Canada's economy is showing surprising strength despite a barrage of challenges, and that resilience suggests the Bank of Canada is more likely to ease interest rates than tighten them if officials decide to move, according to TD's top economic minds.
Derek Burleton, TD's vice president and Deputy Chief Economist, painted a cautiously optimistic picture of Canada's economic outlook at a mortgage industry event in Toronto this week. While the country has weathered pandemic aftershocks, trade tensions, Middle East conflicts driving up fuel prices, and the labour market disruption from artificial intelligence, the economy continues to hold its ground.
Consumer Spending and Employment Show Resilience
Recent data from Statistics Canada reveals consumer spending climbed 0.8 per cent in February, while employment has remained relatively steady. Even as gas prices continue to strain household budgets, the gains in Canada's oil and gas sector are offsetting those pressures, Burleton explained.
"We are dealing, as an economy, with a series of shocks," Burleton said. "Yet, our economy has shown some resilience."
Most of the Big Six Canadian banks are forecasting a steady 2026, but Burleton's message to rate watchers is clear: if the Bank of Canada moves from its current benchmark rate of 2.25 per cent, cuts are far more likely than hikes.
Inflation Pressures May Ease If Middle East Tensions Cool
The current inflation spike looks different from the post-pandemic surge that forced the central bank to raise rates aggressively, Burleton noted. This time, inflation is being driven by a single supply-side event—elevated oil prices stemming from Middle East conflicts.
"I think the bar for a rate hike is relatively high. If the shock proves bigger, oil prices grow higher, energy prices impact demand in provinces like Ontario more than expected, then they'll have to adjust downward."
Unless the geopolitical crisis drags into summer, he doesn't expect the Bank of Canada to intervene. The critical difference: post-pandemic inflation was fuelled by massive demand and multiple supply shocks simultaneously. Today's inflation is more narrowly focused, giving the central bank room to hold steady—or eventually cut.
Canadian Dollar Strength Reflects Economic Optimism
Perhaps the most telling sign of Canada's economic resilience is the strength of the Canadian dollar. The loonie held relatively steady over the past year and strengthened noticeably in April—a signal that international investors remain confident in Canada's prospects.
"It's a very nuanced story in Canada, but I am cautiously optimistic, and I think the Canadian dollar's strength reflects that," Burleton said.
Foreign direct investment is a major factor. While such investment plummeted south of the border last year, it soared in Canada. Pension fund flows into Canada have strengthened considerably, and recent federal efforts to attract investment by highlighting Canada's strengths in minerals, oil, and other sectors appear to be paying dividends.
Immigration Pullback Supports Labour Market Stability
Canada's job market has proven surprisingly resilient, a development Burleton attributes partly to a pullback in immigration. After years of steady population growth, Canada's population actually declined last year—the first contraction since Confederation. This shift has eased labour market pressures without triggering widespread layoffs.
The combination of steady employment, controlled inflation pressures, and strengthening foreign investment suggests Canada's economic fundamentals remain sound, even as global uncertainties persist. For mortgage holders and borrowers watching the Bank of Canada's next moves, Burleton's assessment offers some reassurance: rate cuts appear far more likely than hikes in coming months.
This article is based on reporting from Canadian Mortgage Trends. Read the original story here.