Martin Lefebvre
Hi, everyone. Thank you for tuning in to our NBI podcast. Today's topic will be on the Canadian economy. And to do so, I'm joined by Daren King, Senior Economist at National Bank Capital Markets. Welcome, Daren.
Daren King
Thank you for having me.
Martin Lefebvre
Daren, we can’t help but talk about what’s going on worldwide—in Iran and the Strait of Hormuz—and the impact it’s having on the Canadian economy. Can you tell us about the oil shock right now and the impact not only on importers—because we’re net importers in Canada—but also on consumers?
Daren King
Yeah. Like you just said, we are net exporters of energy produced in Canada. So that’s good news, because we won’t face scarcity like maybe some countries in Asia or Europe. That means that for consumers, the real impact will be on prices. We won’t face scarcity—we won’t have to make sacrifices in our day-to-day—but it will cost more to buy some products, notably gasoline. We’ll probably see a second-round effect later this year, because even if the conflict stops tomorrow, there’s a backlog. Even if we reopen the Strait of Hormuz tomorrow morning, it will take some time before we can catch up with deliveries of products that were stopped during the past few weeks. Also, we’ve seen price increases in several other products that will have an effect down the road, notably fertilizers, sulfuric acid (for chips, for AI, for example), and stuff like that. We can expect we’ll see higher food prices in the next few months, or other products that are energy-intensive—for example, aluminum. The impact on inflation will last longer than only the direct impact of the conflict. That will mean more inflation for Canadians, but we probably won’t see the direct impact on consumers, on the economy directly. For some provinces, that means opportunities—obviously for provinces like Alberta, Saskatchewan, and Newfoundland-and-Labrador. But for others, it will probably mean more inflation, which is not good news for households and businesses in Quebec and Ontario. It will be a more negative impact.
Martin Lefebvre
And sort of a tax on consumption.
Daren King
Exactly. There will be some winners, some losers. Overall, in Canada, I think that will be a winner, but for some provinces, there will be some losers.
Martin Lefebvre
You talked about inflation and the short-term impact versus the long-term impact. Can you just give us a view of where inflation is right now and what's creating more inflation or less and what's your view on what's coming?
Daren King
With the latest CPI data we had for March, we saw a pickup with the increase in oil prices around the world, in Canada and the U.S. But the good news is that when we look at core inflation—so when we remove energy and food, essentially—we saw a slightly lower increase than what economists expected. It means we’re starting on a good footing if you are a central bank trying to fight inflation. Especially in Canada, since the end of last year, we’ve seen a downward trend in inflation that was really welcome. It gives the Bank of Canada more leeway when it comes to fighting inflation in the next quarters. Not so much in the U.S.: inflation picked up at the end of last year and is still above the Fed’s 2% target. They probably have less margin south of the border, but we have more margin here in Canada. That’s good news. But since it’s a supply shock that we’re facing right now, the Bank of Canada’s ability to respond is very limited. When you’re at the Bank of Canada and you increase or decrease your policy rate, you mainly impact demand—the ability to buy more stuff, or for businesses to invest more. You can’t drill oil with interest rates, obviously.
Martin Lefebvre
Monetary policy can't fix a supply shock.
Daren King
Exactly. It can in the long run if you keep interest rates low for a long period of time—stimulating investment and creating new supply capacity—but it takes many years to do so. In the short run, the real impact they can have is on demand. That’s why the Bank of Canada will probably try to stay put for the moment, trying to look through that shock to see what will happen. And if the conflict lasts for a long period of time, there’s also a scenario where we go through a worldwide recession. In that case, if they try to increase interest rates right now to fight inflation, the effect would be limited—because, again, they’re only impacting demand—and it could make the economy worse than we want. That’s not the best-case scenario. If we have a worldwide recession, ultimately Canada will be impacted, even though we’re in a better position for the moment. It’s a dilemma for the Bank of Canada right now. They will probably try to stay put as long as they can before they really need to do something. But for the moment, we’re optimistic they won’t change their policy rate.
Martin Lefebvre
You’re sort of in disagreement with what the market is expecting. At the very early stages of the oil shock, or the tantrum in the Strait of Hormuz, oil prices went up above $100, and then the market started pricing in three rate increases. So that didn't make much sense to you guys.
