report<\/a>.<\/p>\nCapping immigration \u201cresulted in negligible population growth in the second quarter and this trend will continue in 2026 given the government\u2019s downsizing of its targets,\u201d she says The result of which could be a double whammy \u2013 of crimped consumption and a deteriorating labor market.<\/p>\n
\u201cWith both employment and the labor force softening, the unemployment rate, which hit a recent high of 7.1% in August, is unlikely to move much higher, [but] labor market conditions will remain strained in the near-term,\u201d she warns.<\/p>\n
Against that backdrop, Deloitte\u2019s Desjardins forecasts real GDP to gain 1.3% this year and 1.7% next year.<\/p>\n
A Rebound on The Horizon<\/p>\n
Despite a grim forecast for the near-term, some observers expect things to start looking up in 2026.<\/p>\n
Deloitte\u2019s Desjardins says the groundwork is laid for better prospects in 2026.<\/p>\n
\u201cThe Bank of Canada is expected to provide some additional stimulus to boost consumer and business confidence,\u201d she says.<\/p>\n
Although sector-specific tariffs will continue to impact manufacturing industries, Canada is facing low overall average tariffs, compared to other countries, which \u201cis minimizing the size of the economic damage,\u201d she says.<\/p>\n
The outlook for a pickup in growth next year is also underpinned by the prospect of increased \u201cclarity on the fiscal front, monetary stimulus and the expectation that the trade sector adjustments will largely be behind us,\u201d Desjardins says.<\/p>\n
Meanwhile, Desjardins\u2019 Tiago Figueiredo expects the Canadian economy to undergo some notable structural changes in 2026. \u201cWith globalization under pressure, economic growth is set to be more concentrated in the domestic economy,\u201d he says.<\/p>\n
A key factor that could drive Canada\u2019s medium-term growth is the Carney government making good on its promise of increased defense and infrastructure spending.<\/p>\n
\u201cWe\u2019re past the point of bold declarations,\u201d says Figueiredo, adding that \u201cwhat will matter going forward is the nitty-gritty of executing on these projects.\u201d<\/p>\n
Most of the pickup in the \u201c[economic] activity we\u2019ve penciled into 2026 is driven by public investments,\u201d he adds.<\/p>\n
Citi\u2019s Clark strikes a contrarian note though in expecting Canada\u2019s economic woes to persist.<\/p>\n
\u201cI think the slowing in demand will be with us into 2026,\u201d she says, stressing that the \u201coutput gap is already widening further with the unemployment rate rising.\u201d<\/p>\n
Bright Prospects for the Bond Market<\/p>\n
The fourth-quarter is expected to be a solid quarter for Canadian fixed income. With growth softening and inflation pressures receding, the odds are high that the Bank of Canada continues its rate-cutting cycle.<\/p>\n
\u201cLower and declining inflation and lower and declining [economic] growth are both very positive for government bonds,\u201d says Konstantin Boehmer,\u202fhead of fixed income and portfolio manager at Mackenzie Investments.<\/p>\n
\u201cAbsent a truly game-changing federal budget, which we do not expect, the disinflation and weak-growth trend should persist, supporting bonds.\u201d<\/p>\n
A game changing budget, he says, would comprise ingredients that increase Canada\u2019s economic strength.<\/p>\n
These could include functional transportation for people and goods, reliable and affordable grid and energy systems, faster approvals of productive projects, substantial investments in schools and trade skills, digital infrastructure that is modern and secure, collectively driving private capital to follow.<\/p>\n
Boehmer also points to the divergence between US and Canada monetary policies, which has led to \u201cCanadian bonds outperforming US bonds, especially those under 10 years of maturity.\u201d<\/p>\n
He sees attractive opportunities for bond investors beyond the fourth-quarter, through 2026. \u201cWe\u2019re constructive on high-quality bonds in Canada, particularly government bonds in the front end and belly of the curve [out to about 10 years],\u201d he says.<\/p>\n
Long-dated US inflation-linked bonds are also \u201cinteresting investments,\u201d he notes.<\/p>\n
Further afield, Boehmer is particularly optimistic about opportunities in \u201clocal-currency emerging markets, especially Mexico, Brazil, and South Africa, where real yields and policy credibility remain appealing.\u201d<\/p>\n
The Canadian Dollar Claws Higher<\/p>\n
Nick Rees, head of macro research, Monex Canada, forecasts the Canadian dollar will end the year stronger against the US dollar.<\/p>\n
His outlook is underpinned by the expectation that the Bank of Canada holds the rate in October, while the US Federal Reserve cuts rates at both of its two remaining meetings this year.<\/p>\n
\u201cWe see growing risks that the Fed will cut rates too far, based on the FOMC\u2019s recent decisions, though this poses upside risks for USD\/CAD both via a weaker greenback and through positive growth spillovers,\u201d he explains.<\/p>\n<\/p>\n
He also points to uncertainties arising from the ongoing US government shutdown and the upcoming Canadian federal budget in November. However, Rees assures, \u201con balance, we think both tilt risks in favor of [the Canadian dollar with] year-end USD\/CAD call of C$1.36,\u201d from the current C$1.40, as of Oct. 22.<\/p>\n
Even though its upside story continues past the fourth quarter, Rees projects the Canadian dollar will \u201cunderwhelm against the broader G10 complex.\u201d<\/p>\n
This is because the Canadian economy remains too tightly bound to the US, \u201cwhere we expect to see growing signs of slowdown, for the loonie to make outsized gains,\u201d Rees adds.<\/p>\n
The other major risk looming on the horizon is the review of USMCA, the continental free trade agreement, due next July. \u201cGiven the recent approach of the Trump administration to\u202fsuch negotiations, we suspect this will likely prove a headwind for the loonie, once the process kicks off in earnest,\u201d Rees cautions.<\/p>\n
Bank of Canada Policy Predictions<\/p>\n
Analysts expect the Bank of Canada to continue to cut rates in the fourth quarter, and likely in 2026, to stimulate growth, provided inflation remains in check.<\/p>\n
\u201cMonetary policy remains the immediate and flexible lever to stabilize growth,\u201d says Desjardins\u2019 Figueiredo, who forecasts the central bank to lower the policy rate to a trough of 2.00%.<\/p>\n<\/p>\n
The timing of that easing, though, will be conditional on \u201ccontinued progress on core inflation measures,\u201d he says, but adds that \u201cwe don\u2019t believe that there is an inflation problem in Canada.\u201d<\/p>\n
Citi\u2019s Clark says policymakers will still primarily be concerned about inflation and be cautious of turning too dovish. She forecasts \u201ca cut in October\u201d and a policy shift indicating more cuts to follow.<\/p>\n
\u201cEventually, policy rates falling below neutral will help boost demand again, as well as more fiscal support into 2026,\u201d she says.<\/p>\n
Boehmer forecasts <\/b>two additional cuts in 2025 but says \u201cthe Bank of Canada is likely uncomfortable taking the policy rate to 2.00%, particularly if the US Federal Reserve delivers only one more cut in 2025, which is our base case.\u201d<\/p>\n
The author or authors do not own shares in any securities mentioned in this article. Find out about
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