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Canada’s economic growth challenges are expected to ease as the Bank of Canada continues to lower interest rates further and more quickly than other advanced economy central banks—but not right away, and longer-run challenges remain.
Indeed, the silver lining of an underperforming Canadian economy (per-capita gross domestic product declined for a sixth straight quarter in Q3 and the unemployment rate is up 1 percentage point from a year ago) is that inflation pressures have been on a clearer path lower than in other parts of the world.
Not including rising mortgage interest costs (a direct result of earlier interest rate increases), consumer price growth has been essentially at or below the BoC’s 2% inflation target for all of 2024, and was at 1.4% in October.
That has allowed the central bank to ease off the monetary policy brakes more quickly than abroad with 175 basis points of interest rate cuts since June.
Rate divergence with Fed isn’t likely to stoke domestic inflation
We expect the BoC to continue to cut interest rates more aggressively than the U.S. Federal Reserve—reflecting a record underperformance (dating back to the 1960s) in per-capita GDP growth over the last five years, and a larger softening in labour markets.
The situation in the United States is very different with a resilient economy driven in large part by an unusually large government budget deficit for this point in the economic cycle (more here), reduced interest rate sensitivity, and strong productivity support that is keeping economic growth positive but also inflation higher. These factors are large in absolute terms, but also, particularly when compared to the Canadian experience where interest rate sensitivity has been considerably higher and productivity has serially disappointed.
This economic and policy divergence, alongside the risk of U.S. trade protectionism, is expected to weigh on the value of the Canadian dollar. But, we argued earlier this year that a weaker currency need not push broader inflation higher, or prevent a significant deviation in central bank policy rates when economic growth prospects are diverging.
The reality is that most of what households consume is not imported. Imports of consumer goods (excluding autos) are under 10% of total household spending, and disinflationary pressures from a broadly softer Canadian economy are larger than the inflationary impulse from a weaker currency’s impact on import costs.
A weaker loonie also improves Canada’s export competitiveness. We don’t expect that to translate into a wave of business investment, but it is a marginal positive for Canadian exports and foreign direct investment flows that have already perked up in 2024.
Population growth tailwinds turn to headwinds…
Strong population growth in Canada (up 10% since 2019) has prevented outright declines in Canadian GDP, but on a per-capita basis, output has been falling like it historically would in a recession.
That support from population growth is about to make a sharp U-turn. The federal government’s plans to reduce new arrivals are expected to essentially wipe out all previously expected population growth in years ahead. While the final impact on population is yet to be known, the direction will be lower, turning demographics from a tailwind to a headwind.
…but Canada’s per-capita GDP slump looks poised to end
We expect GDP growth on a per-capita basis will end its slump by mid-2025. Interest rate changes impact the economy with significant delays, and household debt payments are expected to continue to rise in the year ahead as fixed-rate mortgages, dating back to the ultra-low borrowing costs days of the pandemic, continue to renew at higher rates.
Still, there have been signs of life in interest rate-sensitive sectors of the economy—residential investment posted its first increase in four quarters in Q3. The mortgage renewal wave will be manageable as long as the labour market does not falter too much.
And, while the Canadian labour market slowdown is likely not over yet, we expect the unemployment rate to peak at 7% before beginning to edge lower later next year. That will result in Canada’s long slump in per-capita GDP growth to end by mid-2025.
We don’t expect Canada will be main target of new U.S. tariffs
Renewed tariff threats from the next U.S. administration are adding downside growth risks in 2025. The threat of a 25% tariff across the board on products from Canada and Mexico appears to be too severe of an economic impact to be realistic. They essentially make the North American manufacturing ecosystem uncompetitive with offshore supply chains.
As of the time of writing, we are considering some form of a negotiated settlement to address U.S. concerns (such as border security and illicit drug flows rather than international trade grievances) as a more reasonable base case than broad-based being implemented.
This, however, won’t be the last time that tariffs are used as negotiating levers, and there is a risk of targeted measures on specific products and industries like the 2018 tariffs on Canadian steel and aluminum products. Tariff threats to address external grievances were used regularly in the first Trump administration. And despite how implausible the tariff threats are, they still add to outlook uncertainty and could weigh on already underperforming Canadian business investment.
Lower interest rates won’t solve longer-run demographic and productivity challenges
There is reason for optimism about the economic outlook in the year ahead as central banks continue to ease off the economy’s brakes, but the risk is that long-run issues tied to an aging population and weak productivity growth will get worse before they get better.