Daren King
No, exactly. It was overpriced. Market expectations for interest-rate hikes have come down sharply since then. They are now expecting probably one hike by the end of this year. But that wasn’t our scenario from the beginning. We will probably see the Bank of Canada stay put for the entire year. And we might expect them to increase interest rates at the beginning of next year—once or twice—really to come back into their neutral zone, because now they’re slightly in accommodative territory. They’ll probably try to return to neutral, not because they really want to fight inflation actively, but to have more ammunition if there’s a downturn in the next few quarters.
Martin Lefebvre
We've talked about short-term interest rates, which the impact on longer-term rates and perhaps in this environment where there's a lot of fiscal spending, when there's a little bit of inflation, as you said?
Daren King
The dynamic is very different than for short-term interest rates. If you’re an investor and you’re expecting more inflation, you want to be compensated for that expected inflation. We’ve already seen long-term interest rates go up over the past few weeks. But there’s also, like you said, the question of fiscal policy that we have here in Canada and in the U.S., with the “One Big Beautiful Bill,” for example.
Martin Lefebvre
And in Europe for that matter. It's a worldwide phenomenon.
Daren King
Exactly. We’re talking a lot about Canada and the U.S., but this is worldwide, with governments spending quite a lot. In Canada, we’re going through a structural change in the economy. With the trade conflict with the U.S., we need to invest to diversify our supply chains and trade. I think the fiscal package that the federal government is putting into the economy is a good thing as the Canadian economy is probably going a bit slower that it could be at the moment.
Martin Lefebvre
Are we going to see the impact of that in 2026, or is it just something that’s coming?
Daren King
It’s something that will be seen probably in the coming years. It takes time before the plan is executed and we see the fruits of those investments. But in the U.S., the economy is more at an equilibrium at the moment—already running at its potential. That will probably mean more inflation. Again, more inflation because of that fiscal spending means higher interest rates. There’s also the question of the sustainability of the deficit. We’ve seen the U.S. credit rating decreased over the past few years by several agencies. We’ve also seen governments around the world—notably in the U.K., where the prime minister proposed a fiscal package that was not well accepted by the markets. Obviously, the U.S. is a bigger player. We probably won’t see that, but investors are getting more concerned about that question. If you’re lending money to someone and you don’t know if they’ll repay you down the line, you’ll probably charge a higher interest rate to reflect that risk. That’s the same thing we’re seeing in the bond market at the moment. We’re expecting higher interest rates on the long part of the curve in the coming years.
Martin Lefebvre
What does it mean for mortgage rates?
Daren King
Like I said, we’re not expecting the Bank of Canada to cut its interest rate. Variable rates are probably at the lowest level they’ll be for some years—except if we have a worldwide recession; then it’s another story. That’s a very pessimistic scenario, and that’s not what we’re expecting. They’re probably at their lowest level. And for fixed rates, they’ll probably go up in the next few months and quarters. If I were to renew my mortgage tomorrow, obviously it depends on your risk profile, but I would probably take a fixed rate for three or five years. I don’t really have a preference. Will we really have lower interest rates in three years? If you take a three-year term, I don’t have a lot of conviction about that. So five years might be a good option.
Martin Lefebvre
We talked about Alberta, maybe the oil shock is a positive for them. But for the consumer, tariffs, higher oil prices, are we seeing sort of a slowdown in the Canadian economy? What's your view on that?
Daren King
I think the uncertainty surrounding the trade conflict we have with the U.S. is still being felt in the economy, even though we’re getting used to it. I think that the CUSMA renewal this year is very important to dissipate that uncertainty. If we can renew the trade agreement with the U.S. and Mexico as fast as possible—and as smoothly as possible—without Trump completely derailing the negotiation when he can.
Martin Lefebvre
What's the probability of that happening?
