Transcript: Canadian economy looks set to catch up in 2025
Jack Manley of J.P. Morgan Asset Management says conditions are right for the U.S. to start to slow down as Canada picks up speed
- Featuring: Jack Manley
- January 7, 2025 December 27, 2024
- 13:01
iStockphoto/DChumak
Jack Manley
Welcome to Soundbites, weekly insights on market trends and investment strategies brought to you by Investment Executive and powered by Canada Life. For today’s Soundbites, we get a Canadian market outlook from Jack Manley, vice-president, global market strategist with J.P. Morgan Asset Management. We talked about coming themes and past performance. And we started by asking about investor mood as we enter 2025.
Jack Manley (JM): I would say this year investors are going to be cautiously optimistic. Because in 2023 the sentiment was quite negative, right? Everybody thought that the U.S. economy would enter a recession, that the Federal Reserve would be forced to cut interest rates, that equity markets would be flat or down. And really none of that stuff happened. So, everybody said, ‘Well, okay, we got the call wrong in 2023 but maybe 2024 is the year that we actually need to be worried about.’ And it wasn’t a bad year. In fact, it was another, a very good year. So, I think in 2025, a lot of investors are realizing that a lot of that sentiment, the negativity over the past couple of years, was largely unfounded. Hence that kind of cautious optimism that I think a lot of folks have right now.
Key themes he’s looking for in 2025
JM: There’s one big theme that will be playing out this year: how central banks will respond to rapidly changing macroeconomic conditions. They’re willing to be proactive. They’re willing to try to juggle what the appropriate level of interest rates will be. And that leads to some very interesting stuff in 2025. Does that end up meaning that the Bank of Canada, for example, cuts a lot, whereas the Fed cuts a little? Or the ECB cuts a lot, whereas the Fed cuts a little? That potential gapping out of interest rate differentials around the world will have impacts on yield curves, it will have impacts on currencies, it will have impacts on local equity market prospects. So that is, I think, the big theme in 2025.
A review of the Canadian economy
JM: I would say the good news here is that the Canadian economy has performed more or less in line with how a number of other developed market economies around the world have performed, which is to say, sluggishly. But it’s not like Canada was unique in that environment. Canada and many other developed countries were facing the same sets of issues. Where you do see Canada notably lag behind is in the relationship with the United States. And I think something that’s very interesting to point out here is that for a very long time, the Canadian and American economies operated more or less in lockstep. But that has not been the case over the past few years. There has been a meaningful divergence between these two economies. The U.S. grew around 3%, for example, in the third quarter of 2024. Canada grew 1%. In the U.S., the unemployment rate sits at around 4%. In Canada, it’s north of 6%. In the U.S., inflation is running a little bit warm, meanwhile, in Canada, there were a few months in 2024 where that inflation print started with a 1 instead of a 2, and the BOC was all of a sudden worried that maybe we were heading into a deflationary period. That divergence has been pretty pronounced. And I would guess that as we move into 2025, the U.S. economy will slow modestly, which will allow the Canadian economy to play a little catch up. I do think there should be something of a convergence in growth between the U.S. and Canada, with the U.S. slowing down just a little bit, and Canada hopefully picking up speed.
Canadian fundamentals
JM: In Canada, it’s a tricky question, because there are more things to be a little bit worried about than there are that are encouraging. The biggest issue is how rapidly your population is growing and how insufficiently equipped your country is with the infrastructure to support this very large growing population. There is a chronic housing shortage in Canada that is only going to get worse, unless there are significant policy changes that make their way out of Ottawa. The flip side of that the big tailwind that I think we see coming for Canada, is that the interest rate environment is getting better. And so at least homeowners are going to get something of a reprieve, and they’re going to have a little bit more money to spend on other things, which means that they may be able to go out and propel GDP growth. So, I think the rate story is encouraging as we move through this year. The housing story and the population growth story is a little bit more troublesome.
And finally, what should Canadian investors bear in mind as we start the new year?
JM: Canadian investors should be cautiously optimistic about the prospects for their own economy, for the U.S. economy, and for economies around the world, and, in turn, capital markets around the world. That said, I think we also have to acknowledge that there is, as always, a whole lot of uncertainty on the horizon. And that uncertainty makes it very, very difficult to pick winners, to pick losers. And so, alongside this cautious optimism, I think Canadian investors need to remember the importance of diversification when it comes to portfolio construction, owning a little bit of everything, and building an asset allocation portfolio to smooth out that journey to whatever your end destination happens to be.
Well, those are today’s Soundbites, brought to you by Investment Executive and powered by Canada Life. Our thanks again to Jack Manley of J.P. Morgan Asset Management. Visit us at investmentexecutive.com where you can sign up for our a.m. newsletter and never miss another Soundbite. Thanks for listening.
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