The federal government’s recent pivot on immigration policy may help in the near term for supply in some sectors, particularly housing, to catch up with excess demand. But, it will also cause the population to age more quickly, and add to a government funding gap as demands for public services, like healthcare, continue to rise and outweigh the relative tax base as a share of the population.
Moreover, as we noted before, Canada’s economy has a longer-run growth problem that has left our per-person output significantly trailing behind other major economies. Our relatively low productivity—the amount of production and income generated per hour worked in the economy—has been held back by a shortfall in business investment.
Moving forward, the risk is that weak levels of business investment will persist. Lower interest rates will help lower funding costs, but the threat of trade disruptions adds to uncertainty about future project returns.
Provincial overview
We’re keeping Ontario (1.2%) and Quebec (1.2%) near the bottom of our provincial growth ranking again in 2025. However, forecasted growth rates mark an improvement from 2024 as easing inflation and lower interest rates kickstart a rebound in interest-rate-sensitive sectors.
B.C. is poised for an even stronger recovery with growth accelerating to 1.5% next year from 0.9%. Lower borrowing costs and rebounding housing market activity will be important drivers, while a more favourable natural gas outlook pushes growth above the national average.
Growth in the Prairies is expected to remain steady in 2025. Utilization of new infrastructure and an expected rise in potash prices should support stable growth in Alberta (2.8%) and Saskatchewan (1.9%), while diversity across industries helps Manitoba (1.4%) hedge against emerging challenges. The Prairies are among the best equipped to adapt to slowing growth in U.S. demand.
Out east, we see most economies shifting down gears as population growth slows and large government capital investment projects come to an end. However, economic momentum will remain above the national average for most of the region. New Brunswick (1%) is the lone exception with weak household spending and a heavy reliance on U.S. demand keeping growth subdued.
BRITISH COLUMBIA – Growth to accelerate but new risks emerge
British Columbia’s economy is set to rebound in 2025 despite facing new challenges. Consumer confidence has started to recover from historical lows as interest rate cuts stimulate activity. The outlook is also brightening for key B.C. commodities—like liquified natural gas (LNG)—boding well for exports in the coming quarters.
On the heels of a relatively weak year, B.C.’s real gross domestic product is projected to grow by 1.5% in 2025, outpacing the Canadian average of 1.2%. However, lower immigration targets and a riskier investment environment from proposed tariffs by the incoming U.S. administration pose risks to the outlook.
Falling interest rates are having a positive impact on consumer confidence as seen in reviving housing market activity and slowing declines in per capita spending. While year-over-year spending remains negative, these trends point to a gradual improvement, which we see building momentum as interest rates drift lower—offsetting the heightened financial stress of some households that will be renewing mortgages at higher rates.
We see labour markets tightening in the back half of the year, keeping upward pressure on wages. This, alongside tamed inflation, should help restore purchasing power, supporting an acceleration in per capita spending next year.
Exports are another expected source of growth. Expectations for supply-side shocks and the utilization of new infrastructure—such as the newly expanded Trans Mountain pipeline and the soon-to-be-completed LNG export facility (phase 1)—are set to boost energy exports and natural gas production in 2025. We’re forecasting natural gas prices to appreciate nearly 50% next year, boding well for the natural resource sector.
Lower immigration targets are a notable source of downside risk, which could have a particularly strong impact on the economy. B.C. is among the few provinces with a negative birth rate and net interprovincial migration outflow—meaning population growth is entirely dependant on international immigrants. A sharper-than-expected outflow of international immigrants could make population growth negative next year. Though unlikely, we’re aware of the downward pressure stalled population growth would put on overall growth for B.C.
ALBERTA – Energy sector powers growth
Alberta’s economic growth is set to remain relatively steady at 2.8%, ranking as Canada’s top provincial performer in 2025. The energy sector is expected to continue powering growth after the expanded Trans Mountain pipeline surpassed expectations, already reaching near-full capacity at the end of this year.
2025 marks the first full year of service for the expanded pipeline, supporting continued growth in oil production. Faster transport of Alberta oil to ports will help foster new export partnerships, while a weakening Canadian dollar against the U.S. dollar bolsters demand for Alberta oil.
Since the pandemic, Alberta’s economy has consistently been among the strongest in Canada. Robust commodity markets and strong population growth have kept demand and output churning at a solid pace, promoting a relatively healthy labour market and positive sentiment around business investment.
