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MNI POLICY: Warsh Task Forces Will Need To Woo FOMC Skeptics
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Federal Reserve Chairman Kevin Warsh's star-studded task forces face heavy lifting to overcome institutional inertia and win over skeptical members of the FOMC.
While some of Warsh's top policy priorities like revising or scrapping the Summary of Economic Projections and shrinking the Fed’s balance sheet have broad support, the notion of relying more on novel indicators or revisiting the inflation framework will likely face stronger resistance -- especially after the FOMC dropped flexible inflation targeting to return to a more traditional regime less than a year ago.
To keep the panels from reinventing the wheel, each task force is supported by two staffers -- one from a regional Fed bank and one from the Fed Board, MNI understands. Their job is to ground the outside experts in baseline technical data and past debates.
The task forces start briefing the committee as early as September, with conclusions due by the end of 2026. But they can only make recommendations to the FOMC, which alone decides what changes, if any, are adopted.
"Ultimately, decisions will be made by my FOMC colleagues," Warsh told Congress last week.
WELL-TRODDEN GROUND
Convincing Fed insiders will be tough because many view Warsh's five lines of inquiry as well-trodden ground. The Fed has already done extensive work on these topics, some of it stretching back years. At the same time, subjects like AI and productivity involve too many unknowns to impact near-term policy.
And the task forces were designed and selected with little input from other FOMC members.
Still, the perceived legitimacy of the prominent scholars, business leaders and central bankers picked to lead the task forces, together with their broad range of views, should lend weight and credibility to the recommendations and give Warsh leverage. And the most significant reforms are expected to come in communications and the balance sheet, areas already earmarked for changes after the missteps of the pandemic.
REFORMS UNDERWAY
Modifying or scrapping the dot plot has been debated for years, and Warsh is finding broad support among colleagues for ditching forward-looking statements. But real reform means clarifying how the Fed explains its reaction function, not just saying less.
Scenario-based analysis could better communicate how policy might react under uncertain conditions and is likely to be among recommendations from Peter Fisher, Arminio Fraga and Mervyn King. But finding consensus across 19 committee members will remain a challenge, especially with officials increasingly protective of transparency and a regional diversity of views. (See MNI INTERVIEW: Fed Regional Banks Key To Independence - Judge)
Reducing the balance sheet is another discussion well underway inside the Fed, with staffers and policymakers converging on the idea that size should follow function and regulatory changes will have the most impact.
Karen Dynan, Raghuram Rajan and Jeremy Stein are likely to recommend keeping the ample reserves framework and to float ideas to reduce banks' appetite for reserves. Warsh himself conceded last week that any portfolio reduction will move slowly and deliberately to avoid market dislocation. (See MNI POLICY: Fed Prepares Balance Sheet Options For Warsh)
DATA DOUBTS
The data task force faces potentially the steepest climb. Warsh argues that relying on public data is akin to driving using the rearview mirror. But adopting a shiny new dashboard of more forward-looking indicators would face a problem of optics.
Officials fear basing monetary policy decisions on non-public information risks damage to trust and could lead to the erroneous perception that the Fed holds secret information not available to investors, making market reactions to economic reports more volatile.
Staff economists' use of alternative data has also grown for years as the Fed folded in private statistics, granular spending data and its own surveys to sharpen its read on the economy. Like many private investors, the Fed has picked over proprietary and alternative datasets since the pandemic, but sampling biases and missing seasonal adjustments remain persistent hurdles.
Jul-22 15:53
The European Central Bank is set to leave policy rates unchanged Thursday, as policymakers take stock of a return to conflict in the Gulf region and surging energy prices, before what is likely to be an additional 25-basis-point rate hike in September.
Market pricing and economists are largely in line with recent ECB speakers in suggesting July will see the Governing Council leave rates on hold at 2.25%. Latest pricing sees only 1.5bp of hikes priced for tomorrow, but 23bp are priced for the September meeting.
