Over the past two years, we\u2019ve been living through a period of painful policy shifts designed to rebalance the economy in the wake of the post-COVID-19 sugar high. <\/p>\n
The most noticeable change has been the effective freeze on net immigration implemented last year. Net immigration has been calibrated to run at around replacement level through 2027. This pause is giving local economies time to adjust to a national population that surged by over 7.8 per cent between 2021 and 2024. From 2028 onwards, immigration will rise to levels designed to offset Canada\u2019s aging population and skills gaps in a system more closely resembling pre-COVID-19 policies.<\/p>\n
While immigration recalibration was clearly necessary, it has not been costless. The decline in migrant-related demand, coinciding with a structurally higher interest rate environment, has stifled house price growth after a two-decade-long bull market. This is welcome news for those focused on improving housing affordability, but the pace of new development is weak, and the sector is no longer a strong driver of employment growth. <\/p>\n
Canada has also maintained a less expansionary fiscal policy of late than our southern neighbour \u2014 a prudent decision, which has nonetheless held back our growth relative to America\u2019s. Despite that fiscal boost, the sluggish state of the U.S. economy (outside the AI boom) has not provided Canada with much support from external demand or capital inflows during this adjustment phase. Nor have global commodity prices been particularly helpful until recently.<\/p>\n
As Canada has taken its economic medicine, the Mark Carney government has spent its first year in power laying the groundwork for a period of economic development centered on large infrastructure projects, mineral extraction, and a more supportive regulatory environment for business development. <\/p>\n
Some green shoots are showing through as the investment case for Canada has improved, and Canada\u2019s potential as a sleeping energy giant with the healthiest public balance sheet in the G7 has dawned on both the local and global business community. <\/p>\n
But \u2013 and this is a big but \u2013 there is one major obstacle preventing those green shoots from sprouting. Canada\u2019s favourable access to U.S. consumer markets (over 85 per cent of our exports to the U.S. are currently tariff-free) is under threat as the CUSMA trade deal, signed during the first Trump administration to replace NAFTA, comes under review and renegotiation this summer. <\/p>\n
Any firm with a significant American client base is holding back on investment and hiring decisions until it has certainty about its market access.<\/p>\n
The Prime Minister\u2019s \u201cforward guidance\u201d address on YouTube earlier this month looked like an attempt to steel the country for a bumpy path in the upcoming trade negotiations, and perhaps to soften the ground domestically for some concessions to secure a deal. <\/p>\n
Despite this, there are reasons to be optimistic that a good deal for Canada can be secured. The CUSMA negotiations may end up more political theatre than fundamental economic realignment. <\/p>\n
With the November U.S. midterm elections looming, there is little incentive for President Donald Trump to fight the overwhelming support for the status quo from Republicans in Midwestern swing states. At the same time, he will want to announce a deal before elections; otherwise, he would risk his ability to control the terms of any new deal with a Democrat-controlled House and possibly also Senate opposing him. <\/p>\n
Cutting through the inevitable noise that the Trump administration will generate, the most likely outcome is a near-status-quo deal with minor concessions before the November midterms. <\/p>\n
This would pave the way for a surge in pent-up economic activity in Canada, in turn lifting growth back into the 2 per cent-3 per cent range and significantly improving per-capita income. <\/p>\n
Meanwhile, the 30-40 per cent increase in global oil prices that has so far been the upshot of the war in Iran will not bypass Canada. Headline CPI inflation is set to rise above the Bank of Canada\u2019s 1-3 per cent control range over the next six months. <\/p>\n
This looks like it will be a transitory inflation shock, with inflation falling back to target once the step-change in oil prices has moved through the economy. Underlying price pressures are moderating steadily and will not be affected by the war. Shelter costs, for instance, are tied to the slow-leak housing market, and core services costs are driven by a labour market that remains relatively loose. <\/p>\n
This temporary increase in inflation is very different from what the U.S. will experience. There, the oil price shock is adding to an already inflationary environment. Delayed tariff costs are only now being passed on to consumers, with producers using oil prices to cover margin recovery. Also, wage growth is rising again as the AI utility investment boom meets emerging pockets of labour shortages in immigration-starved sectors.<\/p>\n
Putting this all together, I think a structural change in relative interest rates is emerging. The Bank of Canada will be able to \u201clook through\u201d higher inflation, keeping rates low to support the ongoing economic transition. The Fed will not be so lucky, so we will not see the convergence of near-term (1-year and shorter) rates that many expected. Over the medium and longer-term, Canada\u2019s improved growth prospects (assuming a positive outcome on CUSMA) argue for stronger relative equity returns and a stronger loonie, accompanied by higher long-term interest rates, steepening the yield curve compared to its current position and making longer-dated government bonds less attractive. <\/p>\n
For those willing to carry some trade negotiation risk, now looks like a good time to position for a \u201cbullish Canada\u201d trade. <\/p>\n
Dylan Smith is the founder of arcMacro, a research and advisory firm specializing in macroeconomic analysis for institutional and private market investors.<\/p>\n","protected":false},"excerpt":{"rendered":"Over the past two years, we\u2019ve been living through a period of painful policy shifts designed to rebalance…\n","protected":false},"author":2,"featured_media":639422,"comment_status":"","ping_status":"","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[11],"tags":[901,888,902,879,877,903,45,49,48,876,895,896,891,878,875,46,549,295,894,887,914,880,881,893,889,890,884,904,885,909,910,912,907,911,905,908,882,898,899,714,897,906,865,61,900,892,886,883,913],"class_list":["post-639421","post","type-post","status-publish","format-standard","has-post-thumbnail","category-economy","tag-alberta","tag-arts-news","tag-bc","tag-breaking-news","tag-breaking-news-video","tag-british-columbia","tag-business","tag-ca","tag-canada","tag-canada-news","tag-canada-sports","tag-canada-sports-news","tag-canada-trafficcanada-weather","tag-canadian-breaking-news","tag-canadian-news","tag-economy","tag-education","tag-environment","tag-federal-government","tag-foreign-news","tag-globe-and-mail","tag-globe-and-mail-breaking-news","tag-globe-and-mail-canada-news","tag-government","tag-life-news","tag-lifestyle","tag-local-news","tag-manitoba","tag-national-news","tag-new-brunswick","tag-newfoundland-and-labrador","tag-northwest-territories","tag-nova-scotia","tag-nunavut","tag-ontario","tag-pei","tag-photos","tag-political-news","tag-political-opinion","tag-politics","tag-politics-news","tag-quebec","tag-sports-news","tag-technology","tag-travel","tag-trudeau","tag-us-news","tag-world-news","tag-yukon"],"_links":{"self":[{"href":"https:\/\/www.newsbeep.com\/ca\/wp-json\/wp\/v2\/posts\/639421","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.newsbeep.com\/ca\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.newsbeep.com\/ca\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/ca\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/ca\/wp-json\/wp\/v2\/comments?post=639421"}],"version-history":[{"count":0,"href":"https:\/\/www.newsbeep.com\/ca\/wp-json\/wp\/v2\/posts\/639421\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/ca\/wp-json\/wp\/v2\/media\/639422"}],"wp:attachment":[{"href":"https:\/\/www.newsbeep.com\/ca\/wp-json\/wp\/v2\/media?parent=639421"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.newsbeep.com\/ca\/wp-json\/wp\/v2\/categories?post=639421"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.newsbeep.com\/ca\/wp-json\/wp\/v2\/tags?post=639421"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}