The Economy Feels… Off
“The economy is struggling or stagnating,” says Royce Mendes, Head of Macro Strategy at Desjardins Capital Markets, summing up the hazy state of Canada’s growth on BMO’s Open Outcry1 podcast with host Bipan Rai, Managing Director, Head of ETF & Alternatives Strategy at BMO Global Asset Management.
Sure, the first quarter showed a decent GDP boost—mostly thanks to exports—but Q2? It’s been a mixed bag. Mendes isn’t convinced the jobs data tells the real story. “The labor force survey is notoriously volatile… most people call it the random number generator,” he quips. Meanwhile, businesses are uneasy, households are pulling back, and uncertainty is still clouding the outlook.
Bottom line? “It’s not running at full health,” Mendes says. And with the Bank of Canada (BoC) sitting tight for now, both he and Rai agree: we’re in wait-and-see mode.
Core Inflation: One Weird Month Skewed the Story
Inflation isn’t misbehaving outright, but it’s still making the BoC nervous. “The measures that the Bank of Canada puts the most weight on… look sticky, look too high for their comfort,” Mendes explains. But he doesn’t see this as a trend—more like a blip.
The culprit? April.
That’s when rents appeared to surge—though Mendes isn’t sure how believable that is. Add in some possible tariff-related price hikes and companies quietly hiking margins after the carbon tax was lifted, and suddenly core inflation looks hotter than it really is. “That did get captured in the April data,” he says, calling it “one time in nature.”
As April falls off the rolling averages in July, Mendes expects a cooler read: “Something probably within the 1 to 3% band.” And if that plays out, the BoC may feel comfortable enough to cut again this fall.
The BoC Isn’t Big on Surprises—And That’s a Good Thing
So what happens at the BoC’s next meeting? “I see a very slim chance that they would cut rates,” Mendes says. While the BoC is more willing to surprise markets than the Fed, now’s not the time. “With all of the uncertainty that is already prevailing across many industries and households in this country,” he says, “I don't see that reason.”
But make no mistake—more cuts are likely coming. “The Bank of Canada typically doesn’t get out of bed for one cut or one hike.” His team thinks a couple more are on the way before year-end. Why? Because inflation will likely soften, and because “the expected short rate embedded in the 10-year government of Canada bond yield is about 2.5%. That sounds about right to me.”
Mortgage Renewals Are the Next Shock
Beyond inflation, a much more personal pressure point is creeping into view: mortgage renewals.
“2025 and 2026 will be tough,” Mendes warns. With many households set to renew at much higher rates, the squeeze on disposable income will be real. “They might not be able to buy that bigger house,” he says. Or they may need to skip the bigger vacation, or cut back elsewhere.
Layer on tighter immigration rules and population growth slows too, which affects everything from housing demand to tax revenues. That means more slack in the system, and potentially less inflationary pressure ahead.
In Mendes’ view, a bit of extra easing would help the economy adjust. “We need to probably go a little bit below [the neutral rate] to help the adjustment.”
Canada’s Global Moment—If It Doesn’t Fumble It
Shifting gears, Rai and Mendes talk big picture: Can Canada actually become a magnet for global capital?
Mendes is cautiously optimistic. “Canada has the best-in-class federal debt-to-GDP ratio… the narrowest deficit of any G7 nation,” he notes. And despite polarization elsewhere, Canadian politics remains relatively moderate and stable—an underrated edge in today’s world.
But there’s a catch: the government has to deliver. “If there is a credible path to cutting government spending… Canada has a huge opportunity to attract capital.” Investors are already nibbling. Mendes has noticed more buzz around Canadian credit abroad: “A lot of clients… are very interested in talking about Canada—much more than… five years ago.”
Steepening Ahead, But Not Necessarily More Than the U.S.
So, what does this all mean for the yield curve?
Mendes does expect some steepening, especially if the BoC cuts again. But will Canada out-steepen the U.S.? Probably not. The Fed is expected to cut more in the next two years, and on the long end, rising term premium in U.S. Treasuries could steepen their curve more aggressively—though that premium “may not build to the same extent” in Canada due to its stronger fundamentals.
August 1: Trade Turbulence Ahead?
One looming deadline is keeping investors nervous: August 1, when the U.S. could slap a 35% tariff on non-USMCA goods. Mendes isn’t panicking—but he’s wary.
“I think there has to be a deal before August 1,” he says. But he also cautions: “Whether it is one that Canadians… find very favorable is a different story.”
The U.S. wants manufacturing back, and Canada may be in the crosshairs. If the USMCA exemptions vanish, “we could be in a very different position.” And for an economy like Canada’s—heavily trade-reliant and commodity-driven—that’s not a minor risk.
The best-case scenario? Maybe some mild under-promise/over-deliver diplomacy from the Carney government. But Mendes is clear: “The big risk is to the downside.”
Final Thoughts: Data Will Decide
Where things go from here is still uncertain, and the BoC knows it. As Mendes puts it, “Monetary policy in the short term… is a good option to help smooth the path towards a healthier economy.”
But with trade tensions rising and households about to feel the pinch of renewal season, there’s a lot riding on what comes next—both at the Bank and in Ottawa. Investors, policy watchers, and everyday Canadians alike will need to stay sharp.
Because in this climate, every data point matters.
Footnote:
1 Open Outcry Podcast, Episode 12 — “The BoC’s Path Forward” with Bipan Rai (BMO) and Royce Mendes (Desjardins Capital Markets), July 2025. ↩︎