The recent resurgence in energy prices could mean that some members of the Governing Council could this week make a more forceful argument for following up June’s 25bp increase with another hike this week, but they will almost certainly be in the minority. (See MNI SOURCES: Gulf Flare-Up Reinforces ECB September Hike Case )
NO GUIDANCE
Given President Christine Lagarde's June 29 Sintra speech stepping back from forward guidance and offering a newly defined "framework guidance", the official policy statement is unlikely to offer much from previous commitments to a data-dependent, meeting-by-meeting approach with full optionality and no set rate path. (See MNI SOURCES: ECB September Meeting 'Live' Despite Iran Deal)
However, Lagarde's description in the press conference of the balance of risks and how the inflation outlook compares to the staff's projections and scenarios could provide additional nuance.
Recent data has been fairly benign, providing the Governing Council with justification for a hold this week. Euro area inflation slowed to 2.8% in June and growth was a fairly solid 0.3% q/q from Jan-March when stripping out volatile Irish data. The ECB’s bank lending and access to finance of enterprise surveys this week showed little to suggest imminent second round inflation.
Jul-22 15:20
Federal Reserve officials will likely look through a recent spike in inflation, viewing it as a temporary product of passing supply shocks, and refrain from raising interest rates this year, former Fed Governor Stephen Miran told MNI.
“I still am inclined to think that they will do the right thing, which is to look through the temporarily higher inflation,” Miran said.
He said investors worried about a string of rate hikes are too focused on the hawkish dots in the June Summary of Economic Projections, as well as pronouncements from more hawkish members of the committee, particularly in light of Chairman Kevin Warsh’s light-touch approach on communications.
“The market is overkeyed to those dots, and I also think the inflation data are going to start coming in better over the remainder of the year,” Miran, now back at hedge fund Hudson Bay Capital, said in an interview.
“What's happened is the chairman has decided not to provide any forward guidance whatsoever, which means that only the people who are willing to provide forward guidance are able to communicate that guidance to the markets.”
Miran, who stepped down from the Fed’s Board of Governors in May, said he would have submitted a June dot calling for two rate cuts because he believes that price pressures are actually subdued.
Still, he concedes that “there are clearly people who want to hike,” adding that “they may end up cutting late this year if the inflation data come in well over the second half, but that would depend on the data. Certainly right now it seems a big hurdle.” (See MNI INTERVIEW: Fed Expected To Cut Rates Late In 2026- Ireland)
INFLATION MISMEASURMENT
A key element of Miran’s dovish view is his research on how the most widely used measures of inflation could be painting an overly hot picture that is not in keeping with reality, particularly with regards to portfolio management services and software prices.
“The PCE is measuring quantities and labeling it as prices because the stock market was up and AUM was up. That's not an actual price increase. Trends in the asset management industry have been in deflation for decades,” he said.
In software, he flagged a “composition bias" that overstates demand for software and accessories and extrapolates demand concentrated in AI to household spending more broadly. Miran noted the inversion of a longstanding trend of CPI being higher than PCE is indicative of some of those anomalies, which he thinks should forestall any policy reaction.
"A decision to pursue higher interest rates in order to compensate for measurement error to bring lower inflation elsewhere in the basket -- because the measurement error is an implicit reduction of the inflation target and it also effectively asks Americans to lose their jobs to offset statistical anomalies -- to me is a bit of a grotesque interpretation of the word stable prices," he said.
MONETARIST VIEW
Miran has just co-authored a paper that tries to rekindle interest in monetary aggregates among central bankers, noting that Warsh has pushed back against the idea that money does not matter for monetary policy.
“As I try to get a handle on how Chairman Warsh thinks, it became very clear to me that he's somebody who takes money supply seriously and monetarism seriously in a way that I think a lot of people at the Fed haven't in a long time,” he said.
His paper finds that rather than becoming less reliable over time, as Fed officials had concluded, monetary aggregates were simply not being measured adequately as the financial system evolved with the creation of savings vehicles like money market funds, which are money-like but not exactly cash instruments.
New measures developed by other economists try to weight the money supply by how “money-like” different types of financial instruments are. “When you do that, the models regain their predictive power,” said Miran.
