Signs suggest Canada will avoid deep recession

The trade relationship between the U.S. and Canada remains a key consideration on economic growth, and will influence how Canadian assets perform this year, says Leslie Alba, head of portfolio solutions, Total Investment Solutions at CIBC Asset Management.  

“Tariffs and the uncertainty around it really have weakened the economic outlook for Canada,” she said in a May 1 interview. But she added that she remains “cautiously optimistic” Canada will avoid a deep recession in the next year.  

“We expect fiscal stimulus, monetary policy accommodation, and lower oil prices due to rising supply [from] OPEC and slowing global growth to really mitigate the negative impact of tariffs on GDP growth,” she said.  

Listen to the full conversation on the Advisor To Go podcast, powered by CIBC Asset Management. 

Alba added that an escalating trade war between Canada and the U.S. could as easily push the U.S. into recession. 

“That incentivizes U.S. policymakers to reach a revised trade agreement with Canada sooner than later,” she said. “And for this reason, our baseline outlook is for a U.S.-Canada trade deal within the coming months.” 

Alba noted while there might be an economic slowdown in Canada as trade negotiations continue, she expected growth to average 1% over the next four quarters.  

There are risks to that view, she said, including the Liberal’s minority election win, which could impact the federal government’s agenda and weaken Prime Minister Mark Carney’s political leverage in U.S. negotiations. 

“There’s [also] the risk that the federal government may underdeliver on some of its promises due to red tape and potential lack of expertise,” she said.  

Finding yield 

Tariff uncertainty is continuing to drive market performance, creating volatility and market swings, Alba said.  

“With global trade making up about 6% of global GDP, we expect market volatility also to remain elevated for at least the foreseeable future,” she said. To address volatility, Alba suggested positioning portfolios for the long term and diversifiying.  

Bonds, she said, remain “a dependable offset” during equity drawdowns. She pointed out that from the beginning of the year through April 11, the Bloomberg U.S. Treasury bond index in U.S. dollars delivered a positive return on 75% of the days that the S&P 500 index lost more than 175 basis points. 

Bonds are counter-cyclical to monetary policy, she noted. “We see bond prices rise when central banks cut rates to stimulate the economy. So investors should be able to find some comfort in diversification and in the yield coming from bonds,” she said, adding that corporate bonds do particularly well compared to equities during economic weakness.  

The key for investors when faced with uncertainty, she said, is to stick to a strategic asset allocation, remain calm and avoid the temptation to sell out of markets, and focus on long-term objectives.  

This article is part of the Advisor To Go program, sponsored by CIBC Asset Management. The article was written without input from the sponsor.