Uncertainty expected to slow growth early in 2025

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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. 

Benjamin Tal deputy chief economist, CIBC.  

The question is, to what extent 2025 will be a good or a bad year from a macro perspective, and I suggest it will be a tale of two halves.  

The first half will continue to be relatively weak. In fact, we don’t see the economy growing in any significant way until the middle of 2025. In the second half of the year, things will start to improve for a few reasons.  

One, the magic of low interest rates will start working, impacting the consumer and businesses. Also, I think that the uncertainty about the Trump administration will ease a little bit, and that will add some momentum to the economy. So overall, I suggest it will be a tale of two halves.  

Expect relatively weak economy with GDP per capita actually going down over the next six months. Beyond that, some improvement going into 2026. That’s the story, more or less.  

The question is, to what extent the Bank of Canada will continue to ease? Is the economy weak enough to continue easing? What’s happening with inflation? And the most important story is what the Fed in the US is going to do. And of course, the Bank of Canada cannot divorce itself from the Fed for a long duration.  

So if the Fed in the US does not cut interest rates, the Bank of Canada will be limited in its ability to continue cutting.  

I believe that if you look at the overall story, clearly the Bank of Canada should continue to cut interest rates into 2025 given the fact that the inflation is basically at target, the economy is definitely slowing, we are in a per capita recession, and I think that the Fed will continue to cut interest rates, allowing the Bank of Canada to continue cutting.  

We see the Bank of Canada continuing to cut Interest rates by the end of 2025 or even the third quarter of 2025. We see interest rates, the Bank of Canada rate falling to about 2.25 or maybe two and a half.  

Now, if we have a situation in which the Trump administration introduces a lot of negative sentiments regarding the market and the Canadian economy, including tariffs, this means that the Bank of Canada will have to support the economy even more and might take interest rates below 2%.  

At this point, I see the Bank of Canada stopping at close to 2%.  

The question is, to what extent inflation is a factor that will continue to impact the psyche of the Bank of Canada? My short answer is that inflation at this point is irrelevant.  

In fact, the Bank of Canada itself is telling us that the risk of going below 2% is as high as going above 2% which means that we basically won the war against inflation.  

We have to remember that if you look at overall inflation minus interest payments on mortgages, it’s already has been below 2% for about few quarters. So I think that inflation is no longer an issue. I think that the Bank of Canada made it very clear that it was never, never about inflation. It was always about the cost of bringing inflation down to 2% and this cost, by raising interest rates too much, led to a per capita recession.  

I believe that inflation will not be a relevant story. We are going to stabilize at about 2% allowing the Bank of Canada to continue to cut Interest rates. 

There is no question that the political arena is impacting the economy in a very significant way. South of the border, we have Trump administration about to take office that will introduce significant uncertainty to the market, and we have to remember that when it comes to Trump, the goal, the aim is uncertainty and the tool is chaos.  

I think that they would like to see uncertainty in the market, because that’s basically helping their agenda.  

In Canada, clearly, we are going to have elections coming. I believe the election will be April, May of this year. This is going to be a significant change. Our working assumption, based on the assessment, is that it will be a majority Conservative government. It’s a premature to suggest what the differences will be. We know the few things that the conservative are willing to do, but nothing that is significant enough to change the macro economic story from a short period of time.  

So overall, I suggest that clearly, the elections will be a factor that will introduce uncertainty to the market, but I don’t think it would be a game changer. 

The housing market has been the center of attention for many, many years, and clearly nothing is going to be different in 2025.  

I believe that 2025 when it comes to housing will be a tail of the two markets.  

The low rise segment, the detached segment of the market, is still going to be relatively okay. It’s still okay now it’s basically in a balanced condition. It will not be a buyer’s market, it will not be a seller’s market, it will be an okay market, not too much to write home about.  

However, the condo market, the high rise market, will continue to struggle. In fact, this market currently is in a recession. Sales are going down dramatically. Pre sell activity is basically dead. Developers cannot make money, and therefore they are not building. And investors are out of the market, because roughly 80% of them are in negative cash flow, so you don’t have demand. And clearly we still have more supply coming, because we have to complete buildings that we started two years ago. So we have more supply coming, not demand. And therefore prices are going down and will continue to go down over the next six months.  

So the condo market is relatively weak.  

However, however, however, it’s very important to remember that at this point we are not really building anything new. Two years from now, you will have a situation in which investors will be back because interest rates are going to be lower than they are now. I think that the market will recover and there will not be supply, because this supply is not being built now. The supply that should be ready two years from now is not being built now, therefore, there will be lack of supply two or three years from now.  

So the point that I’m making when it comes to the condo market is that this is a buyer’s market now. There is a window of opportunity. If you are in the market for a condo, this is your time in a year or two years from now, there will not be enough supply, demand will rise, and we’ll see prices rising again.  

So it’s a tale of two markets. The low rise segment is doing okay. The high rise segment is in a recession. There is a window of opportunity for the next year. Beyond that, it will be a seller’s market again.  

When it comes to the overall market assessment of housing activity by region, I think that clearly it’s a location, location, location story.  

The most expensive centers, namely Vancouver and Toronto, will see the most significant decline in prices in the condo market, because they have been very expensive for a long period of time. When it comes to Alberta, I believe that the market there will do fine. We simply have a lot of demand coming, demographically speaking, not enough supply. But again, in Toronto and Vancouver, I see a situation in which the condo market will continue to be in a recession for the next year or so. Eastern Canada, I see some weakening in activity after a very strong growth over the past few years.  

So it really depends where you live, but overall, the market will be better in the second half of the year, as opposed to the first half of the year. 

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