Bank of America has lowered its outlook for Canada’s economy, citing trade tensions with the US and political uncertainty ahead of a likely snap election.
The bank now expects Canada’s gross domestic product to grow 1.5% in 2025, down from a previous estimate of 2.4%, and has trimmed its 2026 forecast to 2% from 2.2%.
The downward revisions reflect concerns over trade disruptions, slowing US growth, and the impact of tariffs imposed by President Donald Trump’s administration.
With US-Canada trade relations fraying, Bank of America expects Washington, Ottawa, and Mexico City to reopen negotiations on the US-Mexico-Canada Agreement (USMCA) later this year.
“In our view, a PM elected through a federal election is necessary for USMCA renegotiation,” analysts wrote.
Despite the turbulence, the bank forecasts the Canadian dollar strengthening against the US dollar as trade tensions ease. It projects the exchange rate to hit 1.40 USD/CAD by year-end, driven by narrowing interest-rate differentials and a fading risk-off sentiment.
Bank of Canada’s response
The Bank of Canada is expected to cut interest rates further to cushion the economy. Bank of America sees an additional 25-basis-point rate cut in April, bringing the central bank’s benchmark rate closer to 2.5%. The report notes that uncertainty around tariffs could weigh on economic activity, making further easing necessary.
Mark Carney, the newly appointed prime minister and leader of the Liberal Party, is expected to call a snap election as early as March 23, with voting likely on April 28. He faces a strong challenge from Conservative leader Pierre Poilievre. Bank of America anticipates a fiscal expansion regardless of the election outcome.
The bigger picture
With trade risks mounting and economic momentum slowing, Canada faces a challenging 2025. The coming months will determine whether policymakers can steer the country toward stability or if heightened uncertainty will further dampen growth prospects.
“Given that US President Donald J Trump followed through with the imposition of some tariffs, that threats of further tariffs continue and slower US GDP growth, we believe that activity will likely decelerate in Canada,” analysts wrote.
Despite the uncertainty over the economy, Canada’s main stock index, the S&P/TSX Composite, has gained around 0.9% so far in 2025.