Daren King
I think we will see a deal—definitely. But it will depend on how long it takes, because it’s really the uncertainty that is damaging the economy right now. When we look at the effective tariff rate that Canadian exporters are facing—that the U.S. is paying for our products—it’s very low, around 4%. But it’s really some specific sectors that are impacted: wood, cars, aluminum. There are provinces like Quebec and Ontario where the impact is bigger, compared to Alberta and Saskatchewan, where the impact is very limited. There will be losers and winners there as well. I think we’ll see a deal down the line, but the uncertainty is certainly slowing down the Canadian economy. At the same time, we’re seeing a historic shock on the demographic front. We saw historic growth with 1.5 million people coming into the country in 2024. Now we’re expecting the population to decrease for the first time in Canada. That’s another drag for the economy. We’re expecting productivity to increase to compensate for that decline in population, but it takes time. Interest rates for businesses that want to invest in productivity haven’t really come down, even though the Bank of Canada cut its interest rate for all the reasons we said earlier. It’s tougher for them to take credit, and it costs more. Those productivity gains will probably take more time to show up. That’s why we’re expecting a sluggish growth in the Canadian economy in 2026, but probably a pickup in 2027, with less uncertainty, more investment, and the fruits of those investments coming into the economy.
Martin Lefebvre
But not a standstill. We're talking about what, like a 1.5% growth?
Daren King
For this year, approximately 1%, roughly, but probably 1.5% next year in Canada.
Martin Lefebvre
Last question about the real estate. What are you seeing? We know condos in Toronto are feeling the brunt of all of this. What should we expect for 2026?
Daren King
The real estate market is interesting because we’re getting back to the normal dynamic we had before the pandemic. Before the pandemic, we weren’t talking about the real estate market, but about segregated real estate markets, with different dynamics.
Martin Lefebvre
Montreal always lagging Toronto, always lagging Vancouver.
Daren King
Exactly. It was very different depending on where you are. During the pandemic, it was like one big real estate market: everything went up and down at the same time.
Martin Lefebvre
Everything doubled.
Daren King
Pretty much. But now there are places where it’s going down sharply, and that’s what is very different right now. When we look at markets like Montreal, Quebec City, and Calgary, those markets are doing pretty well, actually. Transactions remain high—in line with or slightly above their historical average. It’s normal activity, with prices going up slightly. It’s a balanced market, or slightly favourable to sellers. But for markets in Ontario and in B.C., it’s very difficult at the moment. You talked about the condo market in Toronto, but it’s not just the condo market in Toronto—it’s the entire Toronto market that is very difficult right now.
Martin Lefebvre
What's the culprit? What's the higher interest rates? Overconstruction?
Daren King
I think we're still seeing a lack of supply everywhere in the country. We'll talk about that probably later, but the biggest reason for the slowdown that we're seeing is really affordability. The prices compared to the rest of the country.
Martin Lefebvre
It went up too fast.
Daren King
Households’ capacity to pay for those units, it remains very unaffordable. If you combine unaffordability with uncertainty, it magnifies the effect on the real estate market. It’s a very big financial decision, and if you don’t know whether you’ll still have a job tomorrow morning, you wait. For those markets, we’ve had a sharp slowdown. Those are also the markets where we’re seeing the biggest slowdown in demographic growth. It’s the perfect storm for a slowdown. We’ve seen prices decrease sharply in those markets. For some people who purchased a home over the past few years, if they want to sell tomorrow morning, they have negative equity on their home. It’s like the market is stuck: people won’t sell their home, and people are not able to buy at those prices. We’re seeing lower transaction volumes and prices that are continuing to decrease. We’ll probably see, for Toronto and the Golden Horseshoe in general—and Vancouver—prices continue to go down this year. Nobody wants to catch a falling knife. If you are a buyer, you’ll try to buy when you see the market picking up or stabilizing. It will probably still take some time. But affordability will remain a big issue around the country for probably the next few years because, at the same time, you have home builders facing higher financing costs and higher construction costs, along with weaker demographic growth and a resale market that is essentially frozen. If you want to buy new units at the moment, it’s very difficult to launch new projects. Down the road, we want new builders to continue to build because that’s the only way we’ll restore affordability across the country. But for the moment, it’s very difficult for them to do so. Affordability will remain an issue for probably the next 10 years.
Martin Lefebvre
Very interesting, Daren, and I’m sure we can talk more about that in the near future. But for the time being, it’s all the time we have today. So thank you very much for joining and participating in our NBI podcast. And for those of you watching or listening, thank you for tuning in, too, and we’ll talk again next month.
Daren King
Thank you.
Martin Lefebvre
