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Canada's Economy to Return to Growth in Second Half After Contraction, TD Economics Says

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Canada's economy may see growth momentum return in the second half of the year after posting two consecutive quarterly contractions that raised recession worries, according to TD Economics.

A large part of the Q1 0.1% year-over-year contraction was the pullback in government spending, which the bank doesn't expect to continue, it said in a report on Thursday. Household spending is also projected to continue after rising 1.5% quarter-over-quarter in the first three months.

In addition, the Statistics Canada flash estimate of monthly GDP revealed a "solid" bounce-back of 0.4% month over month in April.

"Looking ahead, we expect the economy to continue to gradually regain some momentum," TD said. "International trade data also supports the case for a rebound in April."

Job gains in May reversed a large part of the losses posted earlier in the year and reduced the unemployment rate to 6.6%, TD said. The bank expects gross domestic product growth to accelerate to 1.3% year-over-year in Q4 from 0.7% in the same period last year. GDP is estimated to expand further to 1.8% annually in the last quarter of 2027. TD sees the unemployment rate decline slightly to 6.4% by the final quarter of this year.

"Our go-forward view is contingent on an ongoing improvement in the trade picture, which means that the upcoming CUSMA trade talks are a risk event," TD said, referring to the Canada-U.S.-Mexico trade treaty. Formal talks between the U.S. and Canada haven't started yet and TD doesn't see the review finalized by the July 1 deadline.

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Berenberg Assesses the Economic Impact of The U.S.-Iran Deal

In their framework agreement to be signed on Friday, Iran and the United States have apparently left some key issues unresolved, said Berenberg.Examples seem to include the dilution or disposal of Iran's highly enriched uranium, the Israel/Lebanon issue, some details of long-term sanctions relief for Tehran and, possibly, the precise arrangements for managing the Strait of Hormuz in the future.However, chances are that both sides will want to avoid the pain of a new prolonged closure of the Strait of Hormuz, U.S. President Donald Trump probably even more so than Iran, noted the bank. A collapse of the deal, followed by a renewed surge in oil prices, could hurt Trump's Republicans badly at the midterm elections to Congress on Nov. 3.The structure of the deal, with a 60-day period for further negotiations, should make it easy to simply extend the deadline further and further if the two sides cannot settle their differences in time.Since late April, Berenberg has based its economic and financial forecasts on the assumption that the worst would be over by June. More precisely, the bank suggested that the price for dated Brent crude would fall from an average of US$120 per barrel in April to around US$90 in June and further to US$75 in January 2027.Berenberg now seems to be on track for that. Futures prices have receded to be roughly in line with the bank's oil price assumption. As a consequence, it sees no need to revise its economic or financial forecasts.For the last three months, Berenberg has argued that bond markets have overreacted to the surge in energy prices. Central banks won't tighten policy as aggressively as markets are pricing in.Unlike in 2021 and 2022, when the combination of an ultra-loose monetary policy and a V-reshaped economic rebound from the pandemic had paved the way for a major surge in inflation even before Russian President Vladimir Putin had launched his full-scale invasion of Ukraine, the potential for major second-round effects from the spike in energy prices and transport costs is low, added the bank.

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The Canadian Dollar May Swing on USMCA Trade Review News, Says Rosenberg Research

U.S. President Trump's announcement last week that the United States will not renew the USMCA trade deal wasn't especially surprising, said Rosenberg Research.The agreement would remain in force until 2036, but the decision would trigger annual review periods, and it fits neatly within the U.S. administration's broader strategy of maximizing negotiating leverage, noted Rosenberg Research.USMCA is proceeding with a mandatory joint review, starting this July. The USMCA talks so far are showing minimal progress, with U.S. officials framing Canada as non-responsive. Changes to rules of origin, and specifically questions about the Chinese content of goods, have been a major theme of the negotiations.With their USMCA-compliance exemptions shielding them to some extent from the Section 301 tariffs, Canada and Mexico continue to have a competitive advantage relative to most other exporters in the U.S., providing some insulation from U.S. trade policy volatility.However, there are still vulnerabilities, stated Rosenberg. A U.S. refusal to renew the deal would leave the USMCA in force, but the reversion to an annual, rather than six-year, review process, and the exposure to mercurial swings in U.S. trade policy, would also present a sustained overhang that would weigh on international direct investment and domestic investment trends in Canada, with potential spillover effects on trade and employment.Canada's economy remains cyclically battered by the events of the last year and a half, along with poor structural growth to begin with. Jobs data has been volatile, with the May numbers showing a drop in unemployment from 6.9% to 6.6%, but the employment growth trendlines have been very poor over the last year, pointed out Rosenberg.For Canadian assets, the new reality is clear. Rosenberg expects some heightened market sensitivity for the Canadian dollar, and in particular, there is a "skew" to the potential market moves.Sudden setbacks in the negotiations will cause downside jumps in the loonie, while any gains will be incremental, according to Rosenberg.

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