Economic Outlook and Market Expectations

Introduction to the Market Participants Survey

The Bank of Canada’s Market Participants Survey for the third quarter of 2025 indicates a slightly weaker economic outlook compared to earlier in the year. Respondents now expect real GDP to grow 0.6% in 2025, down from 0.8% in the second-quarter survey. Most see growth landing in the 0% to 1% range, suggesting a cooler backdrop heading into next year.

Economic Growth and Risks

The outlook for 2026 also eased a touch, with the median forecast slipping to 1.7%. Trade tensions remain a major concern, cited as the top downside risk by 90% of participants. Concerns about softer consumer spending and a weaker housing market also ranked high, with nearly nine in 10 respondents believing the economy is operating below its potential, up from 85% in Q2. Recession risks edged higher as well, with the median probability of a downturn within six months staying at 35%, while expectations of a downturn in the next 12 to 18 months also held steady at 25%.

Inflation and Interest Rate Expectations

Inflation expectations barely moved this quarter, with respondents still seeing CPI easing back toward the Bank’s 2% target and holding their year-end 2025 forecast at 2%. The outlook for 2026 and the five-year horizon also remains pinned at 2%, reflecting confidence that inflation pressures are settling. Expectations for the policy rate are similarly steady, with participants continuing to forecast an overnight rate of 2.25% through the end of 2025 and into early 2026.

Bond Yields and Economic Environment

Market participants also trimmed their bond-yield forecasts slightly for the year ahead. The median year-end 2025 estimate for the 5-year Government of Canada yield now sits at 2.70%, down from 2.78% in the previous survey and slightly below the current yield of roughly 2.75%. The 10-year yield forecast among market participants also eased to 3.20% from 3.23%. Forecasts for 2026 show a similar pattern, with respondents expecting the 5-year yield at 3.00% and the 10-year yield at 3.40%, both modestly lower than the median projections in the second-quarter survey.

Conclusion

In conclusion, the Bank of Canada’s Market Participants Survey for the third quarter of 2025 indicates a slightly weaker economic outlook, with respondents expecting slower growth and lower bond yields. While inflation expectations remain steady, the risk balance has shifted, with most participants now expecting a lower interest rate path. As the economy continues to evolve, it will be important to monitor these expectations and adjust accordingly. The survey’s findings suggest that market participants are anticipating a gentler economic environment, but still see trade tensions and recession risks as major concerns.