Business Data Lab Ep6
Feat. Dawn Desjardins
SUMMARY KEYWORDS
Canadian economy, economic outlook, tariffs, interest rates, inflation, consumer confidence, trade policy, immigration, labor market, productivity, investment, housing market, business confidence, economic growth, trade agreements.
SPEAKERS
Host Marwa Abdou & Guest Dawn Desjardins
Dawn Desjardins 00:00
So obviously, confidence for businesses has come down significantly. The Bank of Canada survey suggesting that Canadian businesses are going to not be as active in terms of investment. Totally sensible in this environment, these things are, we think, percolating and also nipping at our forecast for economic activity.
Marwa Abdou 00:24
On today's episode, we're looking at Canada's economic outlook for 2025 where things stand, what's changing, and how risks like us tariffs and slowing immigration could shape the road ahead, from interest rate cuts to tariff threats, there is no shortage of signals pulling our economy in a multitude of directions. Deloitte, Canada's latest report, calls this the calm before the storm, and today, we'll explore what's driving that forecast, what to watch for, and whether we should be preparing for a recession, hopefully not. Our guest today is dawn. Desjardins chief economist at Deloitte Canada. Dawn brings decades of experience analyzing and forecasting economic trends in Canada and the US. Prior to joining Deloitte, she was deputy chief economist at RBC, a reporter for Bloomberg financial news and a bond strategist at JP Morgan Canada. She's also a passionate advocate for women's labor market engagement and a leading voice in policy and economic discussions across the country. Welcome to the podcast, Dawn.
Dawn Desjardins 01:38
Thank you for having me so
Marwa Abdou 01:40
Dawn your team has just released their 2025 economic outlook. The title says a lot calm before the storm. The report outlines a fragile recovery where interest rates are easing, inflation is stable, and household savings offer some protection, but the risks are rising, and the biggest concern is, of course, trade potential, 25% tariff us, tariff on Canadian exports, could significantly undercut our growth prospects, and already we're seeing revisions to those prospects, according to our data and the modeling that we did, those tariffs could cost the average Canadian up to and more than $2,000 per year. And if Canada retaliates Deloitte projects, the GDP could contract by point, 8% despite that recent turbulence. Your baseline scenarios call for modest growth, 2% GDP in 2025 and that's driven by a few key offsets. One is that there is a shift in the Bank of Canada's interest rate policy. The overnight rate forecast is going to fall to 2.25 by mid year. That's a dramatic change from the 5% peak that we had early in 2024 Could you talk me through some of the pillars that are holding up this sort of calm?
Dawn Desjardins 03:08
Certainly, when we looked at the economy in January, we were looking at some pretty positive factors, cyclical factors, I guess I call them inflation, as you stated, was moving lower. Now we have seen that change a little bit in the most recent data. The Bank of Canada, as a result, was able to lower the policy rate, and we expect will continue to do so. Labor markets were softening, but not dramatically. So we felt pretty confident that the Canadian consumer would hold in but we fast forward now to a couple months, and we see lots of really big impediments, I think, from the consumer's perspective, at this stage, we see that consumer confidence has come down significantly. We've also seen a modest pickup in inflation. Now that pickup reflected a few factors, and we don't think it's sufficient to derail the Bank of Canada from continuing to lower the policy rate, but we have a lot of risks for the economy, and so while we were anticipating that these cyclical factors were really going to boy up the economy, we're now taking a pretty hard look at that forecast, yeah, and trying to determine, what does it mean? In an environment where we have some tariffs already being applied to our steel and aluminum, we are constantly under threat. More tariffs coming, and some of our big sectors, oil, potash, at 10% but when we look at others like motor vehicles, we could be talking at a much higher tariff rate, and we know that's going to cause a lot of disruption for our economy, and consumers, naturally have now stepped back, I would say, a little bit, because they're going well, I don't know if I'm going to have a job. How. In three or six months. I don't know what these tariffs are going to mean for my particular industry. So we have now looked at the consumer as a more vulnerable part of the economy than we previously had been. With rates coming down, it means that some of that refinancing of mortgages that we were very nervous about in 2024 it's getting a little bit easier. I'm not saying it's going to be easy, but it's getting a little bit easier. And as you mentioned, households do have a lot of savings on the balance sheet. So we do think that it is case that we will see consumers pulling back somewhat in the near term, just because this confidence hit is really quite remarkable.
