Our economic outlook for Canada

Canada’s economy continues to face meaningful challenges, and while recent data suggest a degree of resilience, the overall outlook remains subdued. Following a 1.6% annualized GDP contraction in the second quarter, growth is expected to recover only modestly in the second half of the year. Trade tensions with the U.S., particularly around steel and automobiles, have weighed on exports and business investment, and the outlook remains highly sensitive to the trajectory of negotiations.

Our 2025 GDP forecast stands at 1.25%, modestly above consensus, reflecting Canada’s relatively favorable trade position with the U.S. Canada benefits from United States-Mexico-Canada Agreement exemptions, resulting in one of the world’s lowest effective tariff rates at approximately 6%.

Domestic demand has shown pockets of resilience. Retail sales rebounded in August following a July slump, with households benefiting from lower interest rates as the Bank of Canada (BoC) has cut its policy rate by 2.5 percentage points since April 2024. Labor market slack remains a risk as businesses are cautious about hiring new workers in the face of elevated macroeconomic uncertainty.

But the September employment report, which showed the addition of about 60,000 jobs, was encouraging. A considerable increase in manufacturing employment suggests that Canada’s relative trade advantage is providing a level of support for the challenged sector. This development and domestic demand resilience have led us to lower our year-end unemployment rate forecast from 7.5% to 7.3%. The unemployment rate was unchanged in September at 7.1%.

The BoC lowered its policy rate by 25 basis points to 2.5% in mid-September, citing a weaker economic backdrop and diminished inflationary pressures. (A basis point is one-hundredth of a percentage point.) This decision reflects a balancing of risks amid slowing global growth and the removal of most retaliatory tariffs on U.S. imports. September’s labor market report likely gives the bank some pause related to further accommodation, but we ultimately expect one more 25-basis-point cut before year-end.