Current conditions

Monetary Policy Report—April 2025—Canadian economy

Inflation was near the 2% target in the fourth quarter of 2024, and interest rate cuts had bolstered economic growth. But since then, the trade conflict has intensified. Trade uncertainty and tariffs are expected to slow growth and add to price pressures.

Since the January Report, the United States has imposed large and broad-based tariffs on most of its trading partners (Figure 1). If the tariffs announced on April 2 are fully implemented, the weighted average US tariff rate will increase from 2% to about 22% (Chart 1). The United States has also imposed tariffs on Canadian goods, and Canada has responded. China has imposed tariffs on some Canadian agricultural and seafood products.

Tariffs and increased uncertainty about US trade policy appear to have slowed growth in gross domestic product (GDP) in Canada.

At the same time, tariffs imposed by Canada on imports of US steel, aluminum and consumer goods, including motor vehicles, and the past decrease in the value of the Canadian dollar are putting upward pressure on prices. However, the removal of the consumer carbon tax and lower oil prices have led to a decline in energy prices.

Figure 1: Global trade tensions are evolving rapidly

Tariff announcements up to and including April 11, 2025

Announces 25% tariffs on imports of goods from Canada and Mexico (10% tariffs on Canadian energy products) starting February 4Announces 10% tariffs on imports of goods from China starting February 4 Suspends February 1 tariffs against Canada and Mexico until March 4 Imposes February 1 tariffs on China Announces 25% tariffs on all imports of steel and aluminum starting March 12 Imposes February 1 tariffs on Canada and MexicoDoubles tariffs on imports of goods from China to 20% Imposes 25% tariffs on $30 billion of US goods and announces potential further tariffs on $125 billion of US goods Suspends February 1 tariffs on all goods from Canada and Mexico covered under the Canada-United States-Mexico Agreement and lowers tariffs on Canadian potash to 10% Announces 100% tariffs on some Canadian agricultural products and 25% tariffs on some Canadian pork and seafood products starting March 20 Imposes February 10 steel and aluminum tariffs Announces 25% tariffs on $29.8 billion of US goods; tariffs imposed at midnight on March 13
Imposes March 8 tariffs on some Canadian agricultural and seafood products Announces 25% tariffs on imports of all finished vehicles, starting April 3, and on certain parts and components, starting no later than May 3; includes exemptions for US-made content Announces 10% universal tariffs on imports of goods from nearly all countries starting April 5, with additional “reciprocal” tariffs for many countries starting April 9 Exempts Canada and Mexico from universal and “reciprocal” tariffs Imposes March 26 tariffs on all imports of non-domestic motor vehicles Announces 25% tariffs on vehicles imported from the United States with exceptions for components made in Canada and Mexico Announces 34% counter-tariffs on imports of goods from the United States starting April 10 Imposes April 2 universal tariffs Imposes additional 50% counter-tariffs on imports of goods from China Imposes April 3 tariffs on motor vehicles imported from the United States Announces additional 50% counter-tariffs on imports of goods from the United States starting April 10 Suspends April 2 “reciprocal” tariffs for 90 days; April 2 universal 10% tariffs remain in place Announces further tariffs on imports of goods from China to bring the total of new tariffs to 145%
Imposes April 4 and April 9 tariffs on imports of goods from the United States Imposes April 9 tariffs on imports of goods from China Announces further tariffs on imports of goods from the United States to bring the total of new tariffs to 125%

Inflation

Consumer price index (CPI) inflation has been volatile due to the GST/HST holiday. Excluding the tax holiday period, inflation has risen from 1.9% in November 2024 to 2.3% in March 2025 (Chart 2).

Total CPI inflation has increased because inflation excluding shelter services has rebounded to near its historical average, outweighing a steady decline in inflation in shelter services (Chart 3). While inflation in shelter services remains above its historical average, it is easing. In particular, inflation in both rent and mortgage interest costs—while still high—is declining.

Goods price inflation has increased

Goods prices were roughly flat before the GST/HST holiday, but inflation in goods prices reached 1.3% in March 2025, after the tax holiday ended.

Inflation in goods prices has picked up and is broad-based. For example, inflation has risen in the prices of sporting and exercise equipment, clothing and fresh fruit (Chart 4). These increases stem partly from the delayed effect of the Canadian dollar decreasing in value in late 2024, which is making imports more expensive now. Additionally, some businesses have indicated that suppliers are proactively raising prices in anticipation of future tariffs.1

Services price inflation has been stable

Inflation in services prices was around 3.5% before the GST/HST holiday but fell to 3.1% in March 2025. The decline is mainly due to an easing of inflation in shelter prices. In contrast, inflation in services prices excluding shelter has been increasing, rising from 1.7% to 2.2% over the same period.

