Economic forecast for Canada

05.12.2024

GDP growth is expected to strengthen from 1.1% in 2024 to 2.0% in 2025 and 2.0% in 2026. This improvement is supported by a stronger global outlook and lower interest rates, which will boost exports and business investment. Although the labour market has deteriorated in recent months, it is set to recover during 2025. Headline and core inflation have come down and approached the target level. However, the housing market remains weak, and high mortgage costs continue to weigh on consumer spending. Risks around the projections are broadly balanced, but uncertainty about policy developments has increased.

The Bank of Canada began cutting interest rates in June 2024, with further reductions likely. Increased government spending, particularly on housing affordability and new social programmes, has raised the general government deficit, albeit from low levels. A key policy priority remains to strengthen Canada’s weak productivity performance by enhancing the growth-friendliness of the tax system, removing internal trade barriers, improving infrastructure and making better use of immigrants’ skills.

High population growth has supported economic activity.

GDP growth strengthened in the first half of 2024, following a sluggish period in the second half of 2023. It increased by 0.5% in the second quarter, after rising by 0.4% in the first quarter. The flash estimate points to slightly lower growth in the third quarter. Private consumption has continued to benefit from strong population growth, but remains weak on a per capita basis. Business investment has rebounded from the downturn in the second half of 2023, growing by 2.1% in the second quarter. In contrast, housing investment has continued to decline since the beginning of 2022. The unemployment rate has risen in recent months, reaching 6.5% in October. Employment is growing more slowly than the labour force, which is boosted by high population growth. Lay-offs have been limited so far. Meanwhile, vacancy rates have returned to normal levels. Despite the slowdown in the labour market, wage growth remains relatively elevated compared to productivity growth. Consumer price inflation has decreased. Headline inflation stood at 2.0% in October 2024. Core inflation, although still above headline inflation at 2.3%, has also slowed. Service price inflation and shelter inflation remain elevated.

The international environment became more supportive in the first half of 2024, partly due to robust growth in the United States, Canada’s largest trading partner. However, exports of goods and services did not fully benefit from this more favourable environment, declining by 0.4% in the second quarter of 2024. In the third quarter, merchandise exports (in real terms) increased slightly by 0.3%. Canada’s oil exports are benefiting from enhanced export capacity of the Trans Mountain Expansion pipeline, which began operations in May 2024.

Real GDP growth is projected to strengthen.

Real GDP growth is projected at 1.1% in 2024. Looking ahead to 2025, real GDP growth is projected to increase further due to strong external demand, which will support exports, and lower policy rates, which will support investment. Private consumption growth is expected to slow in 2025, driven by lower population growth and a weaker labour market, before picking up again in 2026. Labour market conditions are expected to improve gradually from the first half of 2025. Headline inflation is projected to be close to the 2% target, with some month-to-month fluctuations. Core inflation is expected to remain slightly above 2% in 2025 due to high service price inflation.

Risks on the projections are broadly balanced, although uncertainty is high. On one hand, more restrictive global trade policies or a more significant deterioration in the labour market could bear down on economic activity. High household debt service costs could continue to weigh more heavily on consumer spending than currently projected. On the other hand, stronger external demand or a stronger boost to consumer spending from increased household savings could support economic activity. The outlook also depends on future population trends. The projection assumes a slowdown in population growth in line with recently announced lower immigration targets. However, the speed of adjustment in particular for temporary immigration remains uncertain.

Source: European Commission. European economic forecast, december 2024.