Canada appears to have a dodged a recession, but forecasts that the economy will tread water in the months ahead have one group of economists calling for deeper interest rate cuts by the Bank of Canada.

Much deeper cuts, actually. While most of the big six banks in Canada are calling for the central bank’s rate to settle at 2.25 per cent or higher, Capital Economics predicts it could drop to 1.75 per cent.

The Bank of Canada made its first move in six months in September when it cut its rate to 2.5 per cent, citing a slower Canadian economy and weaker inflation risks.

Many economists expect it to cut another 25 basis points in October, but Capital thinks it will go further than that.

U.S. tariff shocks and lower immigration has set the economy up for a period of weak growth, said Stephen Brown, Capital’s deputy chief North America economist. Though Capital doesn’t expect a recession it thinks the economy is “teetering on the edge” of one.

It forecasts gross domestic product will rise just 1 per cent this year and the unemployment rate will peak at 7.3 per cent in early 2026 as uncertainty surrounding U.S. tariffs and weaker immigration weigh on the economy.

While the economists expect exports and business investment to partially rebound in the second half of the year, household spending will remain low.

Inflation, on the other hand, will prove less of a problem now that the federal government has dropped most of its retaliatory tariffs against the United States, said Brown.

Core inflation has been sticking close to 3 per cent, but the weakening labour market and removal of the tariffs should ease it toward 2 per cent by mid-2026, he said.

“Both core and headline should look largely under control within a few months,” said Brown.

“All of this makes us think that it is not a question of whether the bank will cut again, but how far it will go.”

Capital has “pencilled in” three more 25-bps cuts at every other meeting from October, given the central bank’s emphasis on caution.

As this would bring the rate below the bank’s neutral range estimate of 2.25 to 3.25 per cent, the economists are provisionally forecasting two interest rate hikes in late 2027, as the economy recovers and unemployment rate drops.

One wildcard still to come for their forecast is the Federal Budget to be tabled on Nov. 4.

Prime Minister Mark Carney’s firmer tone on austerity could mean a cut to government jobs is coming, said Brown, which would act as a modest drag on the economy, prompting the Bank of Canada to provide a little more support.

On the other hand, the central bank may see the need for a little less support if more fiscal aid than expected is delivered in the federal budget.

Behold the rise of a car-building nation. Today’s chart shows the staggering decline of Europe’s trade surplus with China in the auto sector.

“Massive investments (and subsidies) in the electric car sector in recent years have transformed China from a marginal player into a leader in the field,” said National Bank of Canada economist Jocelyn Paquet.

In 2023, China surpassed Japan as the world’s leading exporter of motor vehicles with imports from China to the European Union rising from almost nothing to around €13 billion a year today.

Meanwhile, EU auto exports to China have collapsed from around €24 billion per year in 2022 to just €10 billion today.

To curb the damage to local producers, the EU imposed a tariff of up to 45 per cent on Chinese electric cars in October 2024.

“… We expect more measures aimed at protecting local producers, both in the European Union and in other jurisdictions,” said Paquet. “New fronts could yet open up in the global trade war.”

Source: Financial Post