Mid-year forecast roundup: What a drag

As the second half of 2025 gets underway, investors looking for a vote of confidence from Canada’s bank forecasters won’t love what they’re hearing. They won’t hate it either though — the outlooks aren’t all bad. A roundup of mid-year investor notes finds Bay Street in a cautiously optimistic mood, even as U.S. President Donald Trump dictates global trade deals via form letter.

“Uncertainty around U.S. tariffs remains, but the worst-case scenario has largely been ruled out as progress toward trade deals is being made,” wrote Eric Savoie, senior investment strategist and Daniel Chornous, global chief investment officer at RBC Global Asset Management Inc. in the firm’s latest Global Investment Outlook.

The pair outline a base-case scenario in which economic growth slows and inflation rises, but both equity and bond markets offer potential gains.

“In our view, tariffs are set to exert a substantial drag on economic growth over the second half of 2025, but probably not to the extent of causing a global recession,” they wrote. “GDP growth in 2025 is forecast to be modest at sub-2% across the developed world. A mild 2025 slump triggered by tariffs is also expected for most emerging markets.”

Savoie and Chornous explained that inventory stockpiling softened the effect of tariffs in the first half, but that’s unlikely to continue in the third and fourth quarters.

Other highlights:

• The U.S. dollar will remain weak. “The president’s second term may well come to mark the beginning of a multi-year dollar decline and a momentous shift for foreign exchange markets, impacting the broader investment landscape.”
• Government bonds have potential. “With inflation relatively stable, the increase in yields was mostly from rising real interest rates. … However, further increases in real rates are likely limited over the long term due to structural factors such as an aging population and reduced growth potential as developing economies bow under the burden of much higher debt. As a result, the U.S. 10-year yield at 4.4% is appealing …”
• Their recommended asset mix includes a minor tilt to equities. Just one percentage point — RBC suggests holding 61% equities, 38% fixed income and 1% cash.

TD: Waiting on Washington

“The global economy continues to ride the tariff rollercoaster,” according to a June 17 note from TD Economics, “and our economic forecast hinges on assumptions about where the train cars will end up.”

TD is forecasting a mid-year contraction in the Canadian economy and a rise in unemployment. The bank predicts a 2% drop in GDP in Q2, a 1% drop in Q3 and then a 1.1% rise in the year’s final quarter. That would put Canada in positive territory for the year, with 0.9% GDP growth. The unemployment rate will rise to 7.3% in Q4, according to TD.

“The world economy continues to soften, downshifting from 3.2% [growth] in 2024 to 3% this year and 2.8% in 2026 as the natural cyclical slowing coincides with the impact of tariffs,” TD wrote. “Underneath these figures, the markdown in North American growth is largely offset by a stronger start to the year in Europe and Asia. China’s economy is set to cool from 5% last year to 4.6% this year, unaltered from our prior forecast. We continue to expect that the negative impact from U.S. tariffs on Chinese activity will be offset by fiscal or monetary stimulus.”

BMO: Canada in the crosshairs

“He was at it again this week,” wrote Robert Kavcic, senior economist and director, economics at BMO Economics in a note to investors on July 11.” President Trump sent out tariff letters to nearly two dozen countries, seeking more balanced and fair trade. … After a period of apparent progress, Canada was in the crosshairs again after President Trump threatened 35% tariffs as of August 1st.”

Kavcic noted that Canadian and U.S. stock markets set record highs amidst all of this. It’s possible “this is yet more noise, and another kick of the can down the road to a later date.”

But any hopes Canadian investors had that Prime Minister Mark Carney was going to succeed in reestablishing free trade with the U.S. appear certainly dashed.

“[I]t’s looking less and less like the endgame here will be one without some sort of lasting tariff on Canada,” Kavcic wrote.

He described the Bank of Canada’s policy rate as “actually very ‘normal,'” and noted that bond yields and GIC rates are “offering decently positive real returns.”

Scotiabank: Recession unlikely

The Canadian and U.S. economies will slow this year, but not contract — at least not for two consecutive quarters, according to a June 11 note by Jean-François Perrault, senior vice-president & chief economist at Scotiabank.

“Trade and policy uncertainty continue to dominate the outlook despite some backtracking in the tariff war between China and the United States,” Perrault wrote. In addition to trade policy, fiscal policy “has been putting upward pressure on longer-term interest rates, and the attractiveness of U.S. dollar assets for investors, leading to a depreciation of the U.S. dollar.”

The bank is forecasting 1.4% GDP growth this year, followed by 1.1% growth in 2026. That said, Perrault wrote that this depends a great deal on the trade front. “While we continue to think a recession will be avoided in Canada and the U.S., this is not a high confidence call,” Perrault wrote.

“Inflation expectations are high for the next 12 months,” he wrote. “Wage growth exceeds productivity, and we know that supply constraints pose additional risks to inflation.”

Watch for core inflation of 2.6% by year’s end, followed by 2.2% in 2026.

CIBC: Clear as mud

Avery Shenfield, managing director and chief economist of CIBC Capital Markets wrote that “the future of U.S. trade policy is as clear as mud,” in his July 14–18 edition of The Week Ahead.

Still, the bank’s forecast is based on Ottawa finding its way to a trade deal with Washington — one that maintains the current deal’s carve-outs. “But judging by talks with other countries,” Shenfield wrote, “we’re likely to achieve only very partial gains in terms of relief from sectoral tariffs.”

Shenfield noted a bit of good short-term news in his note. A cool domestic economy is keeping inflation in check, and the loonie’s strength relative to the greenback is softening tariff impacts.