Marwa Abdou 05:41
You know, a lot of things that you you said, make me wonder, Are there lessons that we've learned a not so recent couple of years ago, I should joke about events that we all went through collectively. There's a lot of commonalities in terms of what happened during COVID, sort of where we're entering this new phase of the economy. We haven't yet fully rebounded from COVID, which is sobering to say, and something to think about. So I'm curious if, if you're seeing some of that echo in the data, that's one and two, what are you seeing on the business side of things? You know, is that something that Deloitte is also looking at
Dawn Desjardins 06:24
well in terms of comparing it to the pandemic. I mean, the pandemic was overwhelming shock to our economy, as well as the global economy, and in this case, it is more a pretty sharp shock to Canada. I think we can't say that everybody else is going to get out of this scot free, is in particular Mexico and China. But I think increasingly, we're hearing rumblings that the new administration in the US wants to levy tariffs on other trading partners as well. So it is, I would say, different from that perspective that was just a big shock that shut everything down this time we do see other outlets, potentially, we are going to be suffering from tariffs on our exports to the United States, not so to other countries. So there is some off ramps Now, having said that, if it were easy to do that, it would be done. So it will take time absolutely to build these relationships with other markets. So I would say, from that perspective, it is somewhat different as well as we've been reading and hearing about governments are getting together to get rid of things like interprovincial trade barriers. So again, opening up our domestic market. We can do all this because it's not that same kind of shock absolutely during COVID. But businesses are not filling all that good at the moment. Whether you look at any number of surveys, the Bank of Canada has recently released one the CFIB, Canadian Federation of Independent Business, their number also hitting a record low. So obviously, confidence for businesses has come down significantly. The Bank of Canada survey suggesting that Canadian businesses are going to not be as active in terms of investment. Totally sensible in this environment, these things are, we think, percolating and also nipping at our forecast for economic activity.
Marwa Abdou 08:21
All of that is understandable. Now I want to shift gears a little bit. Obviously, terror sucked the air out of every room in this current climate, but we have also had a lot of recent immigration happen. Over the last number of years, a record amount of immigration, and that has been a major engine of growth and in recent years, but now we're seeing the federal policy scaling that back. And you know, the number of temporary foreign workers will also likely drop by 30% and permanent residency targets are set to fall to, I think 365,000 annually by 2027 so we're seeing this sharp reversal, and in that immigration ramp, what are the implications of all of this on the labor market and our growth prospects?
Dawn Desjardins 09:16
Well, I think when we look at what happened post pandemic, there were so many vacant positions, and so we saw the government allow a lot more people come to Canada, and that did really help a market where people were businesses were really struggling to find workers. Now, as time went on and the economy became in in a more I guess, normal trajectory. We did see that under supply of labor fading away. So we did see lots of growth in our labor market. You probably recall all of those months and months for saying huge job gains. But over time, the pace of job gains was less than the growth. Growth in our labor force, and we saw our unemployment rate pick up. So it does suggest that the labor market was weakening a little bit, right, and now, as we go forward, we're not going to have that steady influx in terms of the labor market. Now, in the near term, what it would suggest is that, fingers crossed, we continue on in a growth environment, we will still see some job creation, but it won't be met with labor force growth. So you'll see the unemployment rate basically come down. So some tightening, I would think, in labor market conditions. Now, that's a good thing and a bad thing, of course, because if you start to see too much tightening in our labor market, that puts upward pressure on wages. So for workers, they're like, Oh, well, that's okay. But for businesses, it's another impediment in terms of their expansion. So I would say the fact that we are going to see, in fact, it looks like, if you just follow the math, it looks like, Well, I see the population decline over the next couple of years. That is going to take some of the steam out of the consumer side of the equation. Now on the other side, boy, I really am the two handed economist today the housing market, which has been so stressed, we'll start to see some easing up in terms of housing demand, and that might provide a little bit of relief. But we have to remember, we're in an economy where we have a very pervasive housing shortage, and that doesn't look like that's going to be remedied anytime soon.
Marwa Abdou 11:29
Yeah, I mean, there's certainly a lot of levers at play, and it's it's hard to predict which ones are going to take more center stage than others. Now back to the elephant in the room trade. So 77% of our exports go to the US at 25% blanket tariff is an very hard hit. We've talked about that a lot on this podcast for calculations purposes. Deloitte downside model shows that gdb growth is likely. In that scenario, it could fall by nearly three points, pushing the economy into recession territory. If Canada retaliates, what are your expectations if these tariffs Go ahead? I mean, now we have this April 2 deadline. What are your thoughts in terms of what you I mean, obviously you can't predict what's going to happen April 2, given the trajectory of things thus far, but I would love to hear you know, what are you thinking as you're keeping your eyes peeled on the news?
