CIBC Chief Economist, Avery Shenfeld, joins Tim Pinnell of CIBC Mellon on the CIBC Mellon Industry Perspectives podcast to discuss the current economic outlook, including the forces shaping Canada’s economy and key considerations for institutional investors and market participants as the global financial services community prepares to gather at the 2026 Sibos Conference in Miami. This podcast was recorded on August 24, 2026. Economic and market conditions can change rapidly, and the discussion reflects information and perspectives available as of the recording date.
Tim Pinnell:
Welcome to today's episode of CIBC Mellon Industry Perspectives, a podcast series that brings you developments in the Canadian securities industry and potential impacts for CIBC Mellon clients and institutional investors active in the Canadian market. I'm Tim Pinnell, Relationship Executive. Global financial institutions at CIBC Mellon, Industry participants are navigating today's shifting market landscape, including elevated geopolitical tensions and trade uncertainties. As the global financial services community prepares to gather at the Sibos conference in Miami, understanding the factors shaping Canada's economy remains an important consideration for investors and market participants around the world. This episode will offer commentary from CIBC on domestic and global economic factors, and an outlook on what this all means for Canadian market participants. Today's discussion will provide an economic outlook and discuss implications for institutional investors in Canada. To explore these themes and help break it all down for us, we are pleased to welcome Avery Shenfield, Managing Director and Chief Economist at CIBC, to discuss his perspective on the Canadian economy. Thank you, Avery, for joining us.
Avery Shenfeld:
My pleasure.
Tim Pinnell:
To start us off, Avery, can you provide an outlook of the Canadian economy? Let's start with interest rates. Do you anticipate the rate will continue to be held steady by the Bank of Canada? What indicators would we have to see for the Bank of Canada to start adjusting rates in the coming months, or even the year ahead?
Avery Shenfeld:
Well, right now the Canadian economy needs some support, some significant support from interest rates. And although our policy interest rates are well below those in the US, they really not providing that much of a boost to interest sensitive sectors. If you look at, for example, how the homebuilding sector is doing, it's quite weak. Business capital spending may have picked up a little bit in the most recent quarter, but generally the trend has been quite soft, consumer durable spending. Again, another interest sensitive sector. It's done okay, but not spectacularly so. Though rates are low, they're not really overly low in terms of providing a lift to growth. Core inflation in Canada is running. If you look at the various indicators the Bank of Canada looks at core, inflation is running at just around 2%. Now, overall inflation is of course higher because of gasoline prices and conflict in Iran. But the bank account is willing to live with that. So I think on balance, they're on a decided hold on interest rates until the economy actually puts together a string of quarters that look better. So yes, second quarter growth, which we'll get data on this week does look to be a bit better. But that comes after two negative quarters. So we really need a longer runway of growth I think as part of the story for higher rates, we may get there by the middle of 2027, but even then, that's going to depend on what happens with the current trade conflicts with the US. How much of a headwind that ends up being for growth. That could ultimately even delay a move to higher interest rates. So I think it's still coming. We may get back to 2.75 from 2.25, where we are now on the overnight rate, but it's going to take a while. Longer term interest rates are of course a bit higher because they've been influenced by the sell off in the US bond market and the spill over to the Canadian bond market.
Tim Pinnell:
So I heard you talk about that longer runway for seeing what decisions are going to be made. And obviously there are a number of factors at play here. How do you see inflation trends shaping the Bank of Canada's policy decisions across the Canadian economy?
Avery Shenfeld:
If we look at what's happening on the inflation front, obviously oil prices are high. And actually gasoline and diesel prices are high relative to where oil sits today because of the loss of global refining capacity, or in Russia, as well as in the Middle East, where the same issues that are affecting the flow of oil are also affecting the flow of refined products. So we certainly have a lift to inflation coming from that. But we have some counterweights as well. We have rent inflation decelerating in Canada and most provinces, we have a generally modest trend in inflation in a broad range of other goods and services. So overall inflation is a bit higher than the Bank of Canada would like to see. We do have to take a guess as to where that conflict in the Middle East is going. Our assumption is that at some point, cooler heads prevail and the U.S. and Iran can cobble out some sort of deal that truly opens up the Straits of Hormuz, which are seeing some leak out, but not enough. And so headline inflation, which is now running sort of near 3%, could end up down closer to 2% where that core inflation measures now sit.
Tim Pinnell:
Can you speak to us about the recent announcement for the US government to double the maximum size of its long term debt buybacks to at least 4 billion, from 2 billion per operation to stabilize the bond market and lower rising yields, how could US inflation trends impact Canada?
