Rhythmic Reasoning_Highlights_SWM_EN - Flipbook - Page 8
CANADA & U.S.
Canada: Despite tariffs, domestic economic conditions have held up
Strong domestic conditions were not enough for the Bank of Canada (BoC) to fade the
latest GDP reading as forward-looking trends are less encouraging. The Governing
Council’s attention was also fixated on the recent rough patch of soft jobs data,
prompting them to slash the overnight rate by 25 bps in September after three
consecutive holds. Our forecasts are calling for one more 25 bps reduction in the
overnight rate at one of the BoC’s final two meetings of the year.
While the headline 35% tariff rate on Canadian goods is daunting, USMCA-compliant
goods are exempt from these levies. As such, the average tariff rate on Canadian
products remains among the lowest in the world on a weighted basis. Still, the
unpredictability of White House policy could keep uncertainty elevated, especially as
we approach the 2026 USMCA review.
Excluding trade effects, the domestic economy has held up
well, with final domestic demand up in 8 of the last 10 quarters
10.0%
Final domestic demand (QoQ SAAR)
Canada’s economy contracted in 2Q25. While the headline GDP figure left a lot to be
desired, it is important to recognize that the decline was primarily a result of U.S.
tariffs as exports shaved 9.8 percentage points off of growth. Conversely, the
domestic economy showed signs of life with final domestic demand picking up during
the period.
8.0%
6.0%
3.5%
4.0%
2.0%
0.0%
-2.0%
4Q20
3Q21
2Q22
1Q23
4Q23
3Q24
2Q25
U.S.: Softer growth and jobs data pave the way for policy easing ahead
The U.S. economy rebounded into growth territory in 2Q25, largely driven by a
reversal of the trade-induced decline in GDP in the prior period due to tariff frontrunning. Trade distortions aside, the drivers for growth were mixed as household
consumption strengthened but fixed investment slowed.
On the monetary policy front, the latest soft patch of labour market data and
historical revisions prompted the U.S. Federal Reserve to resume its rate cutting cycle
in September with the Committee’s rate projections taking a turn for the dovish. We
expect the Fed to continue to ease policy settings for the balance of this year and
next, bringing the upper bound of the Fed funds rate to 3% by 2026-end.
As far as the political situation is concerned, the Republicans will have their hands full
with the 2026 midterm elections. History has shown that on average the President’s
party loses seats in both legislative branches in the midterms, and with President
Trump’s approval ratings falling, the bar to maintain the status quo appears high. In
our view, the GOP will likely hold on to the Senate but is at risk of losing its slim
majority in the House.
The median projection from the FOMC now forecasts more
policy rate cuts relative to the previous meeting
3.9%
3.6%
3.6%
3.4%
3.4%
3.1%
2025
2026
June forecast
September forecast
2027
