Welcome to the January edition of the George Davis Report and happy new year to all of our viewers. Now, what I'd like to discuss this month is a recalibration of growth expectations in Canada because that's going to have an important impact on monetary policy settings as well as the Canadian dollar.
So as things stand currently, the Canadian economy is experiencing a combination of major supply and demand shocks. On the demand side, the country is expected to have no population growth this year, which would be something that we haven't seen in decades. And obviously that is going to have a downward impact on economic growth. On the supply side, labour productivity has effectively been hovering around 0% for the last 5 to 10 years, and we're not really expecting any major improvement on this metric in 2026. So this combination is likely to put potential GDP growth in a 0 to 1% range according to RBC Economics estimates. Now, as a refresher, potential GDP growth basically refers to the maximum rate of output in an economy with all its resources put into use and not creating excess inflation.
Now, this is basically going to cause investors to recalibrate their definition of what data is good or strong, and what data is bad or weak. So if we consider things on the labour front, for example, low population growth and the retirement of baby boomers will push the labour force participation rate gradually lower over time. And this is basically going to reduce the labour breakeven rate, which is the number of jobs that the economy will have to create each month in order to prevent an increase in the unemployment rate. Now, RBC Economics actually is estimating that the breakeven rate for the Canadian economy in terms of job growth this year is actually going to turn mildly negative.
So in that context, if we get an average monthly print of 10,000 new jobs being created in Canada, that type of data release will now actually be viewed as good or strong economic data. Whereas in the past, we had a much higher breakeven rate and an outturn of about 10,000 new jobs would be considered weak economic data.
Now, on the growth side, it creates a very low bar for growth to come in above potential. And the big question you might be asking is, why is this important? Well, the Bank of Canada is very focused on the output gap in terms of how it sets monetary policy and pivots in the output gap generally result in shifts in monetary policy. If our growth forecasts are correct, as you can see on the screen there, essentially what it indicates is we're expecting actual GDP growth to outpace potential GDP growth.
And so if those forecasts are correct, what's going to happen is we're likely to start to see the output gap shift from a widening trend to a narrowing trend. And of course, that will have important implications for monetary policy. Now, we do think that the Bank of Canada might delay a little bit before starting to raise interest rates in the context of a very uncertain trade backdrop. And also, we think the Bank is going to want to get a little bit of a better handle on how the population shocks are going to impact the broader economy.
Our rate strategists actually assign a 50% probability of the Bank of Canada remaining on hold in 2026 and then starting to raise rates early in 2027. However, they also assign a 40% probability that the hikes could happen in the second half of this year. So it's a pretty finely balanced decision in the sense of when the rate hike cycle could start. It could potentially be in the second half of this year or early next year.
Now, the risks of rate hikes happening sooner, i.e., in the second half of this year, rather than later, i.e., in 2027, are one of the main reasons why we have a declining forecast profile for dollar Canada. Right now, our US economics team just changed their Fed call. They've moved from looking for one to two more rate cuts to the Fed being unchanged in terms of monetary policy this year. And if we start to see the market here in Canada price in interest rate hikes in the second half of this year, that is likely to have a downward impact on dollar Canada. So if you look at our newly released forecast for the month of January, we basically expect dollar Canada to be trading around 1.3700 in the middle of this year, but then decline to 1.3400 at the end of this year.
And again, a lot of it has to do with the recalibration of growth expectations, what is going to be defined as strong versus weak growth, and how the Bank of Canada is going to respond to that in terms of monetary policy settings. Now, in terms of our expected trading range in the month ahead, we're going to go 1.3600 on the downside and 1.4100 on the topside. I think for most of the month of December, the markets felt somewhat comfortable in a 1.3700 to 1.4000 range. So on a tighter basis, I think 1.3700 to 1.4000 and on a little bit of a wider basis, 1.3600 to 1.4100. And as usual, those range extremes can be used in terms of executing your hedging decisions, when to fade the rallies and when to buy the dips.
Now, stay tuned for our next video in the month of February where we'll take a fresh look at the economic backdrop and see if there are any major changes to our forecasts and our outlook.