Currently, those measures are showing monetary policy is close to neutral, the paper finds. “So the idea that it's somehow important to pull a Volcker when inflation is very likely going to normalize on its own accord is to me not the best policy.”
Jul-22 12:04
Renewed conflict in the Persian Gulf is consolidating the case for further tightening by the European Central Bank, Eurosystem sources told MNI, but while some hawkish Governing Council members are likely to make the case for a back-to-back rate hike this week after June’s move, waiting until September remains much more likely.
At least a few officials are expected to raise the argument for acting now, capitalising on the spike in oil prices to press for an earlier move than the September consensus implies, sources told MNI.
“I'm sure some of my more hawkish colleagues will be looking at perhaps doing what we may have to do now. They will argue 'if we think a September hike is necessary, lets hike now - why wait',” one national central bank source said. “It isn't a view I hold and I still see the vast majority of the GC as ready to wait for September.”
The view was echoed by another Eurosystem source, who “wouldn't be surprised if some of the hawks made a point of calling for a hike now rather than later.”
Still, the case for waiting remains stronger, the source said, casting doubt on any suggestion that data now portrays a significantly different inflation outlook to June’s.
“We are close to the baseline scenario, so no real surprises for us. We can sit back on our Framework Guidance and assess data over the summer,” another Eurosystem source said.
It is unclear whether any hawks arguing for a hike at Thursday's meeting would push strongly enough to record a formal dissent, which would break the Council’s recent run of unanimity, officials noted.
"Worst case scenario I could see a non-unanimous decision," one official said. "But my sense is that we need to project the impression of cooler heads being around the table and not people reacting to instant news." (See MNI INTERVIEW: ECB 'May Have To Do A Little Bit More' - Wunsch)
SEPTEMBER BASELINE
For most officials, the firmest analytical ground for policy decision will have been laid by September’s meeting, which will be accompanied by new staff projections.
“Certainly we believe another 25 basis points will be needed in September if nothing changes dramatically," one source said.
In the meantime, Thursday's messaging is expected to be tightly controlled, in line with the ECB’s insistence on its data dependent, meeting-by-meeting approach, and pointing to its three-pillar reaction function as well as the framework guidance outlined in President Christne Lagarde's Sintra speech as a template. Statement and press conference will emphases full optionality and no clear rate path ahead. (See MNI INTERVIEW: ECB Strategy For Uncertain Times -Kazaks)
Still, Lagarde is expected to keep September firmly in play for a possible rate hike, if only by not taking it off the table.
Though officials told MNI that a hike at September’s meeting is extremely likely, one cautioned against any clear signalling, due to the elevated uncertainty.
"Conditionality is key when discussing possible moves, as uncertainty at present sees wide variations from day-to-day, let alone week-by-week, or month to month" another policymaker said.
An ECB spokesperson declined to comment.
Jul-21 16:05
The European Union hopes to arrive at an understanding with China which allows it to protect its threatened industries and gradually reduce its excessive dependence on Chinese supply chains whilst also avoiding a damaging trade war, EU officials and people following talks told MNI.
The initial signs from Chinese officials following the launch of a consultation mechanism on trade and investment at the end of June are that Beijing might be prepared to consider such an approach, and perhaps to voluntarily limit some exports, with European officials explaining that it is only reasonable that they take measures given existential threats to their automotive, chemicals and machinery sectors in particular, they said. The recent announcement of 100,000 job losses at Germany’s Volkswagen has underlined how quickly China has risen to threaten Europe’s key industries both at home and in their major export markets.
A key part of the EU’s strategy will be the proposed Industrial Accelerator Act, which aims to boost manufacturing to 20% of GDP by 2035 and would introduce “Made in Europe” requirements for public procurement while overseeing foreign direct investment more strictly. In comments to the European Parliament last week, the European Commission's Chief Trade Enforcement Officer Denis Redonnet said that it seemed likely that safeguarding measures could be adopted in some cases without derailing the China dialogue, given that such actions are WTO compliant.
