That’s according to CIBC Deputy Chief Economist Benjamin Tal, who suggests the current economic slowdown, though alarming, is largely driven by artificial and temporary factors. He believes they will eventually dissipate, giving way to a booming economy, if the country’s central bank navigates this period successfully.

“If the real and ultimate measure of intelligence is what you do when you don’t know what to do, then the next few weeks, months and quarters will test the economic IQ of the Bank of Canada, the (American) Fed, and the ECB (European Central Bank),” Tal said in his opening remarks at the Teranet Market Insight Forum on Wednesday in Toronto.

“This level of uncertainty is something that we haven’t seen since the early days of COVID, so we have to try and make sense of this madness,” he continued.

We’re in a recession, sort of

Though the country is not technically in a recession, Tal says most Canadians are experiencing a period of prolonged negative growth in wages and spending power.

“Let me break it to you: we are in a recession — a per-capita recession,” he says. “Per capita GDP is down 20% and has been down for five quarters in a row.”

That’s the largest drop in per capita GDP since the 2008 Economic Crisis, but Tal says Canada is not in a traditional recession thanks to the 1.2 million people that entered the country over the last two years.

That, he says, represents a 3.5% increase in population growth, compared to a 0.9% average in all other OECD nations, which Tal describes as “absolutely crazy,” and a key driver of the housing market shortage.

The recent reversal of that immigration policy, and efforts to include more non-permanent residents into future immigration numbers, Tal says, will help ease that shortage, as many of the country’s future “immigrants” already live in the country.

“The good news is that we are in the short-term pain, but there is long-term gain,” he says, adding that Canada’s population grew at its fastest rate since the post-World War II baby boom. “We are getting a youth dividend that no other OECD country has.”

The Toronto condo market resurrection

When it comes to Toronto’s housing market, Tal says houses and low rises remain steady, while the high-rise market is in a recession, “without question,” given that 81% of the city’s condo investors are managing negative cash flow.

That drop in sales, however, has caused a significant decline in new condo construction, which Tal believes will result in a dramatic rebound once the current stock has been depleted.

“The inventory that we have in our country are being absorbed slowly due to lower prices, and in a year, year-and-a-half, we will be at an equilibrium, and then what?” he says. “The demand will be there, interest rates will be lower, and supply will not be there, because we’re not building anything.”

Investment capital is coming

Adding more fuel to that fire will be the investors that parked their money in GICs in recent years when rates were high. Now that rates aren’t as attractive, Tal says many will be looking for new investment opportunities, injecting huge sums into the stock market and housing. 

“This money — between $200 and $300 billion — will be looking for the exit,” he says. “We haven’t seen anything like that in a generation; this is a once-in-a-lifetime opportunity to capitalize on the movement of GIC to dividend-based stocks, high quality financial securities, and some real estate investment opportunities.”

As a result, Tal expects Toronto’s condo market to remain buyer-friendly for the next 12 to 18 months, at which point prices will skyrocket, as more investors compete for more limited supply.

Tal downplays mortgage renewal fears

Unlike many Canadian economists, market-watchers and homeowners, Tal says he is not concerned about the coming mortgage renewal tsunami.

That’s because he says most borrowers will be renewing at more favourable rates than original anticipated.

“I say it is much ado about nothing,” he says. “Forty per cent of people that were going to renew their mortgages in 2025 will be renewing for a lower rate, not higher,” he says.

“The other 60% is not very significant; if you do the math, from a bank perspective, it’s about a 2% to 3% increase in spending, so nothing to write home about,” he added.

Forget about inflation, Tal says

In recent years, the Bank of Canada has based its policy decisions solely on inflation, a strategy that Tal doesn’t believe will be sustainable moving forward, nor one he really believed was sound in the first place.  

That’s because Canada and Iceland are the only countries that include mortgage and housing costs in their primary measures of inflation. That means increases to the policy rate also increases housing costs, which is captured in the consumer price index (CPI), which influences interest rate decisions.  

“It’s like putting a humidifier and a dehumidifier in the same room and letting them go at each other—it doesn’t make any sense,” he says. “If you remove the impact of mortgage interest payments from the CPI, it’s already at 1.7% — below the target [of 2%].”

Tal adds that interest rates are also becoming a weaker lever for the Bank of Canada, as seen in recent months, when the 5-year Canadian bond yield increased in the face of lower interest rates, before lowering again.

That’s because, according to Tal, the Canadian 5-year bond yield—which largely dictates the country’s fixed mortgage rates—is more closely tied to the U.S. 10-year Treasury than Canada’s own central bank policy rate decisions.

“This zigzag is the number-one reason why the 5-year rate is going down and mortgage rates are not,” he says. “Banks cannot commit, given this volatility, and this volatility is a function of the volatility in the U.S.”

The Trump effect: How U.S. policy threats impact Canada’s mortgage rates

If Canada’s mortgage rates are more closely tied to American Treasuries than its own bond market, Tal reasons, then our best way to understand their trajectory is to explore the key factors driving markets south of the border.

According to Tal, American investors are betting that President Donald Trump’s key policy promises will result in higher inflation, dampening the country’s long-term economic prospects—bringing Canada’s 5-year bond yield with it—but he doesn’t necessarily agree with those assessments.

Pointing to a slide using the American president’s name as an acronym for his election promises—Tariffs, Regulations, Undocumented, Migrants and Protectionism—Tal broke down why be believes each will prove “more bark than bite.”

For example, Tal suggests the American market is pricing in Trump’s election promise of deporting 11 million undocumented migrants, which would cause a massive gap in the labour market and thus drive inflation.

“You cannot replace 11 million people doing jobs Americans don’t want to do,” he says. “He’ll deport five, six hundred thousand criminals, and that will be the trophy.”

Tal adds that making a lot of noise about mass deportations will influence the “flock” of migrants more than the existing “stock,” which he suggests is the goal. Tal similarly believes that Trump’s tariff threats are designed to cause chaos and confusion but won’t come to fruition—at least not in a way that will drive significant inflation.

“Uncertainty is the goal, and chaos is the tool,” he says. “If you’re a CEO of a company, you want to expand to Canada, Mexico, China, or the U.S., you’ll say ‘you know what, who wants this uncertainty?’ So, you achieve what you want, if you’re Trump, without actually doing it, just by creating chaos.”

Instead, Tal anticipates tariffs on specific products and industries—including lumber, dairy and metals—but not the broad, national tariffs the American president recently threatened.

In fact, Tal says that Trump’s last-minute decision to delay imposing tariffs on Canada and Mexico in the wake of the stock market’s reaction gives him confidence such threats will never come to fruition. “He views success as reflected in the stock market, and if the market believes there will be tariffs, it’s going down, and that’s exactly the opposite of what Trump would like to see.”

Overall, Tal says the next six months will be volatile, not so much because of underlying economic fundamentals, but because of that intentional policy of chaos and confusion, high tariffs in limited corners of the economy, and ongoing fear of future inflation.

“I’m hearing stories of people not closing on their mortgages because of fear around the labour market and losing their jobs, so that’s something that will definitely impact the Bank of Canada’s need to ease the pressure over the next six months,” he says. “The Bank of Canada will have to keep interest rates low, the Fed will keep theirs flat, because inflation in the U.S. will be higher… which means our dollar will go down.”

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Last modified: February 20, 2025