Our economic outlook for Canada
February 21, 2025
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
Inflation has moderated in recent months, but upside risks remain given uncertainty around U.S. tariffs and their potential to weaken the Canadian dollar. The pace of headline inflation registered 1.9% year over year in January, a third straight month below 2%. On a monthly basis, broad prices rose just 0.1%. Prices of core items, which exclude the volatile food and energy components, fell by 0.1% month over month and rose 2.2% year over year. We foresee core inflation in a year-over-year range of 2.1%–2.4% in 2025, just above the midpoint of the BOC’s 1%–3% target.
2.5%
Monetary policy rate
The Bank of Canada continued its rate-cutting cycle on January 29, lowering its overnight rate target by 25 basis points to 3%. The BoC has cut its policy rate in six consecutive meetings by a total of 2 percentage points. The bank didn’t provide guidance around future changes to the policy rate, citing uncertainties related to potential U.S. tariffs. It noted in its statement that “if broad-based and significant tariffs were imposed, the resilience of Canada’s economy would be tested.” However, the offsetting implications of tariffs on growth and inflation would leave intact our base case of a further 50 basis points in rate cuts in 2025.
6.8%
Unemployment rate
Canada posted a second consecutive strong labor market report, adding 76,000 jobs in January. More than 40%, or 33,000, were in the manufacturing sector. The unemployment rate fell to 6.6%, down from a recent high of 6.9% in November 2024. We foresee the unemployment rate holding around current levels in 2025, with much depending on trade uncertainty and immigration developments.
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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