Outlook

Economic growth in Canada is projected to rise to around 1.8% in 2025 and 2026, outpacing potential output, and excess supply is gradually absorbed. Inflation is expected to remain close to the Bank of Canada’s 2% target.

The economic outlook depends on several key assumptions (see Key inputs to the projection in the Projections section). Importantly, the projection does not incorporate any wide-ranging US tariffs. New tariffs could significantly affect the outlooks for growth and inflation (see In focus: Evaluating the potential impacts of US tariffs). Reflecting an increase in uncertainty about US trade policy, the projection includes a modest negative impact on Canadian business investment.

The easing of monetary policy contributes to the increase in economic activity by stimulating household and business spending. At the same time, exports are supported by new transportation capacity for oil and gas, along with the continued strength of the US economy.

The outlook for growth in Canada has been revised down since the October Report because of new government policies designed to slow immigration and updated assumptions related to outflows of non-permanent residents. Fewer newcomers lead to both fewer new consumers and fewer new workers, with little net impact on inflation (see Canadian outlook in the Projections section).

Economic activity

As the impacts of monetary policy easing continue to work through the economy, growth in gross domestic product (GDP) is projected to increase from about 1.3% in 2024 to around 1.8% in 2025 and 2026 (see Table 1 in the Projections section). Quarterly growth slows near the end of the projection to be more in line with potential output growth as the effects of monetary policy easing fade.

GDP growth is forecast to pick up

The path for economic growth over the projection reflects the net impact of two opposing forces (Chart 12).

• On one hand, growth in GDP per person strengthens in 2025. Per-person household spending is the main factor behind this strengthening, reflecting the effects of lower interest rates as well as rising incomes and household wealth. It also reflects one-time government measures designed to support consumption in the first part of 2025. Export growth and business investment also increase.
• On the other hand, population growth is assumed to slow. After reaching about 2.3% in the second half of 2024, population growth is assumed to decline to 0.5% in the second quarter of 2025, and it is assumed to remain at that pace over the rest of the projection.

On a quarterly basis, GDP growth slows near the end of the projection horizon to be more in line with potential output growth as the effects of monetary policy easing fade.

Excess supply is projected to be gradually absorbed

Growth in potential output is projected to slow from 2.5% in 2024 to roughly 1.5% in 2025 and 2026. The assumed slower pace of population growth over the projection pulls down potential output growth (see Key inputs to the projection in the Projections section). This is partially offset by an expected rise in growth in trend labour productivity.

GDP growth is anticipated to outpace growth in potential output in 2025 and 2026, resulting in excess supply being absorbed (Chart 13).

Growth in consumption per person is expected to increase

Consumption growth is expected to ease over the projection horizon, in line with slower population growth.

On a per-person basis, however, growth in consumption is projected to pick up and average around 1% in 2025 and 2026, supported by past cuts in policy interest rates, solid income growth and increases in household wealth from rising house prices. Consistent with this outlook, respondents to the Bank’s most recent Canadian Survey of Consumer Expectations signalled their intent to increase spending on discretionary items over the next 12 months (Chart 14).

Residential investment growth is forecast to be robust in 2025

Residential investment growth is expected to be robust, at about 6%, in 2025 (Chart 15).

• Declines in mortgage rates strengthen growth in resales. Recent rule changes for mortgage insurance are also expected to boost resales.
• Pent-up demand for housing supports new construction, but constraints will limit supply growth in the short term. These constraints include the amount of land available for new homes, zoning restrictions and a lack of skilled workers.

Growth in residential investment is projected to moderate to about 2.6% in 2026. The housing vacancy rate is anticipated to gradually rise as population growth slows and more homes are built. However, the vacancy rate is expected to remain relatively low.

Growth in business investment is expected to remain modest

Growth in business investment is expected to increase but remain modest, averaging 1.6% over the projection horizon. Stronger demand growth and past declines in interest rates strengthen business investment. Increased export capacity is projected to encourage investment in the energy sector. At the same time, the rise in trade-related uncertainty will weigh on businesses’ investment plans. Moreover, the recent depreciation of the Canadian dollar has made imported machinery and equipment more expensive.

Growth in government spending is assumed to slow in line with federal and provincial budgets and fiscal updates.

Export growth is supported by new transportation capacity for oil and gas

Export growth is projected to increase to about 2.2% on average. It is bolstered by the increased transport capacity provided by the Trans Mountain pipeline, along with new export capacity for liquefied natural gas that is expected to come online in mid-2025. Non-commodity exports grow slowly over the projection despite strong foreign demand.

Import growth is projected to pick up to about 2.4% on average in 2025 and 2026, broadly in line with growth in domestic demand.

Inflation outlook

Consumer price index (CPI) inflation is expected to remain close to target over the projection. The Bank’s preferred core measures of inflation are projected to gradually ease toward 2% as shelter inflation continues to decline (see Table 2 in the Projections section).

The temporary GST/HST holiday on some goods and services will continue to add volatility to inflation in the coming months. After reducing year-over-year inflation by 0.5 percentage points in December, the tax holiday will likely lower inflation by about 0.8 percentage points in January and by around 0.4 percentage points in February (Chart 16). By March, the tax holiday will have ended, and inflation will edge up. The impact of the tax holiday is concentrated in prices for food and alcohol at restaurants (Chart 16, included in orange bars).

Over the projection, inflation is anticipated to remain close to the 2% target (Chart 17).

Inflation in shelter prices is expected to continue to ease but remain above its historical average. Past declines in interest rates will continue to be reflected in slower inflation in mortgage interest costs. With asking rents falling for the first time in several years and population growth assumed to continue slowing, inflation in rent is anticipated to moderate further.1

In contrast, inflation in non-shelter components is projected to rise but remain somewhat below its historical average over the projection horizon. The increase comes about as excess supply dissipates and the recent depreciation of the Canadian dollar lifts inflation in the prices of imported goods.

Endnotes