Signs suggest we’re ‘on the cusp’ of Canadian growth

Text transcript

Welcome to Advisor to Go, brought to you by CIBC Asset Management, a podcast bringing advisors the latest financial insights and developments from our subject-matter experts themselves. 

* * * 

Michael Sager, managing director and CIO of the multi-asset and currency management team, CIBC Asset Management 

* * * 

We’ve certainly experienced a slowing in global GDP growth in the past couple of quarters, and that’s been led by a weakening of activity in the U.S. economy. Overall, though, activity, whether in the U.S. or in the global economy in aggregate, has remained resilient and probably a little bit better than was thought likely at the onset of the tariff war in spring of 2025.  

So that’s the broad situation. It’s slower growth than would have been the case, but it’s okay, and that means that it’s okay for equities and risky assets, broadly speaking. Tariff risks and related policy uncertainty emanating from the U.S. certainly remain high and are important drags on activity by themselves over the next couple of quarters.  

And if we think about where that drag on growth from tariffs and uncertainty is going to be biggest, well, it will be the U.S., which sounds kind of counterintuitive but makes sense when you think about the fact that it’s the U.S. that has chosen to fight a trade war on all fronts. And so the biggest hit to growth will be in the U.S.

Elsewhere — and this is why we’re still relatively constructive on the global economy — the impact on economic activity from tariffs, that negative impact, is likely to be mitigated by higher fiscal spending in Canada, in Europe and China, as well as more policy easing from central banks. So as a result, we do expect the global economy to avoid a recession, and as I said at the top, that economic conditions will remain broadly supportive of equities and risk assets, even though we are in the middle of a slowing. 

* * * 

So let’s turn to Canada and think about how the election, and the results of the election impacted the outlook for the Canadian economy. I think the bottom-line conclusion is that the results of the election are likely to be positive for the economic outlook in Canada. Right now, economic activity is weak. We don’t get the data for the second quarter until well into Q3, but Q2 is likely to be the weakest point of the cycle for Canada. GDP is very soggy. The unemployment rate has risen quite meaningfully.  

So I think it’s clear at the moment, the economy is not doing particularly well. But there’s reasons to think that we’re on the cusp of a gradual improvement. Certainly, tariff risks remain. But here we continue to think that a trade deal with the U.S. is coming, which means that the aggregate tariff rate applied to Canadian exports to the U.S. actually will be quite low.  

In addition, we do think there’ll be significant policy support. There is continued positive real-wage growth, and both of those will be important tailwinds to economic activity, helping the Canadian economy to recover and growth to strengthen as we move through the next four quarters.  

And so specifically, as a result of the election from a couple of months ago, we’re going to get quite significant government fiscal policy support, and that support will be quite targeted, which makes it particularly impactful. For instance, we’ll see more government spending to at least partially alleviate housing supply constraints, targeted spending to improve infrastructure and productivity, which has been very poor for a number of years, and targeted spending to help diversify away from Canadian reliance upon the U.S. economy at least at the margin.  

So if you put all of those together, yes, there’s a negative hit to growth coming from tariffs, but we think the policy to support fiscal and more Bank of Canada rate cuts will probably almost offset that negative tariff impact, and will be an important tailwind to the recovery that we expect. That recovery will likely be very helpful to Canadian equities, relative to U.S. equities for instance. 

* * * 

We’re not calling for an abrupt change in the status of the U.S. dollar. In fact, if you look at the broad usage of the dollar in international transactions over the last quarter century, it hasn’t changed. So despite repeated calls for a loss of global dominance, the dollar is as dominant as it ever was. But at the margin, clearly, something is happening, and investors have grown more concerned regarding the quality of U.S. policy making, the sustainability of U.S. government debt and other factors.  

And you can see that concern in a breakdown of traditional correlations, whether it’s between the level of the U.S. dollar and the level of U.S. Treasury yields. A clear break in that relationship. Or in the correlation between returns to the dollar against the Canadian dollar and local equity returns. Again, a clear change in the correlation. So at the margin, something is deteriorating in the status of the dollar. But we don’t want to over emphasize how big that change is in a short period of time. So that’s one aspect.  

