Our economic outlook for Canada
December 05, 2024
Our outlook for year-end 2025
1.8%
Economic growth,
year over year
We expect Canada’s growth to remain below trend in 2025 despite supportive monetary policy. Households should have more cash flow for saving and spending as the allocation of consumer spending to finance charges should decrease. The increased allocation to spending should boost Canada’s growth, though some of that could be offset by a recent reduction of immigration targets.
2.2%
Core inflation, year over year
Having fallen for four straight months, the Consumer Price Index rose by 2% year over year in October, up from a 1.6% increase a month earlier. The rise was partly attributable to an increase in municipal property taxes driven by past housing price appreciation. Clothing and footwear, rent, and airfares rose by more than expected. Base-year effects on gasoline prices also contributed to the rise. Shelter inflation remains a big contributor to inflation as mortgage interest costs, rents, and property taxes were among the top five contributors to annual inflation. Inflation was only 0.9% excluding shelter in October.
2.5%
Monetary policy rate
We expect that the Bank of Canada will continue to ease monetary policy through 2025, though we expect rates to settle higher than in the prepandemic period. We expect a terminal rate around 2.5%, near the lower end of our estimate of the neutral rate range.
6.8%
Unemployment rate
Canada’s unemployment rate held firm at 6.5% as employers added 15,000 jobs in October. Real estate, finance, and insurance experienced the largest declines, whereas building and support services experienced the largest gains. The number of permanent employees rose, evidence of the country’s rapidly increasing population. The federal government updated its three-year targets regarding permanent residents. It will now welcome 390,000 new permanent residents in 2025, down from 500,000 in 2024. Canada also aims to reduce targets for temporary foreign workers. They currently comprise 7% of the population, which the government hopes to bring down to 5%. These changes, although difficult to implement, will tighten the labor force with the potential for upward pressure on wages.
What I’m watching
Rate cuts should spur investment and consumption
For two years, the Bank of Canada (BoC) has maintained varying degrees of restrictive monetary policy. Policymakers have raised and lowered their interest rate target while keeping it above 3.25%. That’s the upper end of their estimate of the neutral policy range—a theoretical rate level that would neither stimulate nor inhibit economic growth.
While restrictive policy has returned inflation to the BoC’s 1%–3% target range, the economy is clearly inhibited. Personal consumption grew at an average annual pace of just 1.4% in the four quarters before the June 2024 rate cut—less than half its average pace in the run-up to previous rate-cutting cycles. Over the same period, business investment in long-lasting assets used to produce goods or services contracted at a 1.9% average annual rate. The historical record confirms the power of lower rates to lift growth, however, and we expect them to do so again, by spurring improvements in consumption and investment.
Vytas Maciulis, CFA
Vanguard Economist
GDP and its components: Comparing average growth rates before and after rate cuts
Notes: Underlying data reflect quarterly rates of annualized economic growth (gross domestic product) from Q1 1992 through Q2 2024, as well as changes to the Bank of Canada’s interest rate target during that period. The historical averages reflect changes in GDP during the four quarters preceding the start and following the conclusion of each rate-cutting cycle, except the one that began in June 2024.
Sources: Vanguard calculations, based on Statistics Canada data from LSEG as of June 30, 2024.
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