Redonnet’s comments suggested Commission backing for a kind of "managed, quota-based trade" relationship with China, said EU-Asia trade expert and Natixis Asia Chief Economist Alicia Garcia-Herrero. (See MNI INTERVIEW: Industry Unconvinced By EU China Strategy)
TRADITIONAL WEAPONS
The Commission’s traditional weapons of anti-dumping and countervailing duties to shield specific sectors also remain options, former senior Commission official and Bruegel Senior Fellow Ignacio Garcia Bercero told MNI, adding that one of the first sectors the EU could seek to protect in coming months is likely to be plug-in hybrid EVs.
"I heard also some parts of the chemical industry and part of the machinery sector. These seem to be the areas which are the core of European manufacturing and seeing the most rapid surge in imports,” Bercero said. (See MNI INTERVIEW: EU Needs 'Credible Threat' Against China)
The Commission’s drive for a consensual reduction in Europe’s trade imbalances with China comes after a debate within the EU of how to deal with Beijing, with France favouring a more aggressive approach but others including Germany, with its big investments in China, more concerned about preserving a trade relationship. Some countries, notably Spain, have also argued that Chinese direct investment in the bloc will be key to economic growth.
According to Redonnet, the EU aims to reduce dependence on Chinese supplies from levels above 90% in some sectors to 50% in coming years. Beijing must be aware that its 90% domination of some supply chains is a "double-edged sword," given the importance to China of Europe’s continued prosperity, an EU source close to EU-China trade developments told MNI.
"Sure, it gives them massive leverage but there would be ramifications in terms of global economic instability. It would also result in many of their other markets too seeking to diversify away from China,” the EU source said.
Senior Commission officials and their Chinese counterparts will continue technical-level talks through August, focused firstly on reconciling their interpretations of the current state of current trade flows before tackling the question of what to do about them. European Trade Commissioner Maros Sefcovic and Commerce Secretary Wang Wentao are set to meet in Beijing in October.
Jul-21 11:26
A stronger-than-expected boost from the artificial intelligence boom is likely to prompt the Bank of Japan to revise up its median fiscal 2026 GDP growth forecast from the 0.5% projected in April to between 0.5%-0.8% when the Board meets this month, MNI understands, although the final projection will depend heavily on movements in crude oil prices ahead of the meeting.
Bank officials had initially believed the AI boom was benefiting mainly large manufacturers, limiting its impact on overall economic growth. They now judge that smaller firms in regional areas are also seeing stronger demand related to AI, although the effect on capital expenditure and broader economic activity remains uncertain. At the same time, higher costs stemming from the weak yen and efforts to diversify sources of raw materials continue to increase financial pressure on businesses, weighing on corporate profits.
The BOJ believes the economy remains broadly on track, consistent with its June assessment that the risk of a significant slowdown had diminished compared with earlier this year.
Bank lending continues to expand steadily in nominal terms, but officials are closely monitoring whether the additional credit is financing productive capital investment in real terms, as firms have also been increasing investment in real estate and financial assets. While overall financial conditions remain accommodative, some smaller firms are facing rising borrowing costs, highlighting uneven financing conditions across the economy.
OIL PRICES
Lower crude oil prices compared with April are also supporting economic activity, although the bank is expected to maintain its view that downside risks remain. While the renewed conflict in the Middle East has increased uncertainty over the global economy and energy prices, keeping BOJ officials cautious about the outlook for growth and inflation, movements in crude oil immediately ahead of the July 30-31 policy meeting are also likely to influence the bank's updated GDP forecast. The BOJ is widely expected to leave the policy rate unchanged at 1.0%.
Jul-21 06:56
Federal Reserve officials are increasingly worried they will have to raise interest rates later this year despite cooler-than-expected June inflation readings, and even a single hot report could trigger a hike.
Last week's benign June data create some breathing room to hold off on a rate hike at the July 28-29 meeting, but it would likely take several months of consistent improvement in the inflation outlook in order to dissuade policymakers from raising rates. Meanwhile, a bad inflation number could trigger a hike by as soon as September.
