Our economic outlook for Canada

The Canadian economy continues to face headwinds from trade-related uncertainties, though recent indicators suggest the situation may be stabilizing. Declines in wholesale trade and manufacturing resulted in GDP contracting by 0.1% in April on a monthly basis, as U.S. firms’ tariff frontrunning dissipated. But resilient domestic services consumption highlights the firmer position of non-trade-related sectors. Recent tariff developments intensify the uncertainty tax facing many Canadian businesses. But after United States-Mexico-Canada Agreement exemptions, we maintain our expectation that Canada will have one of the lowest effective tariff rates among major U.S. trading partners.

After a weak first quarter, we are seeing signs of revitalization from the Canadian consumer, as nominal wage growth remains supportive and increases in unemployment are concentrated among younger workers who account for a relatively small share of overall consumption.

The Bank of Canada (BoC) held its policy rate at 2.75% at its June meeting, but we expect it to cut the overnight rate target to 2.25% by year-end. This would provide some relief for households and businesses by bringing the policy rate to the lower end of its neutral range, where it would neither stimulate nor restrict economic activity. We maintain our 2025 GDP growth forecast of 1.25% and expect the unemployment rate to rise to 7.5% by year-end, though both are highly dependent on the outcome of U.S.-Canada trade negotiations.