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.

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.

Monetary policy started to ease in June 2024 as inflation approached the 2% target. Further interest rate cuts are likely, with a projected decline in the benchmark policy rate to 2¾ per cent by the second half of 2025, the mid-point of Bank of Canada’s estimated range for the neutral rate. Gradual quantitative tightening is expected to continue until next year. The transmission of lower interest rates to lending rates has begun, and its impact on the real economy will become more apparent in 2025. However, many households will continue to face rising debt service costs when their mortgages come up for renewal, as many of these mortgages were taken out when interest rates were very low.

The general government deficit stood at 0.6% of GDP in 2023. The deficit is expected to widen further in 2024 due to lower cyclical receipts, higher interest payments, an exceptional compensation payment and increased discretionary spending. It is then projected to improve gradually over the remainder of the projection period, driven by the pick-up in activity. The federal government has implemented several spending measures in recent budgets, focusing on housing affordability and social spending. Two new fiscal incentives have been announced in November 2024: a temporary GST/HST rebate for qualifying goods and a CAD 250 tax rebate to be issued in early spring 2025. Increased government outlays are only partially offset by spending efficiency gains and higher taxes on capital gains. The overall fiscal stance is assumed to remain broadly unchanged over 2025-26.

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.

High mortgage debt and elevated debt service costs for households are weighing on economic performance by suppressing consumer spending and should continue to be closely monitored. Increasing the supply of affordable housing remains a broader policy objective, which would also help to address high shelter price inflation. Recent high immigration has significantly boosted labour supply but has also strained the housing market. There is policy space to better utilise the skills of immigrants, for example, through a better and nationwide harmonised recognition of foreign credentials. This could also help to address labour shortages in some sectors, notably in skilled trades. Policies to improve the relatively low productivity performance in recent years remain a priority. The tax system could be made more growth-friendly by shifting the tax burden from direct to indirect and environmental taxes. Preferential taxation for small businesses should be reconsidered. Strengthening investment, especially in physical and digital infrastructure, is also a priority. R&D intensity, a key driver of a country’s innovation capacity, could be enhanced by increasing public R&D spending. Reducing regulatory barriers, such as Canada’s high internal trade barriers, would help to boost competition.