Our economic outlook for Canada
January 24, 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
The pace of headline inflation slowed to 1.8% year over year in December. Shelter prices remained elevated but continued to moderate, rising 4.5% year over year. Core inflation, which excludes volatile food and energy prices, was 2.1% 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
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 gained 91,000 jobs in December, a nearly two-year high that far exceeded expectations, and the unemployment rate fell to 6.7%. It would take another strong labor report or two before we would consider this development a trend. Most of the hiring was in the public sector, tempering any sense of bullishness. We foresee the unemployment rate in the high-6% range in 2025 as the economy grows below its potential.
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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