Our economic outlook for Canada
May 21, 2025
Trade uncertainty likely to weigh on investment
“Significant U.S. tariffs are likely to weigh on Canadian business investment, consumer spending, and the labor market.”
Adam Schickling,
Vanguard Senior Economist
The Canadian economy has been challenged by trade-related uncertainties and softening demand for services. Despite recent interest rate cuts, significant tariffs on Canada’s automobile sector and broader tariff measures from the U.S. are likely to weigh on Canadian business investment, consumer spending, and the labor market. We expect the Canadian economy to grow around 1.25% in 2025 and the unemployment rate to rise to about 7% by year-end, but both forecasts are sensitive to U.S.-Canada trade developments.
The Bank of Canada (BoC) opted to hold its policy overnight rate at 2.75% at its April 16 meeting, a pause in what had been seven consecutive rate cuts. Policymakers emphasized the need for caution amid substantial U.S.-Canada trade uncertainty and concerns about the inflationary implications of retaliatory tariffs on U.S. imports. Ultimately, we expect the economic impacts from tariffs and trade uncertainty to outweigh any inflationary risks, prompting the BoC to cut the overnight rate by half a percentage point by year-end, to 2.25%.
Canada economic forecasts
Notes: Values are approximate. GDP growth is defined as the annual change in real (inflation-adjusted) GDP in the forecast year compared with the previous year. Unemployment rate is as of December 2025. Core inflation is the year-over-year change in the Consumer Price Index, excluding volatile food and energy prices, as of December 2025. Monetary policy is the BoC’s year-end target for the overnight rate.
Source: Vanguard.
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