Welcome to Soundbites, weekly insights on market trends and investment strategies, brought to you by Investment Executive and powered by Canada Life. For today’s Soundbites, we’re doing a mid-year review with Paul Mielczarski, head of global macro strategy at Brandywine Global Investment Management. We talked about market performance in the first half of the year and global trendlines heading into the second half. And we started by asking about his expectations for the U.S. economy.
Paul Mielczarski (PM): The U.S. economic growth for the first half of the year has actually been distorted quite a lot by the impact of frontrunning ahead of tariffs. This has led to a surge in imports and, at the same time, an increase in both goods consumption and in investment in equipment. But we do have signs that the underlying economic growth is starting to slow. Business and consumer confidence measures have declined quite significantly over the last six months. Economic data is showing the gradual softening in the labour market, slowing consumption, and some renewed weakness in the housing market. And even though the short-term recession risks have diminished, we do expect U.S. growth to slow significantly in the second half of the year. And this is due to the tax-like impact of tariffs. And now, also, higher oil prices in response to the war between Israel and Iran. Also trade policy uncertainty, which is depressing investment in hiring. And the economy is facing a number of additional smaller drags, including federal workforce layoffs, a sharp decline in immigration, and decline in international tourism. At the same time, the U.S. Congress is currently negotiating a fiscal package, which is likely to pass by the end of summer. That will provide some short-term stimulus to the U.S. economy, but that only really kicks in around the middle of 2026. So, overall, we do expect a significant slowdown in the second half of the year, although it’s still debatable whether we get close to a recession, or whether we do actually tip into one.
Global GDP expectations
PM: I think in the short term, the rest of the world has benefited from a surge in U.S. imports ahead of tariffs. So, in the first quarter, and in early parts of the second quarter, you saw big increases in exports in Asia, Europe and Canada. In the second half of the year, we are going to see the reversal of this effect. Chinese domestic demand has been quite weak for a while now. And exports have really been the bright spots and these are likely to slow in the second half of the year in response to U.S. tariffs. So overall, the Chinese economy will likely continue to muddle through but with some downside pressures on both growth and inflation. The eurozone economy will also feel the impact of weaker exports in the second half of the year, but there are some important positive offsets. The European Central Bank has cut policy rates quite aggressively in the past 12 months, and we are starting to see the impact of these rate cuts feeding through to housing market and broader loan demand. And the new German government has announced massive multi-year increases in spending on both defence and infrastructure. And the deployment of these funds should provide a multi-year boost to the overall eurozone economy. Switching to Canada, the underlying growth currently is quite weak due to the impact of tariffs on the manufacturing sector and the ongoing weakness in the housing market. The unemployment rate has increased quite a lot more than unemployment rates in other developed market economies. The key question is whether the new Liberal government can really deliver an economic boost via some mix of shorter-term stimulus measures and also through longer-term investments in infrastructure and housing.
And finally, what’s the key takeaway as we head into the second half of 2025?
PM: So I think an appropriate metaphor for the current macroenvironment is this idea that right now we are in the eye of a storm. The overall impact of U.S. trade policy shifts has not been that disruptive. Tariff frontrunning has actually boosted short-term growth. And U.S. companies have built up inventories, allowing them to keep prices unchanged in the near term. But going into the second half of the year, I do expect to see a more meaningful slowdown in economic growth. And there’s a lot of uncertainty about how deep this slowdown ultimately will be, but I don’t think this is the time to be complacent.
Well, those are today’s Soundbites, brought to you by Investment Executive and powered by Canada Life. Our thanks again to Paul Mielczarski of Brandywine Global Investment Management. Visit us at investmentexecutive.com, where you can sign up for our a.m. newsletter and never miss another Soundbite. Thanks for listening.
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