BofA Securities trims Canada's GDP growth outlook for 2025 and 2026

Investing.com -- BofA Securities economist Carlos Capistran has released a report detailing the 2025 outlook for Canada, touching on various key issues including elections, the US-Canada trade war, the Bank of Canada's stance, GDP growth, and the CAD.

The report indicates a revised GDP growth forecast for Canada, down to 1.5% from 2.4% for 2025, and a decrease to 2.0% from 2.2% for 2026, citing potential downside risks. The report also anticipates a renegotiation of the United States-Mexico-Canada Agreement (USMCA) following the upcoming Canadian federal election. With the trade war de-escalation, Capistran expects the USD/CAD to fall to 1.40 this year.

The next Canadian federal election is due by October 20, 2025. Canada's new Prime Minister, Mark Carney, who leads the Liberal party, may call for snap elections on March 23, with the election likely to be held on April 28. The election is anticipated to be a competitive one, with Pierre Poilievre, the leader of the Conservatives, being a strong contender. The report states that a Prime Minister elected through a federal election is necessary for the renegotiation of USMCA. The report also predicts a fiscal expansion, regardless of the election outcome.

On the US-Canada trade war, the report suggests that Canada cannot afford a prolonged trade war with the US due to the risk of recession and potential inflation. It anticipates a renegotiation of the USMCA this year, leading to a new USMCA 2.0, which would likely continue to allow most goods traded between the three countries to have zero tariffs.

The report also covers how the Bank of Canada (BoC) might respond to tariffs. It is expected that the BoC will provide additional support to the economy by implementing further cuts due to the uncertainty around tariffs. One more 25bp cut by the BoC is expected in April, with downside risks to the current 2.50% terminal rate.

The report also addresses the anticipated weakness in Canada’s GDP growth for this year. Given the imposition of some tariffs by US President Donald J. Trump, further threats of tariffs, and slower US GDP growth, the report suggests that economic activity in Canada will likely decelerate.

Lastly, the report discusses the USD/CAD forecast for this year. The report predicts the USD/CAD to fall to 1.40 this year due to a gradual de-escalation of North American tariffs tension. Even if the US tariffs stance becomes more hawkish after April 2, the report sees limited room for USD/CAD to rally as the global tariffs ramp-up is turning out to be more negative for the US.