Canada is in a “stealth recession” and is headed toward a clearer technical recession over the next 18 months if U.S. president-elect Donald Trump follows through on his threat to impose tariffs on Canadian goods, a Franklin Templeton Canada asset manager said on Thursday.
“We don’t have a crystal ball, we don’t know how much of this turns into reality,” said Adrienne Young, senior vice-president, director of credit research and portfolio manager with Franklin Templeton Canada, during a panel hosted by the firm in Toronto.
“But Canada is an exporting and importing nation. We are small, we are open and it’s going to be not great for us.”
Young said she’s projecting a technical recession in Canada if the tariffs are implemented. She noted that an estimated 12% of Canadian jobs are tied to industries that export to the U.S. and that while absolute GDP growth in Canada was still positive in the third quarter of 2024, on a per capita basis, GDP growth has declined for the last six quarters.
“As the Canadian economy and U.S. economy diverge in their paths, the U.S. is rumbling along pretty well, but Canada is in a stealth recession right now … and moving toward a more obvious recession over the next 18 months,” Young said, adding she expects growth in GDP per capita and national GDP to slow next year.
Franklin Templeton has not made a forecast on GDP growth in Canada.
Young also expects the Canadian dollar to further weaken against the U.S. dollar. This, she said, is because the Bank of Canada (BoC) will likely continue its monetary easing while the U.S. Federal Reserve (Fed) may simultaneously pause its interest rate cuts.
“Yes, the Bank of Canada cut 50 basis points [on Wednesday]. And yes, the language around that was a little bit hawkish, suggesting we’re not going to get any more 50 basis points cuts,” she said. Still, she said she expects steady 25 basis point cuts through the end of next year.
Young projected BoC’s overnight rate, now at 3.25%, to fall to 2% or a bit lower by the end of next year, given Canada’s high unemployment rate.
In November, Canada’s unemployment rate rose to 6.8%. Young anticipates it will reach 7.5% by the end of the next year, assuming there are no tariffs.
“If tariffs are implemented, you’re going to see higher numbers. And those numbers are high enough to be concerned,” she said, noting a large segment of Canadian mortgage holders will be refinancing their mortgages over the next two years and will be facing much higher mortgage rates than in 2020 and 2021, which will cause them financial pressure.
For investors, Young said there is a “generational opportunity” in fixed income, with lower interest rates expected in 2025. At the same time, she urged investors to take an active and nimble approach because “a lot of risk is coming from a lot of different places.”
2025 not a ‘set-it-and-forget-it’ year
Michael Greenberg, senior vice-president, portfolio manager and head of Americas portfolio management for Franklin Templeton Investment Solutions, shared a more positive outlook for 2025.
Greenberg said he does not believe that Canada is the primary target of Trump’s tariff threats and that he allocates a decent amount of assets to Canadian markets. He said he “wouldn’t be surprised” if Canada’s manufacturing sector benefits from its role as a key part of the U.S. supply chain.
However, if the tariff threat against Canada is “not just bluster, and there’s actually some more behind that, I think that would be time to be a bit dynamic and probably less exposed in Canada.”
And while tariffs would be inflationary, Greenberg noted other Trump policies could have short-term benefits that outweigh some of the “potential longer-term drag” from higher inflation.
“We’re probably going to need lower taxes, deregulation and probably lower oil prices — these are pretty good things for the consumer, small businesses,” he added.
Greenberg said he expects there to be a “great environment for bonds” in 2025, with BoC and the Fed “cutting rates a lot more than we think.” In the same breath, he said he expects inflation to be a bit higher and a bit more volatile, so investors should look to other asset classes, such as alternative investments, that can complement bonds in a portfolio.
“I think [there’s] a fairly decent chance that we climb the wall of worry, but there’s going to be some bumps on the road. So I don’t think it’s a set-it-and-forget-it year — it’s a dynamic year,” Greenberg said.
Dave Wahl, another panelist and director, senior client portfolio manager with Clearbridge Investments, which is a Franklin Templeton company, said he sees investing opportunities in a few different sectors in 2025 including financials and industrials.
He noted that Canada’s banking sector has had a “pretty good run” over the past year, with some exceptions such as Toronto-Dominion Bank, which Wahl expects to re-establish its footing in Canada after its money laundering scandal in the U.S.
Despite a lag in performance, Wahl said he sees a long-term opportunity in the industrials sector, especially in legacy names such as Canadian National Railway Co., Canadian Pacific Kansas City Ltd. and Waste Connections of Canada, along with engineering companies like Stantec Inc.
Overall, Wahl said he sees 2025 as a year of “upward momentum, but [investors should] be wary of risk and pitfalls.”