He said, while the impact of the tariff war on the Chinese economy is debilitating, the US economy, too, has been slowing down quite a bit. The downward trend in the US economy may not result in a recession, and the US monetary policies may attempt to prevent the downward slide by tinkering with the bank rates.
Additionally, the competitive regulatory regime that the Trump administration has adopted to bring investments and jobs back into the USA has had an adverse impact on the Canadian economy. For instance, the Canadian economy has lost its corporate tax advantage as the US shifts to lighter regulatory burden.
Mr. Mendes said that the lowering of bank rates in the US may have an impact on the Canadian economy. On the Canadian front, the housing market has remained sluggish despite the mortgage rates becoming attractive in the recently. The auto sales also reflect this downward trend, indicating a slowdown. Canadian economy is more reliant on rate sensitive sectors, in addition to elevated stock of household debt, he said.
He said that the consumer debt will remain a perennial pressure point for Canadians, but they are unlikely to get into a payment default ever.
Mr. Mendes said, “The coming rebound in Canada looks to be little more than a normalization following a particularly weak few quarters. Base-case outlook is for the trade-war to linger into next year and the US economy to gradually slow, requiring the Fed to ease only twice to sustain the expansion.”
He said that the Bank of Canada will follow the Fed by cutting rates in 2020 to keep the Canadian dollar competitive and spurring sustained growth in exports and business investment. But, the timing, location and magnitude of trade shocks is difficult to pinpoint, and the situation could deteriorate faster or more aggressively than expected.
Recession is outside of base-case outlook, but trade-war could end up being trigger. Stocks can still rise, so long as rate cuts are delivered, and growth responds, Mr. Mendes said.