Dawn Desjardins 12:30
Well, at this stage, we're thinking that we will see We subjected something on April the second. Not exactly sure, as you say, what that's going to look like. It is going to be very damaging for Canada's economy, but it's also going to be damaging for the US economy. It will increase prices for producers, and over time, I wouldn't be terribly surprised that consumers will also feel some pressure there. We've seen also Sentiment Index, indices in the US, similar to Canada, consumers, businesses, they're not feeling terribly great right now. There's a lot of uncertainty and volatility. I think that that will play into this whole tariff game. If we think that tariffs are coming April 2, whatever that looks like, will they remain in place forever. And I think what we're coming back to is that if the US economy is starting to flag, if consumers, if businesses are saying, I'm going to pull back right now, because I really don't know how this is going to play out, what's the likelihood that we won't see tariffs ratcheting up continually A and B. How long will this persist? We've decided to rerun our model and look at it in that context. What if we have tariffs that come into effect April 2, but within six months we have some kind of trade agreement, whatever that looks like, to ensure that we do have access to our biggest trading partner. What does that look like? And in that context, probably seeing a couple quarters of negative activity, consumers, businesses, job losses likely to come. These things will sour our economy. But as we exit 2025, and assuming that, yeah, the pain inflicted on the US economy is sufficient to get some concessions on both sides of the border, we would expect to see an acceleration of the growth. So perhaps that minus 0.8 that we thought in our scenario analysis, right? Perhaps that's not that's maybe too aggressive. Maybe we see growth of something like 1% in this different environment. If we're trying to think how, what's the likely outcome of all of this that's going on, because we can't, as you say, we can't, very well. Say, with any authority at this stage, what the policy on trade is going to look like as we go forward.
Marwa Abdou 15:05
You know, I think that you touch on a couple of different points, one of which, obviously, that underlies all of this is, is the uncertainty that's going to play out in every component of the economy and every crevice of it. I wanted to kind of zoom out a little bit and say, you know, are we seeing some of that uncertainty affect decision making? How is it going to play out in the upcoming election? You know, according to Deloitte, we are seeing 10 plus billion dollars invested in EV manufacturing, investments that have already been delayed or paused. What does it mean for business confidence, which I know you touched on earlier, but what does it mean in terms of that umbrella of things?
Dawn Desjardins 15:53
Well, I said earlier, you know, definitely seeing a pretty substantive hit to confidence and businesses are saying, maybe not putting too much money to work right now, and so that is of concern as well. They are indicating that not looking to add aggressively to their workforce, because they don't know how strong demand is going to be as they move forward. So we have seen recently, even after our report was issued, some cancelations, some postponement of some of these investments in the EV sector. So that's going to keep you know our investment numbers little lower than we thought. Now, from the government's perspective, we have heard announcements of putting money into EDC to help us diversify where we're sending our exports. I think we have 15 free trade agreements that potentially could reach 1.6 billion people. So we have a lot of irons in the fire, if you will. And so how do we press forward to see these markets as viable and get our goods out there? And that will require a little bit more than just that kind of financial support. It will require infrastructure. Are we going to see that? How is that going to look? How are we going to get our products out of Canada's you're going south of the border, not as much of a challenge, but certainly if you're going around the globe, more more challenges. And so we need to see some money on that front as well.
Marwa Abdou 17:33
Canada's trade numbers are showing surplus and but a lot of that is mostly thanks to energy. And you know, we know that other sectors are going to be exposed. Now we have a US Canada Trade Tracker that shows that growing goods trades vulnerability is going to happen outside of oil and gas, and that's in part and parcel of of all of this playing out. How do you think that's going to take fold in the negotiations?
Dawn Desjardins 18:05
It's going to be very difficult. I think. I mean, as you say, we are sending oil subs as a border, and that has seen a lower tariff being applied to it, potash, the same situation. But when we look at our motor vehicle industry, which, as we all know, is extraordinarily integrated with our two trading partners into the south, how expensive is that going to be? If we have higher tariffs levied on the all these products, it's going to fizzle out into the rest of the economy. Of course, if I'm working in an industry that suddenly there's not as much demand for cars because they're really expensive. What does that mean? Do I okay? So maybe I have people who are furloughed because we're waiting to see how the negotiations are going to go. And if they're furloughed, are they really going to go out for dinner? Are they going to go to the movie theater, probably not. So the services sector, which to some degree, won't be impacted by tariffs, per se, it will filter into that large part of our economy as well. And you know, when we look at things like Canadians traveling abroad, well, probably not going to the US. From what every story I've been reading, people are looking at staying at home. So there may be some offsets, but I think by and large, we would anticipate the services sector also feeling a pinch from these tariffs.
