Outlook

Canada’s economic growth is forecast to strengthen as interest rates gradually ease and both household and business confidence rise.

Growth in gross domestic product (GDP) per person is expected to increase gradually over 2025 and into 2026. At the same time, population growth is assumed to slow. Excess supply will be slowly absorbed.

Core inflation is projected to decline gradually toward target (see Table 2 in the Projections section). Meanwhile, the path for CPI inflation will be uneven. Inflation settles sustainably at 2% in the second half of 2025.

Economic outlook

GDP growth is anticipated to strengthen from about 1½% in the first half of 2024 to roughly 2½% in the second half. This increase is largely driven by exports, particularly in energy and motor vehicles, and some pickup in household spending.

Excess supply will begin to shrink

In contrast to GDP growth, potential output growth is expected to moderate from 2½% to 1½% over the same period, driven by slowing population growth. With supply growth falling below demand growth, excess supply is expected to begin to shrink in the second half of 2024.

Excess supply should continue diminishing gradually over the projection horizon as GDP growth steadily outpaces potential output growth.

GDP per person is expected to rise

GDP is forecast to expand around 2¼% over 2025 and 2026. Growth is led by consumption and housing, reflecting an increase in household spending per person (Chart 9).

Potential output is anticipated to expand by a more modest 2% over this period.

• An assumed pickup in trend labour productivity growth partly offsets the negative impact coming from the expected slowdown in population growth.
• Trend labour productivity growth turns positive in the first quarter of 2025 and rises to 1% by the end of 2026.

Consumption

Despite slowing population growth, the pace of consumption spending is expected to average around 1½% into the first half of 2025. It then rises to 2¼% in the second half of 2025 and stabilizes thereafter (see In focus: How newcomers impact the Canadian economy).

Consumption per person is expected to strengthen as lower interest rates ease debt payments for some households and consumer confidence improves.

However, this outlook is subject to considerable uncertainty given the very different experiences households face. For example:

• Some households are seeing income gains from higher interest rates on investments such as guaranteed investment certificates.
• Some may start to see lower debt payments as interest rates decrease.
• Some will face large increases in debt payments as longer-term mortgage rates reset at higher rates.
• Some variable-rate mortgage holders with fixed payments will have to deal with higher principal payments once they reset their amortization schedules.

This diversity of experience makes forecasting the strength of the aggregate rebound difficult.

Residential investment

Growth in residential investment is expected to rise to almost 8% on average over 2025. Growth should then moderate to a still-strong 4% by the end of 2026.

• Population growth and the gradual easing of interest rates will boost demand for new construction. Although government programs should help increase supply, structural capacity constraints remain.
• The high funding costs currently hindering construction are expected to become less binding in the medium to long term as interest rates decline.
• Growth in renovation spending is expected to pick up over the projection horizon due to easing financial conditions and rising income growth.

Robust demand and constrained supply have led to a historically low vacancy rate. This imbalance is expected to hold up house and rental price growth.

Business investments and exports

Business investment growth is expected to average 4¼% over the projection horizon.

In the energy sector, additional pipeline capacity is anticipated to lead businesses to increase investment in oil and gas production. Businesses’ capital expenditure plans also point to more spending on projects related to electric vehicles and petrochemicals.

Over the projection horizon, the increase in investment spending is bolstered by easier financial conditions and the anticipated pickup in economic growth.

Export growth is expected to rise to 6¼% on average over the second half of 2024. This increase is led by oil exports, as new capacity is created by the Trans Mountain Expansion pipeline. As well, motor vehicle exports should rebound as the drag from plant retooling eases. As the impact from these factors fades, growth is projected to gradually moderate to about 2% by the end of 2025, bringing it in line with the expansion of foreign demand.

Inflation outlook

Inflation is projected to fall below 2.5% in the second half of 2024 (Chart 10). At the same time, core inflation declines more gradually. CPI inflation is temporarily pulled below core inflation largely by base-year effects in gasoline prices.

The path will be uneven

CPI inflation is then anticipated to rise modestly as the base-year effects from gasoline fade and inflation in some goods prices comes off recent lows. Inflation averages around 2½% in the first half of 2025 on the strength of services price inflation.

Shelter price inflation remains elevated due to high mortgage interest costs and rent inflation. However, both are expected to ease somewhat. Price growth in some services remains elevated but is projected to slow as wage growth softens.

Inflation in prices for goods excluding energy remains low due to modest growth in global demand and weak growth in input costs.

Inflation will return to target

While the trajectory may be bumpy, inflation is anticipated to sustainably reach the 2% target in the second half of 2025 (Chart 11).

Housing market imbalances and labour cost growth are expected to remain an ongoing source of upward pressure on inflation in shelter prices and services excluding shelter over much of the projection horizon. Moderate excess supply should offset these upward pressures.

By the end of the projection, inflationary pressures fade, and the economy returns to balance.