Focus
December 19, 2025 | 13:32
5 Fun Facts from ’25; 5 Flashy Forecasts for ’26
Economics
Economics
Fixed Income Strategy
Economics
Economics
Economics
Economics
Fixed Income Strategy
Economics
Economics
5 Fun Facts from ’25; 5 Flashy Forecasts for ’26 |
|
This year was a tale of two halves: the trade war dominated the first half, generating intense volatility, while the AI spending boom took over in H2, keeping growth on track and markets on the hop. Yet, curiously, through those two massive drivers, as well as an extreme political makeover in Canada, growth was close to average, inflation held steady and central banks cut much as they did in 2024. The resiliency in the face of the trade war kicks off our list of surprising 2025 stats: 1) After having a near-bear market experience around “Liberation Day” in April, equities roared back globally to churn out a third straight year of robust gains. Perhaps most surprising is that Canada (+28%) and Mexico (+30%) were near the top of the heap, the two very economies most exposed to U.S. trade. The TSX outperformed the S&P 500 despite omnipresent recession fears and without the benefit of a sizeable tech sector. Gold played a big role, but even excluding bullion, the TSX still topped the major U.S. averages. |
|
2) Despite being the primary target for U.S. measures, and a month of 100%+ tariffs, China’s exports rose 5% in 2025, pushing its trade surplus to a record above $1 trillion. Amazingly, this was despite a 19% drop in exports to the USA. Sales to Europe and the rest of Asia stepped in, partly reflecting re-routed sales to the U.S.. China also reported its first annual drop in fixed investment since the late 1980s. 3) The currencies of both China and Canada rose this year despite the trade clouds, but they were far from the strongest major currencies in the world. Near the top were the Mexican peso—rebounding from a deep sag in 2024—and an almost 14% rise in the euro. That marked the best year for the common currency in more than two decades, despite the fact the ECB cut more than the Fed (100 bps vs 75 bps), Europe was under severe U.S. trade pressure and lost market share in many sectors to China, and despite a lagging tech sector and fiscal concerns (notably for France). 4) Gold roared, but it wasn’t the strongest commodity—it wasn’t even in the top two precious metals this year! It was hi-ho-silver away, as silver more than doubled, while platinum also nearly did so. Notably, despite this big rally, and strong gains for copper and natural gas, overall commodity price indexes were roughly flat this year due to softness in oil, nickel and some crops. 5) Despite widespread concerns over the fate of Canadian jobs in the face of U.S. trade pressure, employment in fact ended the year on a surprising heater. Even Canadian manufacturing jobs were reportedly above year-ago levels by November (according to the LFS, at least). Perhaps the most amazing stat for the year was that the number of Canadians unemployed was lower than at the start of the trade war a year ago. |
That’s the fun/easy part: Let’s turn to the tougher top 5 forecasts for 2026. 1) U.S. productivity rises much more meaningfully, in part reflecting the heavy investments in AI. Output per hour is up at a 2.3% a.r. in the past two years, after the post-pandemic stumble, a bit above the long-run average of 1.8%. Productivity could approach 3% in coming years—strong, but it averaged 3.7% per year for six years during the 1997-2003 internet boom. Firmer productivity allows solid GDP growth without pressuring inflation. Stretch call: Even Canada partakes in the productivity upswing, as it did in the internet boom. Slower population growth and Ottawa’s drive to spur investment will help. The spoiler: U.S. tariffs weigh on some of Canada’s most productive sectors—autos, metals and forestry. 2) Following two years when every major central bank cut rates (save the BoJ), more mature economies see hikes than cuts in 2026. Sticky core inflation in many countries, rising food prices, tighter job markets—and, yes the AI boom—prompt some rate reversals. Japan is already hiking rates, while the RBA seems to be next in line. We suspect they will not be the last, even as the Fed eases further. Still, we don’t currently see hikes in 2026 for either the Fed (75 bps of cuts) or the BoC (on hold). Stretch call: The AI “bubble” becomes a real bubble. It takes Fed tightening to pop a bubble, and we see the Fed going the other way in 2026. 3) The primary reasons why we consider Fed tightening as only a remote possibility in 2026 are: (a) a new, presumably dovish, Fed Chair will be in place by May, and (b) we expect U.S. core inflation to ebb slightly further in 2026. With shelter costs moderating, wages cooling, and productivity gaining steam, underlying CPI could cool well below 2.5% by end-26. Stretch call: Canadian inflation ticks above the U.S., something that has happened for only one full year of the past nine (2019). The end of the carbon tax flattered Canada’s rate this year; the flattery ends in April. 4) The trade front is quieter, but not silent, in 2026. The U.S. Supreme Court ruling on IEEPA tariffs, the ongoing tussle with China, the fraying of some earlier U.S. deals with other economies, and the USMCA review will keep trade very much on the front burner. However, it will make much less impact on financial markets or sentiment, as almost everyone has become inured to the unending wave of drama, as well as because of the limited economic impact. Moreover, since the trade war doesn’t appear to be a big political winner, it may be shunted to the sidelines as the U.S. mid-term elections approach (on November 3). Stretch call: The USMCA does not get fully resolved in the coming year, and will instead be subject to another review in 2027. Count us as relative pessimists on the outlook for the trilateral trade agreement as Canada and the U.S. have struggled to even reach a limited deal on, say, steel, while the President is clearly not enamoured with the 2020 deal. 5) Canada’s housing affordability improves further, getting closer to ‘normal’. With interest rates having done all they can, it now comes down to a further mild correction in prices in Ontario and B.C. and firmer incomes to improve affordability. But a combination of all three things has reversed much of the affordability damage from 2020 to 2023. Solid supply gains, lower borrowing costs and a near-stall in population growth have all helped right the ship, but it will take time. Stretch call: The office market improves notably in 2026, after baby steps this past year. The return to office for many public sector and some financial workers, a lack of new construction, and underlying job growth should all help strengthen the market after a bleak stretch. | Judging Last Year’s Calls Given the policy uncertainty this year, it was an interesting year for forecasters. Perhaps the biggest surprise was how limited the trade-war damage was on many fronts—Canadian GDP, U.S. inflation, or stocks. On balance we thus got more things right than wrong; but we had at least two big clunkers—both of which could be pinned on the trade tensions. Overall, we will give ourselves a solid B (7.5 out of 10). 1) The Trump trade unwinds on most fronts—the dollar, yields, commodities—and U.S. core inflation will actually ebb not accelerate. Yes (mostly), and yes. 2) Canadian GDP growth will be above consensus at 2.0%, and even top the U.S. on Q4/Q4 basis. Growth was resilient, but not quite 2% and, no, it didn’t top the U.S.. 3) Canadian home prices pick up and yet affordability improves. No, and yes. 4) Central bank easing continues apace, and on average, by as much as in 2024. Yes, and yes indeed. 5) The Canadian dollar finds bottom in early 2025 and then strengthens, and the TSX outperforms the S&P 500. Yes and yes. |