Canada's economy is expected to navigate a mixed landscape in 2025, as government policies and monetary easing provide some support, while elevated interest rates and trade uncertainties pose challenges, according to UBS analysts.
“The pace of growth in Canada has picked up, with the economy growing at a 1.7% annualized pace through the first three quarters of the year, relative to the 0.97% increase seen in Q4/Q4 terms in 2023, but it is still relatively soft,” UBS analysts wrote.
Government spending has been a key driver, with government consumption and investment rising at a 4.2% annualized rate. In contrast, business fixed investment contracted by 0.5%, highlighting the impact of high interest rates on the private sector.
Population growth, a significant driver of Canada's economy in recent years, is projected to slow due to new government policies aimed at curbing the number of temporary residents. “Recent proposals from the government to stem the number of temporary residents will likely mean that the pace of population growth slows from around 3.3% in 2024 to 1.4% in 2025, and 1.3% in 2026,” UBS noted.
Fiscal stimulus measures, including a temporary sales tax holiday and direct transfers to households, are expected to bolster GDP growth in early 2025. UBS estimates these initiatives could boost GDP by 0.7 percentage points, though their impact is likely to fade in the second half of the year.
Despite these positive measures, risks remain. “The most notable downside risk stems from a potential shift in Canada's trading relationship with the United States,” UBS warned.
Proposed US tariffs on Canadian goods could dent GDP growth and complicate monetary policy.
UBS expects the Bank of Canada to continue easing rates as inflation stabilizes around its 2% target. However, the potential for policy missteps or higher-than-expected inflation could limit the scope for further easing, the report cautioned.
Here are the key takeaways from the UBS analyst report on Canada's economic outlook for 2025 and into 2026:
Economic growth
Growth moderates: Canada's economy is growing at an annualized pace of 1.7% through the first three quarters of 2024, up from 0.97% in 2023, but growth remains relatively soft.
Government-driven growth: Economic growth has been driven primarily by government consumption and investment, which rose 4.2% annualized, compared to household consumption growth of 2.5% and a contraction in business fixed investment.
Population growth and fiscal policy
Population growth slowing: Population growth is projected to slow from 3.3% in 2024 to 1.4% in 2025 and 1.3% in 2026 due to stricter immigration policies.
Fiscal stimulus: Recently announced fiscal measures, including a sales tax holiday, rebates, and targeted transfers, could inject around $14 billion into the economy, which is expected to boost GDP growth by nearly 0.7 percentage points, mainly in the first half of 2025.
Monetary policy
Easing by the Bank of Canada: Further monetary easing is expected in 2025, supported by moderating inflation, which remains around the Bank of Canada's 2% target.
Per capita GDP growth recovery: Slower population growth and fiscal and monetary support are expected to drive positive per capita GDP growth by 2025.
Risks to the outlook
Downside: Potential trade tensions with the US, including proposed 25% tariffs on Canadian goods, which could lower GDP growth by ~0.3 percentage points in 2026.
The Bank of Canada’s policy adjustments may be insufficient to stimulate growth or could risk inflation moving above target.
Upside: A stronger impact from fiscal stimulus or domestic demand could boost growth.
Persistent nominal wage growth could lead to "stickier" inflation, limiting the extent of rate cuts.
Trade tensions
US tariff risks: Proposed US tariffs could significantly impact Canada’s economy, especially its energy exports, though early indications suggest the Canadian government prefers a collaborative response.