Benjamin Tal, the CIBC deputy chief economist says resistance against Trump's tariffs has started to emerge.Tijana Martin/The Globe and Mail
Tariff uncertainty has cast a long shadow over the Canadian economy.
Many outlooks forecast a sharp downturn in economic growth in the months ahead accompanied by rising unemployment, sluggish business investment, softening consumer spending and continued weakness in the housing market.
Given the challenging macroeconomic environment, I reached out to CIBC’s CM-T deputy chief economist Benjamin Tal. On June 20, he shared his views on when conditions might begin to stabilize and improve. (His last interview with me, in February, can be found here).
We’re nearly halfway through 2025. Are you updating your economic forecasts? If so, where might you make the largest revisions and what’s the rationale behind any changes?
We’re not changing the forecast in a significant way.
We expected the second quarter would be much weaker than the first quarter, and that’s exactly what we are getting. We are forecasting close to 0 per cent GDP growth in the second quarter and we don’t see it improving much in the third quarter, which means that we are very close to a recession. We are in a per capita recession in Canada and we might be in a technical recession. So, we are basically growing at 0 per cent at this point, which was not a big surprise given the vulnerability of the Canadian economy to trade and the fog of uncertainty coming from President Trump.
I think that the resilience of the U.S. economy has been a bit stronger than expected. The U.S. economy is performing well, and that’s for two reasons. One is the starting point was very strong. The economy was at full employment at the start of the trade war. Second, we have to realize that the sensitivity of the U.S. economy to trade is much lower than any other country, including Canada, and this sensitivity has been falling.
If there is an element that is going to impact the U.S. economy, it’s not through trade but rather the consumer, namely to what extent tariffs will lead to inflation and have a negative impact on the purchasing power of Americans. We haven’t seen this yet, but it’s starting to happen.
The most surprising aspect about the Trump saga, so far, was not the tariff, it was not the chaos, it was not the volatility - it was the lack of resistance from the Democrats, from the Republicans and even from the court system, until recently, and that’s something that surprised me a bit.
We’re starting to see resistance emerging now. You have resistance from China. China is not blinking the way Trump expected China to blink. And the court system is starting to show some resistance. There are court challenges to the tariffs.
Speaking about tariffs, what do you believe is going to happen on the July 9th deadline when the pause on “Liberation Day” tariffs expires?
I think we’re starting to realize that Trump has a lot of weaknesses, a lot of vulnerabilities, and those vulnerabilities are starting to become more visible. One example is China. There was this game of chicken between President Xi Jinping from China and President Trump, who’s going to call whom first to start discussions, and President Xi Jinping did not call. Trump ended up dialing the number - that tells you something.
Early in Trump’s second term, earlier this year, he argued that the U.S. doesn’t need China, China needs the U.S. That was basically what he said and that’s absolutely not correct.
There are many vulnerabilities to China. One of them, of course, is rare earth minerals. China supplies about 80 to 90 per cent of global refining capacity. The other is pharmaceuticals, about 90 per cent of antibiotic API [active pharmaceutical ingredient] supply comes from China.
Since 2018, Trump’s first term, China has been preparing itself for this kind of situation. China’s reliance on the U.S. has gone down, its reliance on others has gone up significantly.
To put some numbers on it, China exports to the U.S. is about 2.5 per cent of China’s GDP. In comparison, U.S. exports to Canada and Mexico is between 2 and 2.5 per cent. And if the U.S. is saying its exposure to Canada is not big enough to suffer from counter-tariffs, China can say exactly the same thing to the U.S.
And China has been developing all kinds of tools to oil the retaliation machine, so to speak. The most important tool is the Unreliable Entity List, which is very powerful. They basically developed a list of companies that they consider to be unreliable and they can impose sanctions on them and it can be totally random, basically identifying all kinds of big American companies and make it very difficult for them to operate in China. The point that I’m making is that they are not using it to the extent that they can use it.
What do you believe is going to happen on July 9th? Are there going to be more extensions?
I think there will be more extensions. It will be by sector. The average U.S. effective tariff rate is about 15,16 per cent and that might come down a little bit because it includes a much larger tariff on China, but it will not go up.
The U.S. economy can deal with 15 per cent because it’s going to be sectoral. The global economy can deal with 15 per cent. It’s not going to be ideal but it will not be a disaster.
If you look at Canada, for example, our average effective tariff rate with the U.S. was about 2 per cent before Trump. Now, it’s about 5 to 7 per cent. I’m talking about the weighted average, some industries, like steel, dairy and lumber, will see higher tariffs.
Now, can the Canadian economy deal with 5 to 7 per cent? Absolutely, especially if there is government support and that’s exactly what will happen, I believe.
