Economic Outlook: Slower Growth, Rate Cuts Still on the Table
Since May, Canadian economic data has underperformed, but another interest rate cut in July remains unlikely unless core inflation eases further. Lingering trade tensions, geopolitical risks, and global uncertainty have weakened growth forecasts, including for BC.
Unemployment continues to rise, consumer confidence has dropped, and business investment is still cautious. Despite 225 basis points of Bank of Canada rate cuts, housing activity remains shaky, especially in BC and Ontario condo markets.
The BoC was caught off guard by stronger April inflation, but this seems tied more to discretionary spending than tariffs. Canada’s counter-tariffs are expected to have minimal inflation impact, leaving room for further monetary policy action if needed.
Fiscal flexibility is a key strength: Canada’s debt levels remain relatively low, giving both federal and provincial governments the ability to respond to economic shocks. While a formal spending plan hasn’t been introduced, tax deferrals, EI support, and interprovincial trade reforms are expected to aid growth into 2026. Defence spending could further boost GDP.
Canada’s resource sector—agriculture, energy, and critical minerals—is well-positioned to support global demand as defence and AI industries expand. Despite being less affected by US tariffs, Canada remains closely tied to US economic performance, especially in manufacturing.
De-escalation of US tariffs has improved outlooks slightly. While Canada maintains strong US market access under CUSMA, slower hiring and softer US industrial data still pose risks. Fortunately, a US recession is not expected in 2025.
Governor Macklem noted inflation risks remain, but hinted more rate cuts are possible if inflation falls and unemployment rises. Markets are pricing in another 25bps cut by year-end. The BoC’s preferred inflation measures may be overstating current conditions.
Housing is still sluggish, with high inventory and soft demand. However, improving trade relations and fiscal stimulus could bring buyers back. Population growth slowed in early 2025, adding headwinds to short-term housing prospects.
GDP forecasts for both Canada and the US have been upgraded slightly. Canada’s GDP is now expected to grow 1.3% in 2026, with a peak unemployment rate of 7.1% in Q3. Expanded fiscal spending should support further gains in late 2025 and into 2026.