Marwa Abdou 19:34
Yeah, there's definitely a visceral sentiment toward going south of the border that I know everybody's sensing at the moment in time, and it's very palpable at the same time that all of this is happening, and at the time that we're recording this interview, we are, as I mentioned, heading into a federal election, the US policy under a second Trump term could reshape as you. Touched on this earlier the investment landscape, and you know, you had mentioned a lot of the paralysis that's happening at the policy level and how that's going to roll out. How is it going to impact productivity, do you think?
Dawn Desjardins 20:17
Well, I mean, productivity has been a real sore spot for the Canadian economy for let's just see. I've been in this game a long time, and almost all of that time, it's been a problem for Canada. And so I think we're seeing some of these impediments, as I said earlier, the interprovincial trade barriers. This new idea it's not a new idea, but perhaps this notion that we don't need regulation at each level of government, that perhaps we should be able to get projects through easier and more quickly, these things will, I think, over time, add to our economy, add to our ability to be more productive. But again, these things do not normally happen very quickly, right? And we'll also have to consider, you know what? What is the new leader, the new government? What are they going to be doing on taxes? Haven't really heard on anything on that yet, but it'll be interesting to see. Is that just another catalyst or a lever to be pulled that will allow Canadian companies to be more competitive, for Canada itself to attract capital. These are things that we will all be watching for in terms of, once the new government is established, what are they going to do? They're going to, of course, first have to tackle the Trump administration on these tariffs, and that's going to suck a lot of the time away from for illustration here, yeah. But alongside that, we do have to think of some of these, I would say, impediments to our economy. And we've talked and talked and talked about it, but now maybe this is the catalyst to action.
Marwa Abdou 22:00
I agree. I think you know, so much of our fixation is waiting to see what the US is putting forward in order for us to react to that, as opposed to taking the lead and looking as to what is in our best interests. And we've known so many of those components, whether it's inter provincial, lifting interprovincial trade barriers, or looking at impediments in terms of something that we talk about is, you know, entrepreneurship and the role that that is going to take, not just, you know, in terms of fueling growth in the economy, but In terms of tapping into resources and sectors that we haven't fully realized the benefit from. Obviously, we've covered a lot of opportunity and risk. You highlighted the strength of current conditions, and you've given, I would say, a warning in terms of the the timing of that and the temporariness of it for our audience, policy makers, business owners and economists, I wanted to ask you, what would be something that you would want them to take away from this conversation and your 2025 outlook?
Dawn Desjardins 23:15
Well, I think a couple things. One would be that we anticipate this to be a sharp impact on the economy, but a relatively short lived one, yeah, and so to that end, it means be looking over six a one year horizon. Absolutely, I wouldn't say that. People are not they should be, actually, as cautious as they are, because I think I would be. I mean, anyone who's in business will be cautious, because we don't know what the sales up look is going to be. We don't know what the rules of the game are going to be. So but still looking forward and looking forward to take advantage of any new programs that the new government, whatever government it is, puts in place, to help us move up that curve in terms of productivity. Yeah, so I think there's things we can be looking forward to, but it's very hard to rise above all of the chaos that we're seeing. And it's not just Canada, of course, it's globally. We're seeing the global economy really off kilter. And so what does that mean as we go forward? It's hard to say with any great degree of certainty, but I do think that now we will see concessions made on both sides of the border. And to that end, we will get to a new status quo. And we do as a country, have lots of opportunities here to really lean into changing the way our economy is working.
Marwa Abdou 24:53
You know, I think you touch on, you know, Canada's economy is, continues to be resilient. And continues to show that it can come out of very tough economic times with a lot of lessons learned. And I think we're learning a lot of new lessons, and we're turning into, you know, inwards and examining ourselves with a with a closer look. Thank you so much for joining us today and for sharing your insights. For our listeners, you can read Dawn's full economic outlook at Deloitte.com and don't forget to check out the Canada US Trade Tracker at businessdatalab.ca. To stay current on cross border trends. Thanks for listening, and we'll see you next time on Canada's Economy, Explained.