Canada’s economy primed for a comeback

After a challenging 2024 marked by weak growth in the labour and housing markets, the Canadian economy is set for a rebound in 2025, says Michael Sager.

On this week’s episode of the Advisor To Go podcast, the managing director and CIO for multi-asset and currency management at CIBC Asset Management said, “We’re quite upbeat on Canada and Canadian growth.” 

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Sager attributed much of this optimism to the Bank of Canada’s aggressive interest rate cuts over the past year, which he said should fuel growth in the months ahead.

“The Bank of Canada has been the most aggressive easing central bank in developed markets, and we think that’s going to pay dividends as we move into 2025,” he said. 

One of the key sectors expected to lead the recovery is housing, Sager said. After a prolonged slump that began in 2022, the market is finally showing signs of improvement. 

“Residential construction has been in recession since 2022,” he said, “but building permits are already pointing to a rebound.” 

Nevertheless, he said, Canada’s housing shortage remains a pressing issue, and the sector’s heightened sensitivity to interest rates could amplify its impact on overall economic growth.

The economy’s recovery is also expected to be supported by resilient consumers. He said that while the labour market remains soft, lower inflation has helped boost real growth, and households appear financially prepared for the wave of mortgage renewals expected this year and next.

On the challenging side, Sager noted that external risks, particularly potential U.S. tariffs, could threaten Canada’s recovery. 

“To the extent that we do see a significant increase in tariffs, that would be an important downside risk to our positive view on growth,” he said. Such measures could prompt further rate cuts from the Bank of Canada, potentially offsetting some of the progress.

On the currency front, Sager said the U.S. and Canadian dollars will likely follow diverging paths in 2025. 

The U.S. dollar is expected to remain strong thanks to “good growth, sticky inflation and more conservative monetary policy,” he said.

Meanwhile, the Canadian dollar faces near-term challenges from slower economic recovery, aggressive monetary easing and trade uncertainties. Trading near $1.44 USD/CAD in January, he said the currency could weaken further before stabilizing. 

“The risk is it goes a little bit weaker … and perhaps up towards $1.50 before ultimately, from a long-term perspective, strengthening,” Sager said.

In terms of investments, Sager said both equities and bonds present opportunities in 2025. 

Corporate earnings should drive gains in the stock market, particularly in North America. He said, “Corporate earnings are the primary driver of equity returns, and we definitely think the balance of risks favours continued moves higher in equity markets.” 

Canadian equities, at least in Canadian-dollar terms, are expected to outperform their U.S. counterparts due to better valuations.

Bonds are also poised for solid performance, Sager said, with yields much higher than in recent years. He noted that U.S. 10-year Treasury yields should stabilize within a range of 3.25% to 5%, providing an attractive opportunity for investors. 

“[Given] starting yields and our cyclical outlook, we’re positive on bonds,” he said, though he noted a slight preference for global bonds over Canadian bonds due to higher yields abroad.

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