A broad range of FOMC members is expressing impatience with the persistence of inflation, which has been above the 2% target for over five years and moving in the wrong direction for most of 2026. (See MNI INTERVIEW: Ex-Fed's Bullard Sees Several Rate Hikes Ahead)
PRICE PRESSURES BUILD
One factor driving these concerns is the surprising amount of inflation emanating from relentless demand for AI capital investments. A boom that first appeared to have dovish implications for monetary policy is now fodder for hawkish concerns – in particular, the prospect that demand in the sector could continue outstripping supply for years.
At the same time, despite tariffs, immigration curbs and geopolitical uncertainty, the labor market appears stable and near what the FOMC views as full employment. The drag on employment that many worry could be wrought by AI also has yet to materialize.
The Fed is heartened that the effect of tariffs on inflation was not as significant as feared, and most officials believe those impacts have already mostly been felt. But core inflation drifted higher in the spring, with a breadth of price pressures reminiscent of the Covid era, with elevated core services costs a particular source of concern.
The energy picture is also uncertain. Prices came down sharply after the brief cease-fire in Iran but have resumed their climb since hostilities restarted. Oil prices are unlikely to reignite core services inflation, but more data is needed to confirm this.
RENEWED COMMITMENT
Officials believe that concrete action in the form of tighter policy would underline Fed Chair Kevin Warsh’s repeated commitment to restoring price stability. That could mean a rate rise as early as September, even if the political calendar with a looming midterm election in November appears as a complicating factor.
While Warsh has made a concerted effort to reduce the amount of forward guidance the Fed offers on the path of rates, the tone of officials’ comments on the inflation outlook speaks to the momentum toward action.
“I have taken notice of data that show the risks to our dual mandate have shifted more toward price stability and away from employment,” Fed Governor Lisa Cook said in a speech last week, before the start of the pre-meeting blackout period. “While I will decline to predict the path of policy today, I will underscore that I am committed to returning inflation to our 2% goal.”
The Fed’s June Summary of Economic Projections showed a large jump in officials’ inflation forecasts – up to 3.6% from 2.7% for the PCE index – and a corresponding rise in the number of those penciling in one or more rate hikes for this year.
One complicating factor is that parts of the inflation outlook offer some measure of comfort. The decline in shelter costs, for instance, looks set to remain a drag on overall price growth. Wage growth is still above pre-pandemic levels but has gradually receded to levels the Fed sees as consistent with price stability.
Still, the onus remains on the next round of inflation reports to keep delivering positive surprises. That could be the last plausible line of defense against a near-term increase in the federal funds rate.
Jul-20 15:51
(Repeats story first published on July 17.)
Canadian exports are rebounding to new records a year after the U.S. imposed major tariffs, and the unexpected strength erodes the case for lower central bank interest rates as oil prices rise again, the chief economist of the government's trade finance bank told MNI.
"There isn't as much urgency around a rate cut, and it allows the Bank to sort of let it ride for a little bit to see which of the two risks is most urgent to deal with," Export Development Canada's Stuart Bergman said, predicting the central bank will stay on hold until late next year. "We're seeing the same thing frankly in the United States as well with respect to the decisions of the Fed."
Governor Tiff Macklem on Wednesday held his key lending rate at 2.25% and dropped language about potential for consecutive hikes or a cut, returning to language about being able to hold. He later told reporters the risk of hikes remains if oil prices feed into broader inflation, while noting exporters are benefitting from a strong U.S. economy and adapting to trade uncertainty.
"Exporters are figuring out ways to work around this new trade environment," Bergman said. "The Canadian economy is carrying a lot better than many people had feared." (See: MNI INTERVIEW: Resilience Keeps BOC On Hold- Ex Adviser Ragan)
GLOBAL RISK, CANADA REWARD
Canadian merchandise exports grew to a record CAD77 billion in May. The trade balance swung to a surplus of CAD4.2 billion from a deficit of CAD5.7 billion a year earlier.
