The Battle for the White House Could Have Major Economic Implications in the United States, Canada and Elsewhere

Although inflation has come down and is below target in many countries, some risks remain. Labour disputes could multiply, particularly in Canada and the United States, temporarily disrupting the economy and putting upward pressure on wages and inflation. Except for the Bank of Japan, central banks most likely won’t start hiking rates. There remains a great deal of uncertainty over the lagged effect of higher interest rates on economic growth. It’s therefore quite possible that some central banks may be forced to cut rates faster, while others may take their time. This would generate significant volatility on the currency markets. As more and more homeowners are renewing mortgages at higher rates, far too many Canadian borrowers could have trouble making payments and listings could rise sharply. Tenants are increasingly under pressure as well. And that’s before we even consider the possibility of a spike in layoffs, which would increase unemployment and worsen the impact on the housing market and credit in general. The US presidential election in November could also be a game-changer. A close outcome could provoke social instability. And a second Trump term in the White House may create uncertainty, especially regarding international trade and the independence of the Federal Reserve. (See our full analyses on the impact of the US election for the US External link. and Canadian External link. economies.) Whoever wins, fiscal deterioration in the United States (and elsewhere) could prompt credit rating downgrades and possibly push long-term interest rates higher. The deepening conflict in the Middle East has triggered oil price volatility, which could increase further as more regional players are dragged in. Trends in the global economy, financial markets and commodity prices could become increasingly unstable if the geopolitical backdrop and economic environment deteriorate further. These risk factors aside, equity markets still look vulnerable to a correction after such an exuberant year so far for many risk assets.

With inflation looking to be well-tamed, the Bank of Canada is now justified in taking a more aggressive stance toward monetary easing and cut its policy rate by 50 basis points on October 23. Moving forward, we expect to see additional 25-basis-point cuts until the overnight rate reaches 2.25%. In the United States, the stronger economy means that a scenario of further outsized interest rate cuts—which could have included another 50-basis-point cut by the Federal Reserve—is now likely off the table. We expect the upper end of the fed funds target range to gradually fall to 3.00% by the end of next year.

The US dollar rebounded considerably as investors revised their expectations for US monetary policy and partially discounted the possibility of a Donald Trump victory. However, according to our baseline scenario, the greenback is likely to trend downward over the next few quarters, as we expect to see slower growth in the United States and lower interest rates. This should help the Canadian dollar and many other currencies claw back some ground. The loonie will likely also benefit from a rebound in the price of oil and several other commodities. Equities will probably be volatile over the coming weeks given the uncertainty over the Fed’s monetary policy easing path, compounded by the unpredictable outcome of the US election.