Avery Shenfeld:
So on the bond market side, obviously the Treasury secretary is concerned about the steep rise we're seeing in 30 year rates in the US because for the US economy, 30 year rates are more material than they are here in Canada because people have 30 year locked in mortgages. And certainly that's been a headwind for the US housing sector. It's also creating a bit of a headlight on rising US government debt. And I think the administration would like that headlight to be dimmed a bit. They don't want that issue of ever high deficits to look like it's starting to build into a broader rise in interest rates that's lasting and permanent and does more damage. The effort to actually do these buybacks has had some impact in the last few days on 30 year yields, but it's not a cure all ultimately. Well, they can fund that from their basically their current account. You know that cash at some point they'll have to issue other debt whether it's bills or bonds. And the market will wonder if you flood the market with bills, will you at some point try to lock that in again in longer term debt?
So the permanence of this ability to reduce the supply of 30 year debt is questionable, and therefore it may not have that much of a cooling impact on where 30 year yields go. And it really is, in part, the issue of just very high budget deficits and high financing requirements, particularly for a US economy that is sitting at full employment. You normally see this when you're in a recession. You don't see it year after year. And you also have the massive borrowing for AI projects that's competing with the government. Our view is that at some point, these long term rates will cool, both because we'll be past the peak of that AI capital spending boom, and because, you know, at some point, markets will see value in long term rates this high. Because if inflation does eventually come down to 2% in the US as well, real interest rates are naturally quite tempting for buyers at some point here. So I'm not sure we're going higher. We may see these longer term rates cool, but I don't see that much of a role for this buyback program doing the job on its own.
Tim Pinnell:
Sticking with the US, let’s shift to the topic of trade uncertainties. There was just recently the announcement of a breakdown in the talks over a prospective US Canada trade deal, and the result will be, at least for the moment, the reimposition of additional tariffs on trade in both directions. Can you tell us about these latest developments and how that will impact your economic outlook?
Avery Shenfeld:
Well, let's put this in perspective. It's obviously not good news on two fronts. One is that we do have industries that are being hit by this additional tariff. It will make a major dent in their ability to export products to the US. On their own, if you look at those exports that are affected, you're looking at an impact on Canadian GDP of about a half a percent. They represent a larger share of the total economy, but some of that is imported content. So if you look at the domestic content, you're talking about a half a percent hit to GDP. On top of that, we were hopeful that in fact, we would see somewhat lower tariffs on sectors like steel, aluminum and perhaps a little bit of relief on autos. So not getting that relief also lops a few decimal places off of our forecast. But then we have some cushioning impacts as well. So the federal government is promising some significant relief to the affected sectors. I suspect that if these tariffs stick, we will see a federal budget in the fall that offers a little more stimulus for growth in 2027.
So at this point. Well, we can't put a fine tuned forecast out because we don't really know where all of this is going in detail. Our prior thinking was that next year could see growth of around 2%, which would be a significant improvement from the sort of just under 1% growth we expect to see for 2026. We might end up lopping off a half a percent off that. So still an improvement to 1.5% growth, largely because we have some large capital projects starting up in 2027, more of that in 28, but a bit in 27. And we think that the negative from housing, well, it's not going to turn to a positive. If the housing activity numbers flatten out a bit, it won't be as big of a negative on growth as we've seen this past year or two. So still improving a little bit, but this is a story that is not over. I liken it to you go to a car dealer and you're shopping for a car, and the dealer gives you his best offer and you say, well, that's not good enough. I think I'm going to, I'm going to leave and shop around somewhere else.
And after you walk out the door, they come running after you with a better offer than they just made. And we could well see the two sides get together again as early as a week or two, or perhaps a bit longer. But at some point I think there's an incentive for both the US and Canada to return to the table and try to iron out some sort of deal that lowers the temperature of this trade war.
Tim Pinnell:
If I could extend the metaphor of shopping around, how do you think this situation with the trade negotiations may affect Canada's negotiations with other countries for trade?
Avery Shenfeld:
Well, we've been putting a lot of emphasis on trying to diversify our trade. And you heard the Prime Minister on the weekend talk about Canada strong. And we're trying to diversify our industries and our target export markets. Those are the right steps to do. But I think we shouldn't be naive in thinking that that can quickly replace any dents we see on exports to the US. You know, these other markets as a share of Canada's current trade are quite small compared to the US. We really need to make major inroads, and we need infrastructure spending and changes in product mix so that we're producing a mix of products and have the ability to get them to these other markets.
