Mellow Momentum: A Canada Macroeconomic Update

As inflation stabilized during the second half of 2024, Canada’s economy experienced real GDP growth of 0.5% in the third quarter and 0.6% in the fourth quarter due to strong consumer spending on essential goods and services. Employment rates increased, but unemployment also rose because of a growing population that made job opportunities more competitive and a higher need for skilled workers. Both residential and nonresidential construction sectors thrived, supported by lower interest rates and public infrastructure funding. Investors enjoyed improved financial earnings across many sectors, reflecting positive business sentiment in the second half of the year as the economy successfully handled inflationary pressures.

Labour market

• Canada’s labour market steadily improved: employment rose 1.0% between June and December 2024. Key sectors like finance; real estate, rental and leasing; healthcare; social assistance; and construction saw the most significant job growth. These upticks were fueled by the need for more housing, which boosted construction and related sectors like real estate, rental and leasing. In addition, increased public funding for healthcare supported job growth in those sectors.
• Despite the employment growth, Canada’s unemployment rate rose from 6.4% in June to 6.7% in December. These figures suggest softening economic growth conditions, with the high population having reduced job vacancies. Companies facing elevated operational costs sought skilled workers, making the job market more challenging for many job seekers.
• Industries such as forestry, fishing, mining, oil and gas experienced job losses in the second half of 2024. These subsectors depend on employees willing to work extra hours and are less appealing to job seekers, particularly those with degrees. Stricter regulations on temporary foreign workers announced in August 2024, like increased wages for low-paying jobs and limits on employment duration, also hindered workforce expansion for these industries. The construction and healthcare sectors, however, were exempt from these policy changes.
• Wages rose by 2.6% between June and December 2024, reaching $35.83 per hour. This increase resulted from the need for skilled workers and the changes to the Temporary Foreign Worker Program that require businesses to boost pay for migrant workers in lower-wage jobs.

Consumer spending 

• Household consumption expenditure (HCE) rose by 3.0% between the first and second half of 2024, highlighting consumers’ spending resilience to rising prices as they prioritize essential items.
• Consumers spent more on insurance, financial services and housing during the period. This trend indicates consumers’ focus on addressing crucial concerns such as insurance and the growth of their financial portfolios. Spending on utilities like energy rose due to increased use of electricity; regions like Ontario rolled out the Regulated Price Plan starting November 2024, which raised electricity costs during peak hours.
• There was a drop in spending on education in the second half of 2024, particularly in university education and other education like specialty schools, due to mounting tuition rates and decreasing enrollment rates that resulted from a government-issued cap on international study permits in 2024. The cap included plans to further reduce these permits through 2025 and 2026.

Inflation

• The consumer price index reached 1.9% in the fourth quarter, which is slightly below the Bank of Canada’s 2.0% target. The soft price bump suggests mellowing inflation in the period as efforts to improve domestic supply chains eased costs during the period for industries like alcoholic beverages and household goods.
• Energy costs decreased by 2.8% year-over-year in the second half of 2024, with gasoline prices dropping 2.7%. The opening of the Trans Mountain Pipeline in May 2024 contributed to lowering these costs for consumers.
• Food prices rose moderately, by 2.4% year-over-year when compared to the second half of 2023. Production surpluses of apples and potatoes helped offset increased prices for goods like oranges that had been affected by weather-related production issues.
• Shelter costs rose by 5.0% between the second half of 2023 and the same period in 2024 due to low housing supply and high demand, which increased property values and made it more expensive for homeowners and tenants to stay in their homes.

Residential construction

• In the second half of 2024, investment in residential construction grew by 1.1%, reflecting investors’ increased optimism regarding the financial potential of addressing the nation’s housing shortage. This growth came amid persistently low housing stock.
• Due to the housing affordability crisis, developers focused on building multifamily housing in 2024. These projects are more cost-effective and space-efficient since they accommodate more people at scalable costs. Investment in multifamily projects rose by 3.5% between the first half of 2024 and the second half. In contrast, investment in single-family homes dropped by 1.5% during the same period, highlighting a shift in preference among developers and investors.
• However, housing starts dropped 0.9% in the second half of 2024 compared to the first. Although building activity continued, increasing costs and inconsistent absorption rates caused investors to reconsider excessive building, leading to a moderating effect on construction growth.
• Easing inflation and interest rates resulted in lower bond yields, causing five-year conventional mortgage rates to drop from 7.04% in January 2024 to 6.49% in December 2024. This drop created more favorable conditions for homebuyers.

Nonresidential construction

• The nonresidential market improved in the second half of 2024, having risen by 0.5% compared to the first half. Investors focused on projects with guaranteed backing instead of volatile assets.
• Governmental and institutional buildings received funding via the Investing in Canada Plan, which launched in 2016 and assures financing for various infrastructure projects until 2028. Support from infrastructure initiatives led to a 2.6% growth in institutional and government projects between the first half of 2024 and the second.
• The commercial sector declined, with investments dropping by 0.5% in the period. Rising construction costs and a lack of government support for these projects made these ventures riskier for investors.

