Our economic outlook for Canada

We’ve lowered our forecast for Canada’s full-year GDP growth by a half percentage point, from 1.8% to 1.3%. Uncertainty about trade developments is likely to leave businesses hesitant to invest and consumers less likely to spend. We anticipate material effects from uncertainty even in the absence of a worst-case scenario for trade. GDP grew by a greater-than-expected 0.6% in the fourth quarter, higher than upwardly revised growth of 0.5% in the third quarter. On a per capita basis, GDP rose by 0.2%, ending a string of six consecutive quarterly declines.

Inflation shot higher in February as a two-month sales-tax break ended mid-month. The Consumer Price Index (CPI) rose by 2.6% year over year, having held below 2% for the three previous months. The level would have been higher had it not been for a slowing in the pace of year-over-year gasoline price increases. Prices of core items, which exclude volatile food and energy components, rose by 0.9% month over month, after falling in January. On a year-over-year basis, core inflation was 2.6%, up from 2.2% in January. We have raised our forecast for full-year core inflation from 2.2% to 2.4, which would keep core inflation above the midpoint of the 1%–3% target set by the Bank of Canada (BoC). The forecast reflects our expectations for a relatively modest tariff regime.

We have lowered our forecast for the BoC’s year-end policy rate by 25 basis points, to 2.25%. Although we expect the bank to remain wary of inflation and inflation expectations, we don’t foresee a worst-case scenario for tariff implementation, which would allow for some BoC dovishness in the face of slowing economic growth amid elevated uncertainty. The BoC continued its rate-cutting cycle on March 12, lowering its overnight rate target by 25 basis points, to 2.75%. The BoC has cut its policy rate in seven consecutive meetings by a total of 2.25 percentage points. The bank emphasized that trade tensions with the U.S. “will likely slow the pace of economic activity and increase inflationary pressures in Canada.” It said its governing council would carefully assess “the timing and strength of both the downward pressures on inflation from a weaker economy and the upward pressures on inflation from higher costs.”

We expect trade-related uncertainty to affect businesses’ hiring plans and to slow job gains. After three months of strong job gains, employment was little-changed in February, with the addition of 1,100 jobs. The unemployment rate held steady at 6.6%. While a challenging labor supply environment will help limit upside, we expect the unemployment rate to rise to 7% by year-end amid elevated uncertainty.