Macro Moments Weekly: Canada charts new trade and investment

Toronto, sitting above Lake Ontario and on the same latitude as Marseilles in France, is a remarkable city. Despite having suburbs within a short drive from the US border, it is fiercely separate. The city may have a grid system like many US cities, but so does Glasgow. Its gleaming red-and-white trams help it stand apart, as does the extraordinary subterrain network of walkways which have become shopping malls and happen to be both relaxed and spotless. The vast CN tower, standing like a giant’s mace, dominates the skyline, and, like the recent election, is a statement of a distinct identity. As its nation’s largest city, Toronto represents a clear message that Canada will forge its own future in the world as ties to the United States loosen.

Economy

I was lucky enough to spend this past week in Toronto, and as the November winds accelerated, bringing the first taste of winter, the sense of purpose was palpable. Three days of discussion with clients, in the company of Michael Greenberg of Franklin Templeton Investment Solutions and Jeffrey Schulze of ClearBridge, offered a chance to learn from 2025 and debate the direction for 2026 and beyond.

Given the pivot the United States has taken economically and internationally, most of our audience was wondering what the potential impacts would be in 2026, and how investors can take advantage of this new paradigm. We had two related questions to answer: How strong is the US economy likely to be in 2026 and beyond, and, for Canada, what is the prospect of finding alternative markets?

Frankly, the second question is the same one that people are asking in Europe, China, India and around the world. The previous global economic paradigm, created after 1971 when President Nixon ended the Bretton Woods system, is behind us, and a new one needs to be built.

Outlook for 2026

In the short term, my colleagues Jeffery and Michael are clear that the US economy will likely continue to chug along. Its gross domestic product (GDP) growth might be slow in historical terms, between 1.5% and 2%, but reliable. For Jeffrey, the creator of Clearbridge’s ‘Anatomy of a Recession’ commentary program, their latest analysis reflects only a 30% chance of a recession occurring. With prospects of cheques for US households, paid for by tariffs, the probability may even be falling. Capital investment in artificial intelligence is in the fifth inning (of nine) and thus has a way to go before we get to a bubble. Michael’s concern about inflation borne of supply disruption still leads to a projected US inflation rate of only 2.735% in 2026. Tariffs have not been the economic dragon that the markets were worried about last April.

A new global economy?

But what of next steps? How to reorientate an economy away from dependence on the United States? Do you copy tariffs or try to trade elsewhere? The answer, for a mineral-rich nation like Canada, will always be the latter after discovering the disadvantages of monopsony,¹ even if, back in the day, it made sense.

Reorientation will require not just new relationships, but new infrastructure and new supply routes, and so is likely to prompt significant new investment across the country. There will be both inflationary and disinflationary risks. New capacity, after all, should always be disinflationary, but if one defines capacity regionally rather than globally, the risk of oversupply diminishes, mitigating issues over falling prices. A phrase that we now hear about defence in Europe we also heard this past week in Canada—the new US policy is ‘doing us a favour’.

In light of decent demand and more investment, it’s hard to be bearish for 2026. The world’s economists seemed to have got stuck on the figure of 1.5% GDP for most, if not all, the G7. The IMF used the phrase ‘prospects remain dim’ on the front page of its World Economic Outlook published in October.² But it seems, as Jeffrey Schulze pointed out about US earnings expectations, that analysts have started as bears and found themselves needing to upgrade projections, which is unusual. Normally analysts are too optimistic! We think the real risk for 2026 is that, under the impulse of fiscal stimulus from Germany, Japan, Canada, the United States and China, prospects will only improve.

UK budget

Meanwhile back in the United Kingdom, the long-awaited budget—subject to more ‘pitch-rolling’ and ‘kite-flying’ than the first Test in an Ashes series—was revealed. Of course, the supreme irony was that this happened by mistake—the Chancellor did not reveal it herself. The trick was not to scare the markets and her own members of parliament, and it seems to have worked. While it remains one of the most fiscally austere budgets ever, the pain starts in 2028 and ramps up in 2029 and 2030. The markets have seen that and will worry there is room for backsliding, but taken at face value, the budget is a clear blueprint for the next few years with enough headroom to deal with events.

Parting shot

The timing of the tax rises in the UK budget—with most starting in April 2028—could not be a clearer signal to us that the next election will likely be in May 2028.