While gains are concentrated in energy and gold there are signs of overall improvement. Even excluding the jump in oil and gold prices export volumes have climbed this year, and the share of firms filling out paperwork to have a tariff exemption under USMCA has doubled to more than 80%, Bergman said.
"There is enormous demand again for Canadian commodities," Bergman said, "given increased risk on the geopolitical risk side of things." Canadian leaders have also become motivated to develop the infrastructure needed to diversify exports to non-U.S. markets, he said. Non-U.S. exports rose 16% last year, he said.
Weakness among exporters hurt by U.S. tariffs is a prime reason some economists over the last year forecast a recession that would lead the Bank to cut rates. (See: MNI INTERVIEW: Canada Nowhere Near Recession- Ex BOC Adviser)
Economic output did shrink in the fourth quarter and stalled in the first quarter but the Bank lifted its second quarter forecast a full percentage point to 2.5% annualized. Bergman predicts Canada's economy will grow 1% in 2026 and quicken to 2.1% in 2027, including gains in business investment as firms adjust to the tariff hit.
MEXICO MORE AT RISK?
U.S. President Donald Trump is unlikely to abandon USMCA according to Bergman. While many people believe the failure to meet a July 1 deadline for a full renewal of the deal means it's up for a substantial review, Bergman says the agreement specifies more limited technical talks.
"Strong U.S. congressional and business support for the agreement, in my view, makes a unilateral U.S. withdrawal less likely," Bergman said.
Areas of contention appear limited to areas mapped out in prior discussions, he said, such as agriculture, finance, and entertainment. Trump has complained about Canada's dairy quota system and pressured Canada to remove a "Netflix tax" aimed at funding local artists.
Experts MNI has interviewed see little chance Prime Minister Mark Carney will succeed in removing major tariffs on steel, autos and aluminum. (See: MNI INTERVIEW: Carney-Trump Deal Will Include Tariffs-Chamber)
Canada may still do well compared with Mexico when it comes to Trump's desire to shield the U.S. from what he calls unfair competition from China, Bergman said. "It's been well documented that many U.S. imports from China, to the extent that they were closed off, were redirected through Mexico, and you can see it in the data," he said.
Jul-20 11:24
The People's Bank of China is likely to step up monetary easing this quarter after the Loan Prime Rate remained unchanged this month, as Q2 GDP fell below the government's target range and weak domestic demand continued to weigh on the economy.
Authorities held the LPR at 3.0% for the one-year tenor and 3.5% for the five-year tenor and above on Monday, marking the 14th consecutive month of unchanged rates. Both were lowered by 10 basis points in May 2025 after the PBOC cut its seven-day reverse repo rate – its key policy rate – by 10bp to 1.4% on May 8, followed by a 50bp reduction in the reserve requirement ratio on May 15.
Expectations for further policy rate and RRR cuts have risen after Q2 data highlighted mounting economic headwinds, with GDP growth slowing to 4.3% y/y – the weakest in more than three years and below the government's 2026 target range of 4.5-5.0%. (See MNI PBOC WATCH: July LPR To Hold On Cheap Loans And Inflation)
Zhang Ming, deputy director of the Institute of World Economics and Politics at the Chinese Academy of Social Sciences, told MNI the central bank is likely to cut both the policy rate and the RRR. Lower borrowing costs would reduce mortgage rates and support housing demand in first- and second-tier cities, a key step towards stabilising property prices nationwide, he said. Zhang also expects additional fiscal stimulus to be announced as early as the Politburo meeting later this month, including an increase in the quota for special treasury bonds. (See MNI INTERVIEW: China Likely To Announce New Fiscal Stimulus)
Q3 CUT
The slowdown in investment and consumption, alongside the prolonged property downturn, has significantly increased the need for counter-cyclical policy support, said Dong Ximiao, chief economist at Merchants Union Consumer Finance. Dong expects the PBOC to cut the policy rate by 10-20bp in the second half of the year, lowering the LPR by 5-10bp. He believes the central bank could ease policy at the end of Q3, or sooner if the upcoming Politburo meeting adopts a more supportive policy stance.
