Omnigence says US tariffs and capital outflows could deepen Canada's stagflation over the long term
Canada may be facing prolonged stagflation risks compounded by US trade policy and domestic capital flight, according to private equity manager Stephen Johnston of Omnigence Asset Management, in an interview with BNN Bloomberg.
Johnston said stagflation has existed in Canada for “quite a long time,” describing the current environment as one of below-trend growth — around zero percent real GDP or slightly negative — coupled with above-trend inflation.
He emphasized that this differs from the stagflation conditions of the 1970s.
He pointed to structural economic issues driving inflation, such as high levels of indebtedness and consumption outpacing production.
“We tend to under invest in the economy,” Johnston said.
He explained that capital is concentrated in residential real estate, which he described as unproductive.
He added, “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.”
According to BNN Bloomberg, Johnston warned that once stagflationary conditions take hold, “it can take decades to fix,” citing the combination of inflationary macro factors and recessionary capital conditions.
He identified US tariffs under US President Donald Trump’s administration as a worsening factor, calling them a deliberate strategy to pull capital into the US.
Johnston said this could result in capital and industrial capacity being pulled out of Canada, with serious consequences for growth.
He added that the United States is effectively Canada’s only export market and is responsible for “like 25 percent of Canadian GDP.”
He also argued that Canada’s investment climate has deteriorated over the past two decades.
“You can see it in the foreign direct investment flows, there’s very little capital that flows into Canada from third party countries and Canadian capital… tends to flow out of the country,” he said.
Johnston added that Canada has built a reputation for being “very hostile to capital” and that reversing this would take considerable time.
“This is why it’s our investment thesis, because it’s taken decades to get to this point, and it’ll take decades to fix even if we have the will to fix it,” Johnston said in BNN Bloomberg.
Johnston advised investors to shift strategy amid the current economic conditions. Instead of upending portfolios, he recommended hedging against inflation and recession.
“I think they need to be short growth, or shorter growth, and short middle-class demand and long inflation,” he said.
Over the last 30 years, Johnston noted that most investors have positioned themselves as “very long growth and very short inflation.”
He cautioned against relying on strategies that depend on strong middle-class demand.
“Stagflation is very hard on the middle class,” he said, adding that investors should seek assets that perform well under inflationary and recessionary conditions.
Johnston identified automotive maintenance and farmland as industries resilient to stagflation. He said that economic pressures cause consumers to keep vehicles longer, increasing demand for repairs.
He also noted that Omnigence owns one of the largest farmland portfolios in Canada, valued at $500m.
“It hedges inflation really well… and hedges economic contraction really well, because the demand for food is inelastic during a recession,” he said.
According to an April report by the Canadian Federation of Independent Business (CFIB), Canada’s economy grew by only 0.8 percent in the first quarter and is expected to contract in the second quarter, meeting the definition of a recession.
Inflation rose to 2.4 percent in Q1 and is projected to reach 2.7 percent in Q2, exceeding the Bank of Canada’s two percent target.
The CFIB report warned of “muted growth” in Q1 2025 and a “significant contraction” in Q2.
Economists cited by Global News warned this combination raises the risk of stagflation.
Tu Nguyen, economist at RSM Canada, explained in Global News that stagflation is rare, as high inflation usually occurs during economic expansion, not stagnation.
She said, “We do anticipate higher unemployment in the upcoming months,” as some companies have started layoffs or postponed hiring.
Moshe Lander, economist at Concordia University, described stagflation as a “double whammy” in Global News.
He noted that policy solutions often worsen one problem while trying to fix the other: “You address the stagnating bit, but you made the inflation worse.”
Lander said tariff policies such as those imposed by the Trump administration have historically triggered stagflation. He cited the 1970s OPEC oil shock and COVID-era disruptions as examples.
“Donald Trump is completely destabilizing what global supply chains were rebuilt after COVID restrictions were lifted,” he said.
Nguyen said the odds of stagflation in Canada are currently lower than in the US because Canada has not imposed widespread tariffs.
However, she noted that a US slowdown and further trade restrictions would inevitably impact Canada.
“If the US has a period of slowdown and puts significant tariffs on Canadian exports, a slowdown in Canada is almost inevitable,” she said.
Leslie Preston, senior economist at TD, added in TD Economics that while stagflation concerns are rising in public discourse, Canada does not currently meet the criteria.
“We are hearing the term used today because there’s worry that the economy may be headed in this direction, but the current state of the economy does not fit the definition,” she said.
