Canada’s Recession Risk
Canadian investors confront weak growth, consumer strain, and US-driven yield shifts; Franklin Templeton’s Adrienne Young outlines a disciplined approach to fixed income.
AS OF mid-2025, the case for bonds has rarely been clearer on paper. All major fixed income sectors were yielding above their five-year averages as of June 30, enhancing the appeal of bonds for income-focused investors.
Young begins with the numbers. In August, Canadian CPI came in at 1.8 percent, just shy of the Bank of Canada’s 2 percent target. GDP contracted by 1.6 percent annualized in the second quarter, weaker than consensus expectations.
The Bank of Canada itself acknowledged in its September 17 news conference that the labour market is clearly weakening.
Slowing job creation, the peak of mortgage renewals, and softer household spending − was central to the Bank’s decision to cut its policy rate by 25 basis points to 2.50 percent. With inflation now at 1.9 percent, real rates remain positive and therefore restrictive. Young sees room for at least two or three additional cuts to bring the overnight rate closer to 2 percent, a level more consistent with stabilizing consumption and credit conditions.
Young’s strategies are built for Canadian investors, so domestic bonds remain the core. But Canada’s market is smaller, less diversified, and less liquid than the United States’. That structural difference makes Canada more sensitive to shocks. “Canada is going to feel a recession more intensely than the US,” she says. “It really is the mouse sleeping with the elephant. When the US moves, Canada is affected.” When the US shifts, Canada shifts with it.
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