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Canada

Turbulence in 2025 but a good landing likely

Last update – January 2025

Country rating 


LOW RISK FOR ENTERPRISE
Economic risk

Very low risk of payments disruption
Business environment risk
Very low risk of payments disruption
Political risk

Very low risk of payments disruption
Commercial risk
Moderate risk of payments disruption
Financing risk
Low risk of payments disruption
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Form of state
 Constitutional parliamentary monarchy
Head of government
 Mark Carney (PM)
Next elections
 April 2025, legislative

Strengths & weaknesses

  • Canada ranks highly in areas like property rights, judicial effectiveness and business freedom, reflecting stable and transparent governance in a developed democracy
  • Canada's developed economy remains open and adaptable, with a history of effectively addressing macroeconomic pressures
  • Policy shifts could leverage Canada's vast natural resources to stimulate economic growth
  • Persistent inflation, slowing growth, rising unemployment and low productivity create a difficult economic environment for policymakers and citizens alike
  • A 25% tariff on goods exported to the US could severely impact Canada’s economy, given the significant reliance on US trade
  • The transition to a new government and a shift in policies add complexity to navigating economic challenges, with potential conflicts between fiscal policies and the Bank of Canada’s monetary objectives

Economic overview

A new government will face a host of difficult challenges

2025 is likely to be a turbulent year for Canada. Prime Minister Justin Trudeau’s resignation in January signaled a massive change in Canadian politics, and a desire for a new approach to managing the economy. At the same time the Bank of Canada (BoC) will struggle with a difficult combination of persistent inflation, slowing growth and a potential trade war.

Trudeau’s resignation ended 10 years of liberal policies which eventually lost their appeal. His approval rating at the time of his resignation was less than 20%, signaling that Canadians were ready for a turn towards more conservative policies. His successor, most likely Pierre Poilievre of the Conservative Party, will have to deal with a number of significant problems, including taxes, high inflation, slowing growth, rising unemployment, low productivity, high household debt, a troubled housing market and unpopular immigration and climate policies. One of the issues that the Conservatives will probably address the most quickly is the carbon tax, which has long been a target of Conservative ire. Other Conservative efforts are likely to include supporting the oil and gas sector, capping spending, balancing the budget, cutting immigration and reducing government red tape.

In addition to the political turmoil at the beginning of the year, Canada has been threatened with a 25% tariff on all goods exported to the US. The damage to the Canadian economy as a result of this policy could be significant. First, exports to the US account for 20% of all Canadian GDP – a 25% tariff on 20% of GDP would be a massive drag on economic growth. In terms of inflation, if Canada matches the US tariffs, the results would be devastating as well. Imports from the US into Canada account for 63% of all imports and 16% of GDP. Tariffs on that amount of goods would drive up prices dramatically and create inflationary pressures. Therefore, a tariff war would severely slow the growth of the economy, and sharply raise the prices consumers would face (in both countries).

A classic but complicated dilemma for the BoC

The BoC’s war on inflation, which entailed raising interest rates from March 2022 to July 2023, did indeed have some degree of success. The headline consumer price index fell from a 43 year high of 8.1% in June 2022 and has now been running close to the target of 2%. But the BoC’s favored core measures of inflation have been much more stubborn, staying between 2.4% and 2.7% for most of 2024. That’s not much progress towards the 2% target. So it has been too early to declare victory over inflation, and certainly wage earners know it. Since January 2021 when inflation started to accelerate, wages have grown 16% cumulatively, but the things that wage earners need to live have gone up even more: around 25% for food and shelter, and around 30% for gasoline. In other words, Canadian wage earners are still under water, and that’s why life still feels so expensive, and that’s one of the reasons why citizens have became disenchanted with Liberal policies.

In addition to sticky inflation, the growth side of the economy is stumbling. GDP is well below the long-term average, productivity is abysmal and unemployment has risen from 6.2% when the BoC started to cut rates to 6.7% by the end of 2024. Therefore, the BoC finds itself in the classic central bank dilemma of either increasing accommodation too soon, which could boost the economy but stoke inflation, or not increasing accommodation fast enough, which will choke off inflation but slow the economy. To complicate things even further for the BoC, the new federal government is likely to take measures to stimulate the economy such as cutting taxes and limiting immigration, both of which could stoke inflation, but the government may also try to limit spending which would (temporarily) slow the economy.

We believe the BoC’s most likely path will be to cut two or three times in 2025, bringing the overnight rate down from 3.25% in January to between 2.75% and 2.5% by the end of the year. That’s a much faster decline than the US Federal Reserve Bank, which will most likely set the fed funds rate to a range of 4.00% to 4.25% by the end of 2025. That in turn should drive the Canadian dollar (CAD) down even more than its decline during the last several months of 2024. A weaker CAD would make imports more expensive, thus increasing inflationary pressures, but it would also make Canadian exports cheaper which would increase demand, and thus offset any tariffs the US might impose (to a certain extent).

The outlook for Canada is challenging in 2025, with competing agendas and clashing policies. The BoC would like to be able to cut rates a bit more to make it easier to stimulate the economy, but that risks a resurgence in inflation, especially with the possibility of a tariff war and a weaker CAD. And the new government’s policies create an unknown balance of inflationary and growth impulses. Overall we believe that GDP growth will be around +1.7%, somewhat slower than the long term average, while inflation will remain sticky at 2.2%.

Stable business and political conditions

Despite an uncertain outlook, Canada is an open, developed economy with mostly transparent governance. Canada ranks 16th out of 184 countries in The Heritage Foundation’s 2024 Index of Economic Freedom analysis. Canada ranks particularly strongly in the areas of property rights, judicial effectiveness and business freedom. It is somewhat less favorable in the areas of government spending, fiscal health, tax burden, and labor freedom. Politics are relatively stable as it is a developed democracy. The next scheduled federal election must be held before October 2025 for the Prime Minister and the 45th Canadian parliament.

Trade structure by destination/origin

(% of total, 2023)

Trade structure by product

(% of total, 2023)

Contact 

Dan North
Allianz Trade
+1 41 0753 0664
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