The Canadian economy in 2025: A tale of two halves

From a macroeconomic perspective, the Canadian economy should continue being relatively weak the first half of the year. We don’t see the Canadian economy growing in any significant way until the middle of 2025. During the second half of the year is when the magic of low interest rates should start impacting consumers and businesses.

That’s also when the uncertainty about the Trump administration’s policies should start to ease and add some momentum to the economy. But until then, Canadians should expect a relatively weak economy, with gross domestic product (GDP) per capita actually going down over the first half of the year.

So, will the Bank of Canada (BoC) continue to ease the overnight rate Opens a new window.? It’s currently at 3.00%. The overnight rate is the benchmark cost of borrowing set by the BoC. It influences the prime interest rate set by lenders like CIBC. The lower the overnight rate, the less it costs for businesses to borrow and invest, the faster the economy grows.

If you look at where we are and the progress being made, yes, the BoC should continue cutting its overnight rate this year. The latest Consumer Price Index figure showed prices were increasing at a 1.8% Year-over-Year rate, nicely below the BoC’s 2% target. In addition to that, the economy is slowing, and we’re in a per capita recession. As a result, we expect the year will end with the overnight rate between 2.25% and 2.50%.

Now, if the Trump administration continues to introduce negativity and volatility into the market and the Canadian economy, including increased tariffs, the BoC may need to support the economy even more and take interest rates below 2%. But for now, we see the BoC stopping at close to 2%.

There’s no question that the political arena is impacting the economy in a very significant way. South of the border, we’re expecting the Trump administration will continue to introduce uncertainty to the market during the first half of the year, but we expect the situation will be clearer by the time summer arrives.

Here in Canada, a federal election is probably in store for us in April or May. Our working assumption is that the Conservatives will form a majority government. However, it’s premature to suggest what the differences between now and then will be. While we know some of the things the Conservatives are willing to do, we don’t see any of these actions being significant enough to change the macroeconomic story in a short period of time.

All in all, we expect the Canadian economic groundhog will see its shadow and go back to sleep until the second half of the year, then emerge from hibernation and start moving. If all goes well, we expect Canadian GDP will grow by 1.8% this year. However, if we end up with long-lasting tariffs, then we will likely be in a recession.

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