Recession unlikely despite significant downside risks

While economic growth is weaker due to U.S. tariffs on Canadian exports and policy uncertainty, a recession remains unlikely, says Michael Sager, managing director and CIO for multi-asset and currency management at CIBC Asset Management.

Sager’s positive growth outlook is driven by several factors: previous Bank of Canada (BoC) rate cuts, additional rate cuts that he predicted over the coming 12 months, targeted fiscal policy stimulus and healthy consumer balance sheets. He also suggested tariff concerns will be resolved in due course.

“We have an expectation that we will see a revised trade deal between Canada and the U.S. in the next six months or so, which will help also to moderate some of the high current uncertainty that we see,” he said in an April 14 interview.

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

Sager suggested that while the BoC will likely remain on the sidelines as it assesses the outcome of tariffs on inflation, it will ultimately focus on growth through three 0.25% rate cuts over the coming year. He said targeted federal government stimulus is also necessary “to help support growth in the worst affected segments of the Canadian economy.”

Monitoring the labour market will be key, he added. While he expects unemployment to rise, “the magnitude of that increase in unemployment matters.”

So how will these factors impact markets?

“Heightened volatility, both in the economy and in markets, suggest that equities will continue to be challenged in coming months,” he said.

Sager favours Canadian and European equities over the U.S. due to unfavourable valuations south of the border.

“While stocks elsewhere will be hit by tariffs imposed by the U.S. government, these other markets tend to be less expensive and have more support from underlying improvements in organic growth fundamentals, and fiscal stimulus,” he said.

Germany, for instance, is committed to fiscal spending to support defence and infrastructure, which will help mitigate the negative impacts of U.S. tariffs Sager noted.

In Canada, tailwinds from the BoC’s cutting and targeted federal fiscal policy will be constructive, he added.

“We think the positives outweigh the negatives, and prefer Canada to the U.S.,” he said.

Meanwhile, the fixed-income market will “experience a push-pull between weaker growth, higher inflation, both due to tariffs, and then elevated policy uncertainty,” Sager said.

It’s a challenging environment for riskier fixed income, like high yield, where spreads could continue to widen, he warned. But he expects higher-quality fixed income could outperform.

“We probably lean towards bonds over equities for the time being,” he said. “But because the environment is so uncertain … our conviction around positioning is very low right now. So we’re staying close to benchmarks.”

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