Our economic outlook for Canada

While there has been little good news recently regarding U.S.-Canada trade relations, the Canadian economy continues to show signs of resilience. After contracting by 0.1% in May, real GDP is estimated to have grown by 0.1% in June, led by rebounds in retail and wholesale trade. This modest recovery suggests that while trade-related uncertainty remains a drag on sentiment, it has not yet translated into a broad-based pullback in domestic consumption.

Spending on services such as dining and entertainment has remained relatively strong, and while durable goods purchases have softened, they are holding up better than expected given the macroeconomic backdrop. Crucially, Canada remains well positioned compared with other major U.S. trading partners, thanks largely to tariff exemptions under the United States-Mexico-Canada Agreement. We maintain our expectation of 1.25% real GDP growth in 2025.

The labor market report for July marked a sharp reversal from June’s strength. The economy shed 41,000 jobs, suggesting firms pulled back on hiring amid renewed trade uncertainty. While the national unemployment rate held steady at 6.9%, the employment rate fell to 60.7%, with younger workers facing the brunt of labor softness. We continue to expect a gradual cooling in Canada’s labor market through the second half of 2025, with the unemployment rate likely to reach 7.5% by year-end. However, because the softness is concentrated among younger workers, the drag on aggregate domestic demand will likely be limited.

At its July meeting, the Bank of Canada (BoC) held its policy rate steady at 2.75%, citing both domestic and global economic resilience as reasons to pause and assess the inflationary implications of evolving trade policy. We expect the BoC to ultimately cut the overnight rate target to 2.25% by year-end, particularly if trade tensions persist and weigh further on growth.