28 Feb: Canada’s economy showed strong momentum heading into 2025, with real gross domestic product (GDP) rising 2.6% on an annualized basis in the fourth quarter, according to Statistics Canada. This growth significantly outpaced earlier forecasts of 1.8% by both economists polled by Reuters and the Bank of Canada. However, the return of U.S. President Donald Trump and his impending tariffs on Canadian imports could disrupt this economic rebound.
Consumer Spending and Retail Boom Drive Economic Expansion
Household spending saw its fastest growth in over two years, largely driven by increased purchases of new trucks, vans, and SUVs. TD Bank’s director of economics, James Orlando, attributed this surge to interest rate cuts by the Bank of Canada throughout 2024, which boosted consumer confidence. Lower borrowing costs encouraged Canadians to spend more freely, easing concerns over mortgage renewals and auto loans.
Retail activity was particularly strong in December 2024, with a 2.6% increase, the largest since June 2021, when pandemic-related shopping restrictions were lifted. Real GDP grew by 0.2% in December and is expected to accelerate to 0.3% in January, according to StatCan’s early estimates.
Despite challenges such as the Canada Post strike, the transportation sector rebounded in December, supported by increased courier activity and the resolution of rail and port strikes in November 2024.
Stronger Growth Than Expected, But Tariffs Pose a Major Risk
Canada’s economy also saw 2.2% annualized growth in Q3 2024, revised upward from the initial 1% estimate. However, Trump’s proposed 25% tariffs on all Canadian and Mexican imports, with a 10% duty on energy exports, remain a significant threat. Initially delayed until March 4, these tariffs are contingent on Canada and Mexico introducing additional border security measures, but Trump has stated that he hasn’t seen sufficient progress from either country.
Avery Shenfeld, chief economist at CIBC Capital Markets, warned that while lower interest rates and a sales tax holiday helped fuel Canada’s recent economic momentum, tariffs could “easily snuff out growth.” The uncertainty surrounding trade policies may also restrain capital spending in early 2025.
Bank of Canada’s Rate Cut Dilemma Amid Rising Inflation
Inflationary pressures and an accelerating economy would typically prompt the Bank of Canada to pause rate cuts. However, with the economy facing potential trade disruptions, Orlando believes another quarter-point rate cut, reducing the benchmark interest rate to 2.75%, may be needed as “insurance.”
Currently, financial markets are split on the likelihood of a seventh consecutive rate cut in March, according to LSEG Data & Analytics.
Residential Construction Sees Fastest Growth in Over Three Years
Canada’s residential construction sector recorded its strongest expansion in more than three years in Q4 2024, helping offset a slowdown in business inventories. Additionally, real GDP per capita rose by 0.2%, reversing a downward trend seen in five of the previous seven quarters.
Orlando emphasized that despite the looming uncertainty, the strong Q4 results highlight Canada’s resilience, stating, “It’s crucial to understand how strong you are before facing economic shocks.”
As March 4 approaches, all eyes will be on Trump’s final decision on tariffs and how the Bank of Canada responds to this evolving economic landscape.