So that includes, for example, LNG facilities to sell natural gas to more places in the world and produce more of that. The world does want our resources, but we have to have the facilities to get them to those foreign markets. The same thing in terms of all pipelines. And there are sectors like autos where it's just very difficult.
We produce, you know, big pickup trucks that aren't going to sell in Europe. We produce steel that's difficult to sell to other countries because Europe, Japan, they all have their own steel industry and some protectionism there as well. There's a bit more success on things like aluminum. We had managed to divert some of the aluminum to other places in the world, and now aluminum prices are up so much because of the war in the Middle East and some impacts on aluminum shipments from that part of the world, that we're able to even sell the aluminum to the Americans and they'll pay the tariff price. So it's a mixed bag and it's the right approach, but it's going to take a while. We are negotiating and have already negotiated a lot of trade agreements with other countries. But those work, you know, slowly this will be a matter of years, not quarters, before we really see a major reshuffling of our trade relations with the US and the rest of the world sort of cancel out whatever difficulties we have on the American side.
Tim Pinnell:
And speaking of those longer term negotiations, how do you see the ongoing CUSMA negotiations playing out based on this latest round of trade negotiations?
Avery Shenfeld:
I think the Prime Minister did get asked that question at his press conference, and he rightly pointed out that obviously, this is not a good signal for the Americans willingness to negotiate a mutually beneficial trade deal. They seem to want something that's, you know, all win for them. And, by the way, not a win for their consumers or the industries in the US that by these Canadian raw materials like steel, aluminum and so on. But a win in his mind and really not a mutually beneficial deal, and not really a deal that he's willing to actually live with. Because remember the tariffs that they did put on Canadian steel, aluminum, autos, were actually a violation of that CUSMA agreement. So none of this is good news for that. However, there's still a substantial lobby in the US business community in favor of retaining that deal. That is the message that the administration did get when it did consultations with American business. So we're still hopeful that we can put these frictions behind us, perhaps sit down again on the matters that were under discussion last week and where those talks broke down, but also with Mexico at the table as well, conclude a minor revision to CUSMA that still leaves a lot of Canadian exporters, as is true today, not facing a tariff on exports to the US.
So that's still very important. We shouldn't say well, we can just stand on our own two feet, replace all these exports with sales elsewhere. We really do need that protection of that CUSMA agreement, which is still, as I said, helping a lot of Canada's exports go to the US with no tariff at all. Are we seeing evidence of reshoring Canadian manufacturing activity to the US to avoid tariffs. It's very hard to pick that out of the data. But I think the short answer is yes, there has been some of that. And certainly companies that were just hit with a 50% tariff are going to look at their options. So this doesn't happen quickly. You're not going to build massive aluminum smelters in the US where power costs is a lot higher. And shut down an aluminum smelter in Canada, because you don't even know whether these tariffs will last the years it will take to build that capacity in the US. So it's not happening quickly. But I think at the margin some of that is happening and we also have to look back. Really this is not such a new story.
So if you look over the last quarter century, Canada's manufacturing sector has in fact been shrinking on average over that period, not all of a sudden, but gradually we've lost market share to the US south, which where labor costs are lower, to Mexico, to China. Our auto industry today, for example, is a lot smaller than it was 20 years ago.
So the process is not entirely new. What has been growing, even despite our regulatory burdens and so on, is our resource sector. It has been growing over the last 25 years, and that may be just a sign of where we're more competitive. We're probably more competitive in parts of the resource industry and related resource processing and making things out of some of those resources than we are in some manufacturing that is more mobile and can go anywhere. You know, the good news is that if you have a mine in Canada, you can't move it somewhere else. It's in Canada. That's where the resource is. And we are, of course, now trying to grow some other sectors. And I think that's important to things like defense, technology and so on. And those may be products that if the Americans don't want them, we can sell them to the rest of the world. So we're on the right track here. But again, it's going to take a lot of time to reformulate Canada's product mix to serve the world a bit more, and the US perhaps a bit less.
Tim Pinnell:
Okay, turning to currency and F/X strategy in regards to this, what are the main drivers you see behind your outlook for the remainder of this year?
