The largest downside risk to the Canadian economy is the outcome of the U.S. presidential election, according to a new report.
On Tuesday, TD Economics released a report outlining Canada’s economic outlook in the near term. The report highlights that the Canadian economy “narrowly avoided a technical recession” last year and has shown “surprising resiliency” so far in 2024. Going forward, the report said that while consumer spending is expected to slow, it could be offset by other factors.
“The big risk to this view is related to the outcome of the U.S. election. Canada signed the USMCA deal under the prior Trump presidency, but this doesn’t shield it from renewed trade disputes,” the report said.
“In fact, this will be of greater importance since Canada has increased imports from Mexico and exports to the U.S. since 2020, while reducing exposure to China. Canada is therefore more vulnerable to protectionist trade policy from the U.S., which could limit the expected GDP (gross domestic product) offset from Canadian business investment and trade.”
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As Canada sidestepped a potential recession last year, the report said that debt-constrained consumers have continued to spend on things like restaurants, travel and entertainment. This has occurred alongside population growth that has “well-outpaced expectations” and has resulted in a “bigger base for spending,” the report said.
“How long this can last is uncertain. New government restrictions on non-permanent residents are intended to curb population flows in the coming months, which could act as a headwind for spending,” the report said.
A large number of homeowners in Canada will also face higher interest rates when they renew their mortgage, the report said, despite expectations that the Bank of Canada will lower rates going forward.
“With consumer spending expected to slow going forward, we are optimistic that a mixture of business investment, government spending, and increased exports could be a counterweight,” TD Economics said in the report.
“Whether it be shovels in the ground on new EV/battery plants, the development of purposed-built rentals, or increased oil exports thanks to the expanded Trans Mountain pipeline, there are levers to create a much-needed growth offset.”
Population growth cooling?
As Canada’s population growth is “still running hot,” the report says it is expected to peak with a slowdown occurring in 2025 due to the federal government moving to lower the number of non-permeant residents.
According to the report, international students are likely to be impacted first due to constraints placed on the number of study permits that can be issued by educational institutions.
TD Economics said it is unclear if the federal government can follow through on a promise to reduce the share of non-permanent residents in the population to five per cent by 2027.
“Our forecast embeds a view that between today and end-2027, Canada could see net outflows of non-permanent residents of around 450,000, which would put the country closer to its goal, but still around a percent shy of five per cent,” the report said.
“The timing of these reductions is important, as it can impact the Bank of Canada’s (BoC) policy decisions. For their part, the BoC appears to have some skepticism about whether the federal government will hit its target, projecting Canada’s population growth rate to stay more elevated in the medium-term.”
