While downside tariff-related risks persist, the worst may be over for the Canadian economy, says BMO Capital Markets.
In a new report, economists at BMO said that, despite ongoing trade uncertainty, the economy weathered a contraction in the second quarter —and is now rebounding.
“Real GDP turned modestly higher in July, putting growth on track to meet, and possibly exceed, our current estimate of 0.5% annualized in [the third quarter],” it said.
To start, consumer spending has rebounded from an initial weakness in the face of shifting U.S. trade policy.
“Households are doing their utmost to cushion the blow from the trade war,” it said.
With travel to the U.S. down sharply, “billions of dollars have been redirected toward domestic tourism,” the report said, adding, “A sizzling TSX is also greasing the spending wheels.”
Additionally, “Barring an escalation of the trade war, both exports and investment spending look to stabilize soon,” it noted.
The forthcoming federal budget is also expected to deliver “plenty of fiscal stimulus” — which, along with monetary easing, should enable the economy to “gather steam in the coming quarters.”
That said, the housing market and the labour market represent “a couple of weak links in the economic chain.”
However, the biggest risk is the U.S. government walking away from the existing trade deal, the Canada-United States-Mexico Agreement, which is cushioning the effect of higher tariffs.
If that happens, “the economy would likely face a recession,” it said.