And then, the U.S. dollar is clearly expensive, even though in the first six months it weakened by about 10% on a broad basket. It’s still expensive and likely to weaken. The U.S. economy is losing its cyclical growth leadership. The Fed is likely to become less hawkish, and the rest of the global economy, as I already talked about, is likely to recover faster than the U.S. over the next few quarters. Put those pieces of the puzzle together, they suggest a weaker dollar. So that’s our outlook.  

And so we think about the Canadian dollar today, we’re trading at $0.73 today, being the 10th of July, we think that the Canadian dollar can easily appreciate to around about $0.78. So [a] high single-digit increase in the value of the Canadian dollar against the U.S. Again, that relates to what’s happening in the underlying economy: a gradual slowdown in the U.S., a gradual recovery in Canada. Same story in Europe, where we expect the euro to continue to strengthen, for instance. So the outlook that we have for a weaker U.S. dollar is symptomatic of our view for the cyclical economic outlook. A strengthening rest of the world, and a weakening U.S. economy. 

* * * 

Our view of a modest growth rate for the global economy this year is broadly positive for equity markets and risk assets. So that’s the first opportunity. Definitely keep invested and stay focused on the opportunity that equities broadly offer.  

Within that there are, of course, relative opportunities. We think that Canada and EAFE are relatively attractive. Within the U.S., we like tech. We think that along with the global economic cycle, we think the global tech cycle has positive legs still. And, really, the most dominant place to get access to the up tech cycle that we expect remains the Mag Seven.  So U.S. tech remains positive. We’re neutral on the remainder of the S&P, the 493, as it were.

So U.S. tech, we’re positive. Canadian equity, we’re positive. EAFE, we’re positive. Less attractive from fixed income, given our view on the economy, although within that U.S. Treasuries are probably more attractive, given that there’s a bigger opportunity for yields to fall in the U.S., given the backup over previous months, and therefore for prices to rally.

* * *

This program is intended for Advisor Use Only. The views expressed in this material are the views of CIBC Asset Management Inc., as of the date of publication unless otherwise indicated, and are subject to change at any time. CIBC Asset Management Inc. does not undertake any obligation or responsibility to update such opinions. This material is provided for general informational purposes only and does not constitute financial, investment, tax, legal or accounting advice, it should not be relied upon in that regard or be considered predictive of any future market performance, nor does it constitute an offer or solicitation to buy or sell any securities referred to. Individual circumstances and current events are critical to sound investment planning; anyone wishing to act on this material should consult with their advisor. Forward-looking statements include statements that are predictive in nature, that depend upon or refer to future events or conditions, or that include words such as “expects”, “anticipates”, “intends”, “plans”, “believes”, “estimates”, or other similar wording. In addition, any statements that may be made concerning future performance, strategies, or prospects and possible future actions taken by the fund, are also forward-looking statements. Forward-looking statements are not guarantees of future performance. These statements involve known and unknown risks, uncertainties, and other factors that may cause the actual results and achievements of the fund to differ materially from those expressed or implied by such statements. Such factors include, but are not limited to: general economic, market, and business conditions; fluctuations in securities prices, interest rates, and foreign currency exchange rates; changes in government regulations; and catastrophic events. The above list of important factors that may affect future results is not exhaustive. Before making any investment decisions, we encourage you to consider these and other factors carefully. CIBC Asset Management Inc. does not undertake, and specifically disclaims, any obligation to update or revise any forward-looking statements, whether as a result of new information, future developments, or otherwise prior to the release of the next management report of fund performance. Past performance may not be repeated and is not indicative of future results. The material and/or its contents may not be reproduced without the express written consent of CIBC Asset Management Inc. ^® The CIBC logo and “CIBC Asset Management” are registered trademarks of CIBC, used under license.