When might a trade deal or framework be reached between Canada and the U.S.?
I believe by the end of the year. And are we going to be better off? No, we are not. We will be worse off but it’s a question of magnitude. It’s not the worst-case scenario that people were imagining just a few weeks ago.
Given that you believe that the Canadian economy should be able to handle the tariff impact, what are your real GDP forecasts for 2025 and 2026?
Canada will be at about 1.5 per cent for 2025 and about 1.6 per cent for 2026, but that’s an average.
We have to remember that we are very close to peak uncertainty at this point. I think that six months from now we’ll be in a totally different ball game when it comes to uncertainty. It will be reduced. We’ll know more or less where we are, and people will be able to start investing, not the way it used to be, but better than it is now and that’s why we expect the third and fourth quarters of 2026 to be relatively strong.
Why don’t you think investment will be the way it used to be?
I think it will definitely be better than it is now because there’s a lot of pent-up demand. But there is one structural issue here, quite frankly.
Let’s assume that you are the CEO of a company. Trump signs an agreement with Canada and then what – tomorrow he can change it. There is a permanent fog of nervousness about whether or not he will stick to his word. We have the USMCA [United States-Mexico-Canada Agreement] and he’s basically not respecting that so you cannot make long-term capital expenditure decisions based on that. There is almost a permanent element of volatility and nervousness in the market, but it will be better than it is now because now we are at peak uncertainty.
Expanding on CEO sentiment, last month, the Conference Board Measure of CEO Confidence showed that over half of the CEOs expect conditions to deteriorate over the next six months. When you talk to CEOs is that what you’re hearing as well?
There are all kinds of sentiment indicators like consumer confidence that are down significantly, but there is a significant difference between sentiment measures and real measures. Usually, you don’t see declining consumer confidence reflected immediately in spending, and that’s exactly what we’re seeing now. Spending is still okay in the U.S.
However, when it comes to CEO sentiment, I think there is something to it. As a CEO, you have to make million- or billion-dollar decisions about capital expenditures. Usually, it’s not for the next six months, it’s for the next 10 years, and you don’t know what kind of environment you’re going to be in. Are there going to be tariffs, no tariffs? What kind of tax regime will there be? How can you make a decision? So, everybody is frozen. The same goes for Canada, by the way, and that’s one of the reasons why we see very close to 0 per cent GDP growth.
In the U.S., the impact is not as significant because many businesses are 100 per cent domestically oriented.
Are you hearing CEOs say that they are going to delay capital expenditures until the next U.S. administration?
Absolutely. So, they will do whatever is absolutely necessary, but not beyond that. Investment is not going to be zero, it’s going to be positive in 2026 because there are things that you absolutely need to do.
I think that they need to know that the policy environment is predictable. At this point, it’s not predictable, so you cannot blame them for sitting on their hands.
That’s exactly what we’re seeing, and that’s something that will limit the ability of the economy to grow because business investment is the number one factor impacting productivity - and we need that.
Also, government spending in Canada and the U.S. is going to play a significant role. Defence spending, I believe, is a growing sector. I’ve written a whole piece about why defence spending is rising and why it’s actually bullish for defence stocks. You see countries like Germany, France, even Japan, raising defence spending significantly. In Canada, we know it’s going to go up significantly.
Do you expect the unemployment rate to continue to rise? Last month, the unemployment rate hit 7 per cent.
Our forecast is that it will peak at about 7.1 per cent in the third quarter. The neutral rate of unemployment is about 6 per cent, which means that if you are above 6 per cent, at one point, the Bank of Canada will have to cut rates.
When we spoke in February, you forecast the overnight rate might fall to 2.5 per cent, possibly 2.25 per cent. Is that still your call?
Yes, we still forecast 2.5 per cent or 2.25 per cent, so another 25 or 50 basis points of cuts by the end of the year.
The only question is when. They can go in July and September. They can go in September and October. That’s still to be determined, but I believe that the Bank of Canada should cut interest rates. The unemployment rate is rising. Uncertainty is impacting the economy. Another factor is the lack of investment. Also, fiscal policy that will be supporting growth will take a while because it’s mostly infrastructure and that takes years so it will not support the economy over the next six months. And clearly what’s happening in the housing market suggests that the Bank of Canada should and probably will cut interest rates.
The inflation story has been surprising on the upside, but a lot of it has to do with food prices. Food inflation is tariff-oriented. Also, people are shifting their purchasing behaviour away from U.S. goods to Canadian goods, and given the fact that it’s more expensive, it’s a bit inflationary. Food inflation is not a reflection of strong demand; it’s a reflection of changing behaviour.