Avery Shenfeld:
So mostly this is a US dollar weakening story than a Canadian dollar strengthening story. So we do expect the Canadian dollar to end the year slightly stronger than it is now. When we look into 2027, our view is that Dollar Canada can get to 1.34. So it's been more like 1.38 to 1.40 lately. And the reason for that is not really so much a made in Canada story as a general slippage in the US dollar relative to the rest of the world. So this isn't dollar debasement, this isn't the US dollar going into some massive freefall. This is really something we've seen in prior decades as well. You have long periods where, for various reasons, the US dollar appreciates against the pack of major currencies, and then it reaches a level which is too much of an impediment for US exports, where the capital flows into US dollars start to slow because investors suspect that maybe the best days for dollar appreciation are behind them. And we see some rebalancing of those investment flows to other parts of the global economy. And I think we will see that if I look at dollar yen, for example, the yen has weakened massively against the US dollar. But we've also had periods where the euro was quite a bit stronger against the dollar than it is now. And so if the US dollar does give up some significant ground against some of those other major currencies, we won't see as much movement in the Canadian dollar. It tends to be a lower volatile, lower volatility currency against the US compared to some of those others. And remember the yen was ¥100 to the dollar, ¥160 to the dollar. We don't see moves like that in the Canadian dollar, but I think we will see some modest appreciation. And if we are able to put some of these trade tensions behind us and the Canadian economy does a little bit better, then we could see a period where the Bank of Canada is raising interest rates, and if US inflation comes down, we may actually have the US cutting interest rates marginally next year.
That's sort of both cases. A second half story for 2027. But any narrowing of that interest rate gap, which is very large now by historic standards, would also give us a reason to suspect that the Canadian dollar can do a bit better than it has currently.
Tim Pinnell:
So with all these changes going on across all the different factors, the interest rates, the inflation, manufacturing strengths and challenges, looking further out, what factors could drive further divergence between Canadian and US growth in 2026 and 2027?
Avery Shenfeld:
So we're obviously worried that the trade war could go the other way. Jamison Greer, the U.S. Trade Representative, has said, somewhat cryptically, that the US would not tolerate a Canadian retaliation. And the reason that's interesting is because, in fact, this latest round of tariffs that the US put on Canada was in response to our retaliation to the tariffs they put on us last year. So we put tariffs on their autos and other products in response to the tariffs they put on ours, because those were in violation of the Canada US Mexico deal. Now they're responding to our retaliatory tariffs with those. We're putting new retaliatory tariffs on them. And we may find ourselves facing yet another round of U.S. tariffs. So the worst case scenario is not only that this tit for tat trade war gets worse, but also that at some point the US decides to walk away from CUSMA, which it can on six months notice. And we face tariffs across the board like other countries. So that's a risk. It's not built into our base case forecast, but it's one we're very mindful of. One that would certainly put Canada in a weaker position than our current forecast. But we do have growth improving a bit in 2027. That's the negative side. I think on the positive side, if we are able to negotiate a dialing down of the tariffs, that will be helpful. And if we look further out, there are some big positives for Canada that may show up more in 2028, where the government is putting a lot of weight behind backing major capital spending projects to increase Canada's industrial capacity in sectors where we are competitive, and that spending alone could be a significant lift to growth, particularly when we get to 2028 and more of these shovels are actually in the ground.
So we're slightly optimistic for 2027. But if you push me to give you my 2028 view, I think it's important to note that those gaps between Canada and the US could start to narrow because we do better. And on the other side of that, this US capital spending boom on AI can't go on forever, or AI will just be a sinkhole rather than a profitable venture. You can't spend trillions every year and expect to make money on that. So at some point, the US economy could cool a little bit because they're not getting as much of a lift there. And then I would also say in 2028, population growth could diverge in the two countries. That gives Canada a lift relative to the US. So both countries right now have very slow demographic growth. We're both containing immigration. But for Canada, that's a temporary effort to get back on track after a couple of years of excessive immigration, of non-permanent residents, students and so on. By 2028, our population will be growing again. Somewhere in the 1 to 1.5% range, the US may well be still very much constraining immigration and population growth, and more people creates more customers, creates more business. And again, that could narrow the growth gap in 2028.
Tim Pinnell:
Well thank you Avery. That sounds like there is some silver lining in this storm that we're going through right now. I hope that you enjoyed this conversation and found it insightful and informative. We're very grateful to have Avery join us on today's podcast, sharing his perspective on the Canadian economy. Even with the geopolitical challenges discussed today, Canada still remains an investment destination given its stability, safety, and strong market infrastructure.
Thank you for listening to CIBC Mellon Industry Perspectives. Stay tuned and check back for more insights on the areas shaping Canada's economy, financial markets, and investment landscape right here on CIBC Mellon Industry Perspectives.