Threats vs reality: What awaits the Canadian economy in 2025
Threats vs reality: What awaits the Canadian economy in 2025 . MONTREAL, Canada –  As we look ahead to 2025, Canadian entrepreneurs face a varied economic landscape. Despite potential headwinds, there are many reasons for cautious optimism. The key economic challenges of the last two years are improving. Inflation is expected to stay within the Bank of Canada’s target range of around 2 percent next year. Given […]
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MONTREAL, Canada – As we look ahead to 2025, Canadian entrepreneurs face a varied economic landscape. Despite potential headwinds, there are many reasons for cautious optimism.

The key economic challenges of the last two years are improving.

Inflation is expected to stay within the Bank of Canada’s target range of around 2 percent next year.

Given the positive inflation picture, interest rates should continue to come down.

Overall, the economy is still on track for a soft landing: a recession appears to have been avoided and the economy looks ready to return to moderate growth.

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Interest rates will be the deciding factor in the year ahead

Just as it took time for interest rate hikes to tame inflation and work their way through the economy, the build-up of momentum from rate cuts will also be gradual. Back in March 2022, the Bank of Canada’s policy rate stood at 0.25 percent – the starting point for the rapid cycle of monetary tightening that followed. In 2024, the bank made a U-turn. From a peak of 5.0 percent, it lowered the policy rate to the current 3.25 percent.

That was good news for Canadians and there are more rate cuts to come. We expect the bulk of the remaining reductions to be made in the first half of 2025. BDC forecasts the Bank of Canada’s policy rate to reach 2.75 percent by mid-2025 and may even close 2025 at 2.5 percent.

That will help the Canadian economy to grow modestly in 2025, with GDP growth projected to come in at 1.5 percent for the year. Thus, the economy should continue to expand, albeit at below its potential for a third year in a row.

Stronger consumer spending and a rebound in residential investment will lead the way next year. Lower rates should translate into cheaper borrowing costs for most kinds of loans while, on average, paycheques should rise faster than prices. While many consumers still say they plan to reduce their spending in response to elevated interest rates and/or the expectation of high inflation, the trend is positive.

The unemployment rate ticked higher through 2024 and private employment gains stalled at the end of the year. With a high level of uncertainty in the economy, businesses are more likely to maintain their current workforce rather than increase it substantially.

On the other hand, a slowdown in immigration, coupled with the ongoing retirement of baby boomers, should give employment a boost next year, providing more support for GDP growth and consumption.

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Challenges remain

Despite the brighter path ahead, the Canadian economy is not out of the woods yet.

Even with lower interest rates and inflation back to target, households continue to struggle with heavy debt burdens. Interest-only payments now account for almost two-thirds of all debt reimbursements. Therefore, the impact of elevated interest rates will continue to restrain household spending even when rates have come back to a neutral level of between 3.25 percent and 2.25 percent.On the inflation front, a return to target doesn’t mean prices will come down. It just means increases have moderated to a more sustainable pace. We see little risk that inflation will take off again. However, the housing market is one potential source of inflation. As rates fall, home buying tends to pick up quickly. A recovery in certain cities is already building steam and this could keep shelter inflation high. Inflation in rented accommodation stood at 7.1 percent in October and owned accommodation at 5.0 percent.

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Reduced immigration targets are another factor that could undermine growth in 2025. The government has announced a drop in the number of new permanent residents and temporary residents over the next two years. This will translate into a population decrease of 0.2 percent in 2025 and again in 2026.As a result, we estimated the population aged 15-64 is set to fall by more than 450,000 between the end of 2024 and the end of 2026. By contrast, the international immigration and net non-permanent residents from this age group grew by over 1 million in 2024 (that’s roughly the entire population of Nova Scotia).

Population increases were central to the resiliency of the Canadian economy in recent years. In fact, they were probably the key reason we were able to avoid a recession.

For business owners, a growing population has meant more consumers and a larger pool of potential workers. A decrease in the population could therefore keep a lid on growth, especially given Canada’s aging population and the different consumption patterns that come with it.

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Finally, the big cloud hanging over the Canadian economy in 2025 is Trump 2.0. The president-elect talks a lot and seems to have a busy agenda for dealing with the US’s main trading partners, including Canada. However, there’s a difference between talk and action. The main issue for Canada is the spectre of trade tariffs. On the campaign trail, Trump promised to impose a blanket 10 percent tariff on all imports into the US, except those from China, which would be hit with a 60 percent tariff. A week after his election, he revised those numbers to 10 percent on Chinese goods and 25 percent for those from Canada and Mexico.Of course, we have to take seriously the threat of US tariffs and the impact they would have on the Canadian economy. However, given the integration of the two economies, we are skeptical that Canada will be subject to a long-lasting blanket tariff on our exports to the US.For now, the only certainty about the arrival of the new US administration is that it’s bringing more uncertainty. Uncertainty tends to hurt growth – businesses may decide to ramp up inventories ahead of tariff announcements or postpone investments. Being able to forecast demand with a certain level of accuracy is key to inventory management and business optimization.

Trump administration policies could also make the Canadian dollar fall even further against the greenback. The loonie could slide closer to US$0.70 in early 2025, depending on which policies the new US administration promotes. A further drop in our exchange rate would hurt the purchasing power of Canadian households and businesses for foreign goods and services.

A strong US dollar would also take a toll on Canadian exports to elsewhere in the world by hurting demand for commodities and other goods traded on international markets in US dollars.

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A silver lining

It’s not the first time the Canadian economy has faced such headwinds. Despite these challenges, Canadian companies have shown resilience in the past and we believe they will do so again in the months and years to come.

The key is to keep a close eye on emerging trends impacting your businesses and act on them. One way every business can build resilience is by focusing on improving their productivity. By strengthening your innovation, technology adoption and operational efficiency, you will be in a better position to navigate the complexities of 2025 and beyond.
Santa Lucía
Caribbean News And Beyond
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2024-12-13
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MONTREAL, Canada –  As we look ahead to 2025, Canadian entrepreneurs face a varied economic landscape. Despite potential headwinds, there are many reasons for cautious optimism. The key economic challenges of the last two years are improving. Inflation is expected to stay within the Bank of Canada’s target range of around 2 percent next year. Given […]
The post Threats vs reality: What awaits the Canadian economy in 2025 appeared first on Caribbean News Global.
Threats vs reality: What awaits the Canadian economy in 2025