Financials

• The Bank of Canada reduced interest rates to 3.25% by December 2024, which amounted to four consecutive cuts in the latter half of the year. This December cut was driven by inflation levels having reached the 1.0 to 3.0% target range. However, rising unemployment rates may lead to further interest rate cuts to boost economic growth.
• As rate cuts decreased bond yields, investors turned to stocks, resulting in increased activity on the S&P/TSX Composite. This shift was fueled by the pursuit of higher returns in riskier equities like stocks.
• Investors saw an 18.0% return on the market in 2024 amid Canada’s strengthening economy. The information technology sector led this growth, with companies like Shopify thriving off increased consumer spending on e-commerce.
• Conversely, the communication services sector struggled with heavy debt and intense competition from foreign alternatives, resulting in losses for investors in 2024.

Macro outlook

Canada’s macroeconomic environment will face increased tension. Trade disputes with the United States have escalated, with Canada imposing tariffs on US goods in response to tariffs enacted on Canadian imports. Meanwhile, China introduced tariffs on Canadian agricultural and food products in March 2025, in retaliation for tariffs Ottawa had introduced in October 2024 on Chinese electric vehicles, steel and aluminum products.

The trade conflict with the US began when President Trump accused Canada of not doing enough to stem the flow of fentanyl and undocumented migrants into the United States, and proposed tariffs in February 2025 but subsequently delayed them for 30 days. After the US tariffs on Canadian imports like steel and aluminum went into effect in March 2025, Canada introduced a 25.0% counter-tariff on American imports. These developments heighten inflation concerns, prompting the Bank of Canada to announce it will be carefully monitoring and stabilizing prices at tariff-adjusted levels. However, forecasting relies on the US consistently enforcing these tariffs, and delays and policy reversals in 2025 have created uncertainty – making investors wary. Tariffs may weaken business conditions by making Canadian products more expensive in the US, the destination of the majority of Canada’s exports, leading to a vulnerability against nations unaffected by tariffs. In addition, losing the US as a reliable trading partner could hinder business growth.

Simultaneously, Canada is implementing significant policy changes, particularly in immigration. The country has imposed stricter limits on temporary residents, for example by reducing foreign student enrollment in 2025 and tightening employment restrictions in 2025 and the coming years via the Temporary Foreign Worker Program. Permanent residency programs such as Express Entry and the Provincial Nominee Program have also become more selective, focusing on skilled migrants and French-speaking immigrants to address labor shortages. These changes aim to control immigration rates and reduce domestic unemployment in the medium term. Ongoing infrastructure projects like the Ontario Line Subway and the Site C Clean Energy Project are creating jobs and will support economic growth in the long term.

The political landscape is shifting: Mark Carney was elected Prime Minister in March 2025, succeeding Justin Trudeau. Carney has prioritized increased infrastructure funding and expedited housing projects to stimulate the economy, creating opportunities for industries seeking public support. However, the federal election scheduled for October 2025 could result in a change of leadership. Opposition leader Pierre Poilievre has focused on broader deregulations and tax cuts, which could potentially alter the business climate if his party comes to power.

Risk ratings

• Expanded consumer spending contributed to greater inflation levels in 2022, causing 36.0% of industries to be rated medium-high or higher risk.
• Rising inflation from supply chain difficulties drove up risk levels across the economy in 2023, resulting in 45.7% of industries rated medium-high or higher.
• By the end of 2024, inflation reached the Bank of Canada’s target rates. However, unemployment rose and costs for items like housing did not fully recover, making housing the largest expense for many consumers. This situation moderated consumer spending habits. In addition, difficulty in finding skilled workers made it challenging for businesses to fill positions and created labor shortages, resulting in 52.0% of industries rated medium-high or higher.
• For 2025, the economy will face significant challenges as new tariffs heighten costs for companies and consumers, potentially hampering spending. Despite this, government-backed projects will continue to drive momentum in long-term projects with extended deadlines. These conditions will also encourage stronger support for domestic businesses, benefiting industries less reliant on exports and resulting in 38.7% of industries rated medium-high or higher.

Sector highlights

Mining: Despite implementing the Critical Minerals Strategy, the mining sector faces significant financial challenges. Imported lithium, cobalt and rare earth elements from Asia-Pacific and Latin America have increasingly complicated the ability of domestic mining companies to compete. Tariffs on Canadian minerals add pressure, complicating export options unless additional costs are incurred. These challenges influence industries like Iron Ore Mining and Copper, Nickel, Lead & Zinc Mining.

Finance: Tariffs contribute to the potential for economic slowdown by increasing the costs of goods and shrinking the economy. The effects on markets make domestic business investments less appealing, especially for those involved in trade with affected countries and as threats of further tariffs loom. As a result, corporations may be less inclined to expand their operations, which impacts industries like Commercial Banking and Loan Administration Cheque Cashing & Other Services.

Construction: Efforts to address the Canadian housing shortage and support public infrastructure projects boost the construction sector. These long-term projects, backed by the public sector, promote job growth. Challenges remain, such as the impact of tariffs on developers’ costs. Despite these stresses, the construction sector benefits from domestic policies and protectionist measures, enhancing growth in industries like Heavy Engineering Construction and Homebuilders.