Another factor is that if you look at what’s happening in the rental market, rents are going down, not up. This will catch up with CPI as well.
So, all those factors suggest that the inflation that we are seeing is not sticky. All those factors suggest that inflation in Canada will be slowing down, paving the way for the Bank of Canada to focus on the unemployment rate, and that’s something that will allow the Bank of Canada to cut the overnight rate.
Let’s expand on the depressed housing market.
The housing market is a tale of two markets.
Let’s start with the low-rise segment of the market, namely what we call the detached segment of the market or houses. This market is okay. It’s not a buyers’ market, it’s not a seller’s market, it’s basically a market in equilibrium. The level of inventory is relatively low so prices are stable or maybe rising with inflation.
The condo market, especially in big cities like Toronto and Vancouver, is seeing a significant softening in demand. Investors account for about 60 to 70 per cent of the market, and they are not really in the market anymore. About 90 per cent of them are experiencing negative cash flow. So, they’re basically getting out of the market or at least not entering the market.
How much more downside is there for the resale condo market?
It depends on the city but if you look at places like Vancouver and Toronto, I would not be surprised to see condo prices fall by another 10 per cent or so. Most of the decline will be in the resale market.
To put this in perspective, I’ll give you an example for the GTA. In the next year and half or so, we’re going to get 47,000 completions. About 10,000 of them are not sold. Another 10,000, or maybe 15,000, will not close, people will walk away from their deposits. So, in the GTA, you’re getting around 20,000 units of new supply in the next year and a half. That’s a lot of supply, which means that prices will have to go down to clear the inventory. That will happen over the next two years.
Having said that, pre-construction activity is basically dead, which means that two years from now, three years from now, when inventory falls to zero, there will not be new supply because we are building nothing now, and then prices will go up notably.
Another element that is important to understand when it comes to the condo market in the big cities is that it seems that this recession, if you wish, in the condo market is working to consolidate the industry. Many small developers that entered the market over the past few years will probably exit the market. That means that the builders that you’re dealing with will be more solid from a financial perspective. Their balance sheets will be more stable, reducing the risk of not closing, not completing projects.
Also, there will be a greater focus on end users as opposed to investors. So, if there was any speculative aspect to the market, it will be reduced.
As well, I think that units will be built bigger because they will be geared towards families as opposed to investors, therefore there will be more two or three bedrooms and bigger units. So, the industry will change in a notable way.
Do you believe the U.S. Federal Reserve is behind the curve in cutting its policy rate?
No, I think they are doing the right thing.
The U.S. has the luxury to be able to wait because their economy is doing well. The unemployment rate is around 4 per cent and inflation is not a major issue.
What are your U.S. real GDP growth expectations?
For 2025, we forecast 1.8 per cent and for 2026, 2.2 per cent.
Now, I have a rapid-fire session. Here’s my first question: We have seen how tariffs can negatively impact economic growth. What policy would lift economic growth the most?
Two things. First, the removal of interprovincial barriers is important. Second, is infrastructure spending on productivity enhancing projects.
What policy would lift economic growth the fastest?
Tax cuts. I think that we have to revisit our tax code. Our tax system is putting pressure on our ability to compete in a very significant way. I think that we have to look at corporate taxation and clearly individual taxation in order to increase our potential growth. I think that we simply pay too much tax in this country.
What do you believe is the most important economic indicator to pay attention to in the current environment?
I think that the labour market will tell you how difficult the situation is.
I look not only at the unemployment rate but also at secondary indicators like the quit rate, like the quality of employment, like moonlighters. So, I look at primary and secondary labour market indicators because at the end of the day the labour market is telling you where we are in the economic cycle.
What do you believe is the greatest risk to the Canadian economy?
That Trump will stick to his tariff policy and will not compromise.
What do you believe will fuel global economic growth over the next decade?
Productivity, the AI revolution.
I think that productivity is going to go up significantly in many countries.
Investment is a necessity, and the AI revolution is perfectly positioned to take advantage of that.
You can make the point that Trump is slowing down the process because of the uncertainty, but it’s not going to stop it. This is something that will go beyond Trump.
This is something that I’m very excited about because I think that as investors you would like to be part of this. It’s going to resemble, to an extent, the dot-com revolution of the 1990s.
What do you believe is the most overlooked, or least addressed, important economic issue?
Income inequality.
The widening income gap in Canada, if we don’t pay attention to it, it’s going to be a significant factor impacting our lives in the future. I’m very concerned about it.
Lastly, briefly summarize your outlook for the Canadian economy?
Short-term pain, long-term gain. I think that the present uncertainty environment will be painful, but we will emerge stronger.
This Q&A has been edited for clarity.