A further RRR cut also remains highly likely, helping reduce banks' funding costs and creating room for lower lending rates, Dong added.
Wang Qing, chief macro analyst at Orient Golden Credit Rating International, also expects a 10bp policy rate cut in Q3, followed by declines in the LPR and money market rates. Exports are unlikely to maintain their rapid pace of growth, while domestic consumption and investment require stronger policy support, Wang said. He added that the yuan has remained broadly stable and has strengthened modestly this year, providing favourable conditions for further monetary easing.
Jul-20 09:27Canadian exports are rebounding to new records a year after the U.S. imposed major tariffs, and the unexpected strength erodes the case for lower central bank interest rates as oil prices rise again, the chief economist of the government's trade finance bank told MNI.
"There isn't as much urgency around a rate cut, and it allows the Bank to sort of let it ride for a little bit to see which of the two risks is most urgent to deal with," Export Development Canada's Stuart Bergman said, predicting the central bank will stay on hold until late next year. "We're seeing the same thing frankly in the United States as well with respect to the decisions of the Fed."
Governor Tiff Macklem on Wednesday held his key lending rate at 2.25% and dropped language about potential for consecutive hikes or a cut, returning to language about being able to hold. He later told reporters the risk of hikes remains if oil prices feed into broader inflation, while noting exporters are benefitting from a strong U.S. economy and adapting to trade uncertainty.
"Exporters are figuring out ways to work around this new trade environment," Bergman said. "The Canadian economy is carrying a lot better than many people had feared." (See: MNI INTERVIEW: Resilience Keeps BOC On Hold- Ex Adviser Ragan)
GLOBAL RISK, CANADA REWARD
Canadian merchandise exports grew to a record CAD77 billion in May. The trade balance swung to a surplus of CAD4.2 billion from a deficit of CAD5.7 billion a year earlier.
While gains are concentrated in energy and gold there are signs of overall improvement. Even excluding the jump in oil and gold prices export volumes have climbed this year, and the share of firms filling out paperwork to have a tariff exemption under USMCA has doubled to more than 80%, Bergman said.
"There is enormous demand again for Canadian commodities," Bergman said, "given increased risk on the geopolitical risk side of things." Canadian leaders have also become motivated to develop the infrastructure needed to diversify exports to non-U.S. markets, he said. Non-U.S. exports rose 16% last year, he said.
Weakness among exporters hurt by U.S. tariffs is a prime reason some economists over the last year forecast a recession that would lead the Bank to cut rates. (See: MNI INTERVIEW: Canada Nowhere Near Recession- Ex BOC Adviser)
Economic output did shrink in the fourth quarter and stalled in the first quarter but the Bank lifted its second quarter forecast a full percentage point to 2.5% annualized. Bergman predicts Canada's economy will grow 1% in 2026 and quicken to 2.1% in 2027, including gains in business investment as firms adjust to the tariff hit.
MEXICO MORE AT RISK?
U.S. President Donald Trump is unlikely to abandon USMCA according to Bergman. While many people believe the failure to meet a July 1 deadline for a full renewal of the deal means it's up for a substantial review, Bergman says the agreement specifies more limited technical talks.
"Strong U.S. congressional and business support for the agreement, in my view, makes a unilateral U.S. withdrawal less likely," Bergman said.
Areas of contention appear limited to areas mapped out in prior discussions, he said, such as agriculture, finance, and entertainment. Trump has complained about Canada's dairy quota system and pressured Canada to remove a "Netflix tax" aimed at funding local artists.
Experts MNI has interviewed see little chance Prime Minister Mark Carney will succeed in removing major tariffs on steel, autos and aluminum. (See: MNI INTERVIEW: Carney-Trump Deal Will Include Tariffs-Chamber)
Canada may still do well compared with Mexico when it comes to Trump's desire to shield the U.S. from what he calls unfair competition from China, Bergman said. "It's been well documented that many U.S. imports from China, to the extent that they were closed off, were redirected through Mexico, and you can see it in the data," he said.
Jul-17 15:41About
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