and that's the exciting piece here. The easiest thing to do is just to stand back and hope things go back to the way they were. But many companies are actually using this as a catalyst for growth and prudent risk management. And with the right advice and the deployment of well-thought-out strategy, many are actually poised to come out of the situation stronger and healthier.
Steven Jensen:
So Mayu, thank you so much. And again, I think it really hits one of the primary points. I think there was a time and place where you could, quite frankly, be complacent and not use some of these tools and in this environment, you need to be proactive and you need to use those tools to manage that risk. Thank you so much for what you do for all of our customers and your team. It's one of the best teams in the industry, so really proud and privileged to work alongside you.
We're coming to the end of the hour, and I'm going to wrap up and just say thank you. Thank you for investing the time. This is the start of the conversation. I encourage everyone to reach out to their BMO relationship manager and coordinate and explore all the ways that we could help you. BMO is a powerful enterprise and is here to help, and I couldn't think of a better time than right now to encourage that conversation, spark ideas, share best practices, and provide the market insights. That was the purpose of today, but really it's the start of the conversation. Refer to commercial.bmo.com. We have podcasts, we have up-to-date data. A lot of the information that Shelly and Mayu were covering off are all there as a resource for you.
At BMO, we believe choosing your financial partner is one of the most important decisions you'll ever make. And in this environment, you can see why. We're here as a financial partner with you, and we have a responsibility that we take very seriously, and that's just harnessing all the resources that we have at our disposal to provide the best advice. So just a huge thank you to all our customers out there, and a huge thank you to Gord at EDC. Shelly, thank you as always, and Mayu looking forward to continuing the conversation in our next talk for Leading Through Uncertainty. Thank you and have a great day.
Speaker 2:
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Speaker 1:
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