The Bank of Canada’s preferred measures of core inflation—CPI-median and CPI-trim—were 2.9% and 2.8% in March, respectively (Chart 5). These measures have remained in the 2.5% to 3% range since summer 2024, partly because elevated inflation in shelter prices continues to affect core inflation.2 However, higher goods prices are the main reason for the recent increase in core inflation.

Short-term inflation expectations have risen

Short-term inflation expectations increased in the first quarter (Chart 6). Both businesses and households expect the trade conflict to push prices up. Some businesses report that they have already seen an increase in costs and expect these increases to continue.3 Longer-term inflation expectations remain largely unchanged.

Chart 6: Short-term inflation expectations have increased

Quarterly and monthly data

Economic activity

Canada’s GDP grew by 2.6% in the fourth quarter of 2024, with third-quarter growth revised up to 2.2%. This fourth-quarter GDP growth was due to strong residential investment and consumption, especially in components sensitive to interest rates. Business investment and exports also contributed to the strength of GDP growth, but this was partially offset by a drawdown in inventories.

For the first quarter of 2025, GDP growth is estimated to have slowed to 1.8%, which is below what was expected in the January Report (Chart 7). This slowdown reflects the impact of the intensifying trade conflict and a pullback after a strong second half of 2024.

Growth in final domestic demand is slowing sharply

Final domestic demand expanded by a surprisingly strong 5.6% in the fourth quarter of 2024, partly reflecting households’ responses to past cuts to interest rates. Business investment increased by 6.5%.

However, final domestic demand is estimated to have been weak in the first quarter of 2025, reflecting a slowdown in consumer spending, residential investment and business investment.

Growth in consumption is estimated to have slowed from 5.5% in the fourth quarter of 2024 to around 1.5% in the first quarter of 2025. The slowdown in consumer spending reflects both the end of some government incentives that supported motor vehicle purchases and a sharp decline in consumer confidence.

Results from the Canadian Survey of Consumer Expectations for the first quarter of 2025 suggest that households have become more concerned about job security. This worry is especially pronounced for those working in industries that rely on international trade.

Residential investment is on track to contract by roughly 7% in the first quarter, after having expanded by a vigorous 17% in the fourth quarter of 2024. Inclement weather and heightened trade-related uncertainty weighed on housing activity in the first quarter.

Business investment is estimated to have declined by around 2%. Results from the Business Outlook Survey for the first quarter of 2025 suggest many businesses—particularly those in sectors most reliant on US markets—are slowing or even stopping new strategic investments (Chart 8).

Trade was pulled forward in anticipation of tariffs

Starting in late 2024, businesses on both sides of the Canada-US border began to build up their inventories of imported goods in anticipation of tariffs. This shift in trade activity helps explain an estimated surge of roughly 7.5% in Canadian exports in the first quarter of 2025, along with a close to 7% increase in imports (Chart 9).

Inventories are estimated to have expanded in the first quarter, adding around 1 percentage point to GDP growth. This increase in inventories results mainly from the slowdown in growth of Canadian domestic demand.

Capacity pressures

Solid GDP growth in the second half of 2024 reduced excess supply in the Canadian economy. The output gap is estimated to have been between -1% and 0% in the first quarter of 2025, indicating an economy in modest excess supply.

The labour market recovery has been disrupted

Employment growth strengthened from summer 2024 into early 2025. Strong economic activity boosted demand for workers between August and January, while population growth slowed significantly amid reduced federal immigration targets. As a result, the employment rate stabilized in late 2024 (Chart 10).

Employment contracted in March. Tariffs and uncertainty about trade policy are disrupting the recovery in the labour market. The number of job postings on Indeed has decreased since mid-January, especially in industries likely to be affected by US tariffs. As well, many businesses responding to Bank of Canada surveys now say they will slow hiring in the near term.

The overall unemployment rate reached 6.7% in March, up slightly from February but still lower than its recent peak of 6.9% in November 2024. When combined with other indicators, the labour market appears to be in modest excess supply (Chart 11). Wage growth in the private sector continues to show signs of moderating (Chart 12).

  1. 1. For more information, see Bank of Canada, Business Outlook Survey—First Quarter of 2025 (April 2025).[←]
  2. 2. For a more detailed discussion, see Bank of Canada, “Canadian economy—Current conditions,” Monetary Policy Report (January 2025).[←]
  3. 3. For more information, see Bank of Canada, Business Outlook Survey—First Quarter of 2025 (April 2025), and Bank of Canada, Canadian Survey of Consumer Expectations—First Quarter of 2025 (April 2025).[←]

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