Leading contenders for PM job signal tighter fiscal policy

The leading political parties in next week’s federal election appear poised to steer Canada away from the expansive fiscal approach of the Trudeau era, says Corrado Tiralongo, chief investment officer with Canada Life Investment Management.

Tiralongo said that despite otherwise contrasting priorities, party leaders agree on the need for more targeted government spending and reducing the federal deficit.

“The transition from Trudeaunomics to a more fiscally disciplined, business-oriented regime — regardless of party — sets the stage for a leaner economic profile,” he said. “Investors should expect a shift toward tighter fiscal policy, reduced headline inflation, and a more business-friendly tone in Ottawa.”

Tiralongo said superficially the 2025 election pits Prime Minister Mark Carney’s technocratic, globally engaged policy agenda against Conservative leader Pierre Poilievre’s vision for smaller government, lower taxes, and a populist rejection of carbon pricing and central bank activism.

Markets, however, are focused on the evolving interplay between fiscal direction, global trade dynamics and monetary policy responses.

“I would describe the upcoming federal election as pivotal,” he said. “This time around it is about much more than domestic policy. Canadians face a complex geopolitical landscape.”

He said interest-rate differentials are not expected to support the Canadian dollar.

“In fact, the opposite may be true,” he said.

He pointed out that while some U.S. survey data has softened, the hard data remains healthy. Growth will likely moderate in coming quarters, but the inflationary effects of new tariffs are expected to push U.S. CPI up to around 4% later this year, forcing the Federal Reserve to hold policy steady through year-end.

“Canada, by contrast, is facing a much more acute deceleration in growth,” he said. “While retaliatory tariffs may introduce some upward pressure on inflation, the repeal of the carbon tax creates offsetting disinflation, giving the Bank of Canada more room to act. We expect three additional rate cuts this year, bringing the policy rate down to 2.00% — perhaps at a slightly slower pace than initially anticipated, but still materially looser than the Fed.”

Tiralongo said the U.S. administration’s tariff impositions will likely shape Canada’s macro-outlook more than any domestic election outcome.

“It is worth noting that even a moderate tariff regime poses a meaningful headwind,” he said. “Canadian export volumes — particularly in highly integrated sectors like auto manufacturing — are beginning to soften, and business investment tied to export capacity is slowing.”

He said the revised baseline now forecasts Canadian GDP growth of just 0.7% over the next four quarters, with material downside risks should trade frictions intensify or spill into services and investment channels.

“Business sentiment is deteriorating, and early indicators suggest a slowdown in capital expenditures tied to export-dependent sectors,” he said.

As a result, the Canadian dollar is likely to remain under pressure, government bond yields may drift lower, and equity markets are likely to remain bifurcated, with domestic-facing sectors faring better than export-heavy industries now facing structural headwinds.

“For investors, the key takeaway is that while Canada’s federal election is rich in political drama, markets are signalling that the outcome — though directionally important — is not the dominant macro driver. Instead, U.S. trade policy, monetary adjustments, and global rate differentials will shape Canada’s economic trajectory,” he said. “As always, disciplined portfolio construction and scenario-based analysis remain our strongest tools in managing what lies ahead.”

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This article is part of the Soundbites program, sponsored by Canada Life. The article was written without sponsor input.