By Daniel Johnson
May 1, 2025
Excerpt from article:
One private equity manager says that while Canada has faced longstanding stagflation risks, it faces further challenges from U.S. tariffs and investors should adjust portfolios accordingly.
Stephen Johnston, a private equity manager and director of Omnigence Asset Management, said in an interview with BNNBloomberg.ca Wednesday that stagflation conditions have been present in Canada for “quite a long time.”
He added that U.S. tariff threats have become another factor that make the outlook “much worse.” Johnston said that he is not referring to stagflation conditions similar to the 1970s, but rather below trend growth, coming in at around zero per cent real gross domestic product (GDP) or slightly negative, and above trend inflation.
On the inflation side, Johnston said Canada has issues of high levels of indebtedness where the government and households tend to consume more than they produce and borrow to fund consumption, spurring inflation over the medium term. On the capital allocation side, he notes large amounts of investment is tied up in residential real estate – an unproductive asset.
“So, we tend to under invest in the economy. Capital from Canada tends to flow out of the country, so it shrinks the pool of capital for investment. And foreigners don’t tend to allocate to Canada because they perceive it as a market that’s hostile to investment,” Johnston said.
“We have inflationary macro conditions, and we have recessionary capital conditions, and that presents a challenge. Because it takes a very long time to turn those things around. Once you have stagflationary macro-overall conditions, it can take decades to fix.”
According to Johnston, tariffs enacted by U.S. President Donald Trump’s administration are part of an overall strategy to pull in investment capital into the U.S., which in turn could take capital from some of its key trading partners. If the strategy is successful, he said it will be both “recessionary” and “inflationary” in Canada due partly to the deficit.
“I think we’ve got a serious problem here. The United States is effectively our only export market, and it’s responsible for like 25 per cent of Canadian GDP. And if they’re going to pull capital out of Canada, pull industrial capacity out of Canada, it’s going to seriously impact our growth,” Johnston said.
Original article here.