Monetary Policy Report—October 2024—Canadian economy
Economic growth in Canada is forecast to pick up gradually and average 2¼% over the projection. Inflation is expected to remain near the 2% target.
Economic activity is boosted by lower interest rates, which strengthen household and business spending. Exports also support growth.
Economic activity
Growth in gross domestic product (GDP) is forecast to pick up over the projection. After having contracted since the first quarter of 2023, GDP per person is expected to begin rising in the first quarter of 2025. Potential output growth is anticipated to moderate in 2025 and 2026, and excess supply will gradually be absorbed.
GDP growth will strengthen gradually
GDP growth is projected to continue at around 2% through the first half of 2025 before increasing modestly to about 2½% in the second half. This pickup in economic growth is largely due to stronger consumer spending and business investment, which are supported by declines in interest rates. Increased energy exports and robust foreign demand underpin growth in exports. Over the remainder of the projection, GDP growth is expected to remain around 2¼%.
The evolution of economic growth over the projection reflects the net impact of two forces:
- Population growth is assumed to decline from about 2½% in the second half of 2024 to an average quarterly growth of 1½% over the rest of the projection. Slower population growth means that fewer new consumers and workers will join the economy.1
- Growth in GDP per person rises from about -¾% in the second half of 2024 to average just above ¾% in 2025 and 2026 (Chart 13). This pickup largely reflects the expected strengthening of consumption per person.
As the exact timing of the slowdown in population growth and the improvement in GDP per person are uncertain, the path of economic growth may prove to be bumpier than projected.
Excess supply will gradually be absorbed
Potential output growth is expected to moderate from 2.4% in 2024 to 1.9% on average over 2025 and 2026. Growth in trend labour productivity is assumed to pick up over 2025 and 2026, partially offsetting slower population gains.
Excess supply is expected to remain at around 1% through the first half of 2025, with GDP forecast to expand at about the same pace as potential output. Starting in the second half of 2025, excess supply is gradually absorbed.
Consumption per person will improve steadily
Consumption growth is projected to moderate in the first half of 2025 as population growth eases. It is then forecast to pick up to about 2% over the rest of the projection.
After declining for five consecutive quarters, consumer spending per person is forecast to rise. Growth is expected to turn positive in the second half of 2025 and then continue to strengthen gradually. This recovery is supported by lower interest rates and higher household wealth.
In particular, lower interest rates support consumption per person by reducing the cost of financing new borrowing. Lower interest rates also reduce debt-servicing costs for some borrowers with short-term and variable-rate loans. That said, most households renewing five-year fixed-rate mortgages will face an increase in their debt-servicing costs over the projection horizon, which will dampen this group’s consumption spending.2
As overall economic conditions strengthen, spending by young and low-income workers is expected to rise. Consumer confidence is also assumed to gradually improve.
Residential investment will pick up
Growth in residential investment is expected to rise to around 6% in 2025 and 2026.
- Resales and renovations are anticipated to recover as interest rates decline. Renovations should also be supported by a projected rise in house prices.
- Recent changes to government mortgage insurance rules are expected to bolster housing demand.
- Although population growth should ease, the level of demand is expected to remain robust and support new construction.
Lower interest rates may also facilitate some increase in the supply of housing by easing financing costs. However, constraints on the amount of land available for new homes, zoning restrictions and a lack of skilled labour are expected to limit the pace of construction, particularly over the near term. As a result, growth in housing demand is expected to outpace increases in supply.
Unlike other sectors of the economy that are experiencing excess supply, the housing market is projected to remain tight. House prices are expected to rise, but the pace of increases will likely be restrained because some home buyers will face affordability challenges.
Business investment and exports will rise
Business investment is expected to strengthen over the projection, underpinned by lower interest rates and higher demand. In addition, increased pipeline capacity, along with liquified natural gas (LNG) export capacity, will support investment in the energy sector.
After declining since 2020, the amount of capital per worker is anticipated to pick up as investment strengthens and growth in the labour force eases. This should contribute to an improvement in labour productivity.
Export growth boosted by energy
Export growth is projected to rise in 2025, boosted by the Trans Mountain Expansion pipeline. In 2026, new LNG capacity is anticipated to support energy exports. Robust foreign demand, particularly from the United States, is expected to strengthen non-commodity exports.
Growth in imports is forecast to pick up to about 3½% on average in 2025 and 2026, in line with growth in domestic demand and exports.
Growth in government spending is assumed to ease
Growth in government spending is assumed to slow in line with the 2024 budgets of federal and provincial governments.
Inflation outlook
Consumer price index (CPI) inflation is expected to remain close to 2% over the projection (Chart 14). Core inflation is projected to gradually ease.
Inflation declined to 1.6% in September. In the coming months, inflation is expected to rise to slightly above 2%, mostly reflecting a smaller drag from energy prices (Chart 15).
More broadly, the Bank continues to see opposing forces shaping the outlook for inflation.
First, excess supply, which has been pulling inflation down, should gradually be absorbed as lower interest rates support growth. The narrowing of the output gap should be reflected in a modest pickup in inflation, primarily for many goods prices, which tend to adjust more frequently (see In focus: How the frequency of price changes affects inflation).
Second, inflation for the non-shelter services prices that remain elevated is expected to continue to ease gradually, partly because prices for these products change less frequently. In addition, many of these services are labour-intensive, and wages tend to adjust slowly. With the cooling in the labour market, wage growth is projected to moderate which will, over time, contribute to an easing in inflation for these services.
Third, inflation in shelter prices is expected to moderate gradually from elevated levels.
- Inflation in mortgage interest costs will ease from a high level, aided by the decline in interest rates.
- CPI rent inflation is projected to decrease slowly, reflecting a gradual adjustment to past increases in new rents.
- In contrast, CPI components related to house prices are projected to rise.
As the pressures on these respective components fade over the projection, inflation is expected to remain close to the middle of the control range of 1% to 3%. However, because the exact pace of these adjustments is uncertain, the evolution of inflation may not be as smooth as in the projection.
Endnotes
- 1. See Bank of Canada, “Box 3: Assessing the impacts of newcomers on the Canadian economy and inflation,” Monetary Policy Report (July 2024): 14–15.[←]
- 2. Some households renewing five-year mortgages may be able to offset some of their increased costs, for example, by switching to a shorter-term or variable-rate product.[←]