Our economic outlook for Canada

We recently lowered our forecast for Canada’s full-year GDP growth by a half percentage point. 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.

We recently raised our forecast for full-year core inflation from 2.2% to around 2.5%, 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. 

The BoC paused its rate-cutting cycle at its April 16 meeting, leaving the policy overnight rate at 2.75%. The BoC had previously cut its policy rate in seven consecutive meetings by a total of 2.25 percentage points. The Governing Council emphasized that amid elevated trade-related uncertainty, its focus would be on price stability. We recently 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.

We expect trade-related uncertainty to affect businesses’ hiring plans and to slow job gains. Employment fell by 33,000 in March and the unemployment rose by 0.1 percentage point to 6.7%. While a challenging labor supply environment will help limit upside, we expect the unemployment rate to rise to around 7% by year-end amid elevated uncertainty.