Rhythmic Reasoning_Full Report_Final_EN - Flipbook - Page 7
THE DRUMMER'S EAR | RHYTHMIC REASONING
of troubling consequences for the perceived independence of the
Fed, however.
these rate cuts will be reversed in the second half of 2026 to ensure
that inflation converges sustainably to the 2% inflation target
The Canadian economy is somewhat weaker than the U.S. owing in
part to softer business investment, which has been more impacted
than the U.S. so far this year by concerns about the impact tariffs,
even if those tariffs are significantly lower than feared in the early
months of the year. It has been clear for some time that worries
about the tariffs have impacted spending decisions by firms and
households in Canada (Fig. 5). Moreover, there is some evidence
that the impact of tariffs is being felt more rapidly than we had
assumed. We had expected that the damage from tariffs would
build over time, but the drop in GDP in sectors most impacted
by tariffs suggest that the impact of trade policies hit earlier than
expected.
We expect a meaningful improvement in Canadian growth next
year owing to the combined impact of more stimulative fiscal policy
as governments move on the transformation agenda, and the
impact of tariffs and associated uncertainty fade. The upcoming
October budget will help inform our views on this impact, but it
does seem clear that the economy will receive some fiscal support
next year and beyond. On net, we expect Canadian growth to rise
from an expected 1.2% this year to 1.6% next year.
Fig. 6: Mexico's central bank to follow the Fed, Colombia's
remains cautious, Peru’s is done, and Chile's has a bit more to go
15%
Worries around trade disturbances seem to have abated in recent
months despite our view that the impact has been felt more rapidly
than we thought was going to be the case. This is either the
result of some relief that tariffs have generally been lower than
feared (with the notable exception of those sectors subject to
high tariffs), Canadians slowly getting accustomed to the disruptive
nature of U.S. policy announcements, and some early signs that
the transformation agenda being developed jointly between the
federal government and provinces will eventually set the country
on a better path.
Fig. 5: Canada's and Mexico's
manufacturing sectors are shedding jobs
YoY % change, manufacturing
6%
4%
2%
0%
-2%
2022
2023
Mexico
2024
2025
Canada
Source: Statistics Canada, INEGI, Scotia Wealth Management
There are also signs that last year’s interest rate cuts are working to
boost, ever so modestly, the rate-sensitive parts of the economy.
There is no denying however that recent employment numbers
have been concerning. Over one hundred thousand jobs have
been lost in the past two months. Employment is typically a
lagging indicator and that showing may reflect the drop in GDP
experienced in the second quarter, but the decline does seem large,
and it is cause for worry.
We are inclined to think of additional near-term BoC cuts as
insurance. Declines in employment have given the BoC the option
to make a couple of cuts to protect against weaker growth and
inflation outcomes. However, because we still believe inflation
pressures will be more persistent than the BoC, we expect that
12%
9%
6%
forecasts
3%
0%
2015
2017
Mexico
2020
Colombia
2023
Peru
2026
Chile
Source: Banxico, BCCh, BCRP, BanRep, Scotiabank
Economics, Scotia Wealth Management
Mexico will seemingly avoid the recession in 2025 that we had
predicted in the aftermath of the Liberation Day tariffs, but the
country’s economy is still on track to flatline over 2025 to then only
marginally pick up speed in 2026. Mexican growth continues to face
important domestic and external headwinds that have resulted
in practically nonexistent employment gains in recent months
(and loses in manufacturing, Fig. 5) alongside depressed business
confidence, while inflexible public finances offer little support, and
U.S. tariffs and associated uncertainty, and harsh immigration
policy drag on the country’s external sector. Continued rates
support by Banxico should help (Fig. 6), although the runway for
cuts is short—even with the Fed’s own cuts allowing a bit more
easing than we had previously expected.
Elsewhere in the Pacific Alliance, growth trends are firmer, with
encouraging breadth to the GDP gains seen in Chile, Colombia,
and Peru (Fig. 3). However, general elections in November 2025
(second round in December), and March and April 2026, in that
order, could generate economic anxiety over the next few quarters
that softens growth momentum. Meanwhile, wide open electoral
fields in Colombia and Peru and an unclear outcome for Chile’s
election mean we do not yet know whether their next governments
will act as tailwinds or headwinds for their domestic economies
after a few years of political risks under left-wing administrations.
Among the three countries, Peru’s economy would be the
best positioned to face a drag from electoral risks, as a highly
benign inflation backdrop, strength in labour markets, and
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