Moving into 2025, we see many of these tailwinds dying down—but they won’t be gone. Utilization of new infrastructure and lower interest rates are also likely to offset downward pressure from moderating population growth and heightened trade uncertainty.
Population growth isn’t moderating as sharply as in other provinces—though it will undoubtedly come down from its 43-year high. We see population growth remaining ahead of the pack next year as the province’s affordability advantage and business vigour continue to bring interprovincial migrants—keeping a floor under demand.
Lower interest rates should help the household sector also as debt loads lighten for some Albertans. We see this stimulating greater per capita spending, supporting a 2.1% increase in retail sales on the heels of a particularly weak year for spending (0.9%).
Strong commodity markets are boding well for businesses as well. The completion of the Trans Mountain Expansion Project this spring with oil flow already nearing capacity is stimulating production and supporting a solid gain in exports (6.1% YTD).
Faster transport of Alberta’s energy products to shipping ports should foster new export partnerships, diminishing the risk of potential tariffs from the U.S. and shrinking the discount between Western Canadian Select oil and West Texas Intermediate oil prices.
SASKATCHEWAN – Positioned well amid heightened uncertainty
Saskatchewan’s economic growth is poised to accelerate with real GDP expected to be up 1.9% in 2025 from our previous 1.5% estimate.
A modest pick-up in fertilizer prices and ongoing major construction projects bode well for businesses. Larger interest rate cuts than previously anticipated and tamed inflation should also improve household spending, keeping growth in Saskatchewan ahead of the Canadian average for a fourth consecutive year.
Saskatchewan’s economic outlook remains favourable despite heightened uncertainty in Canada. Ongoing construction of major projects—like phase 1 of the Jansen Potash mine ($10.6B)—will keep the construction sector strong, delivering billions in investment dollars next year.
Potash prices are also forecast to see a modest increase in 2025 amid improved global market stability for fertilizers. A more tumultuous trade relationship with the U.S. may dim some of this outlook, but Saskatchewan’s export markets are among the most diverse, positioning the economy favourably amid rising trade uncertainty.
Saskatchewan businesses are among the most confident with only 10% citing insufficient demand for goods and services as an expected obstacle in the next quarter. That’s much lower than 17% nationally, according to Statistics Canada’s survey of business obstacles. A pickup in business activity is setting the stage for tighter labour markets, and higher wage growth in the year ahead.
This, along with lower interest rates, should get credit cards swiping more freely, sustaining growth in household expenditures in 2025.
MANITOBA – Strength in a diversified economy
We expect Manitoba’s economy to expand slightly faster in 2025, picking up from 1.2% to 1.4%. Public sector construction investment remains a key driver, bolstered by ambitious capital spending plans.
Additional interest rate cuts will also be a positive, fostering a better investment environment for private business and household investment later in the year.
Some of these gains may be offset by looming trade talks and weakening U.S. demand. Diversity across industries and export partnerships, however, will help hedge against emerging challenges.
Manitoba’s manufacturing sector is expected to improve next year as lower inflation leads to a more stable input price environment and modest economic recovery at home picks up demand. The province’s wide array of export destinations positions it well to weather external pressures. But, a slow recovery in Ontario may prevent growth from improving more meaningfully, given it is a critical demand source for Manitoba-made goods.
Construction will remain a linchpin for Manitoba’s economic performance. The continuation of large-scale government projects, outlined in Budget 2024, will be an important source of job creation—aiding a modest recovery in employment next year and likely preventing a material slowdown.
The province could also see a modest lift from its mining sector. Its main metal exports—gold and copper—are set to see price appreciations in 2025 as demand from China rebounds and tight supply sustains upward prices. A more turbulent outlook for Canada’s auto industry, however, could temper gains as demand for some key battery inputs are tied to the sector’s performance.
ONTARIO – External pressures to weigh on growth
Ontario’s economy is expected to see a modest improvement in 2025. Falling rates are projected to ease financial pressures for some Ontarians, supporting a modest acceleration in consumer spending after a prolonged period of restraint. The housing market—which has already turned a corner—should also regain more ground.
Still, structural challenges and external risks will limit the pace of Ontario’s recovery. Stricter than anticipated immigration targets and underwhelming business investment will weigh more on broader economic momentum than we previously expected. We’ve, therefore, downgraded our 2025 growth forecast by 40 basis points to 1.2%.
Lower interest rates are finally freeing up space in some household budgets, allowing pent-up consumer demand to re-emerge. Our credit cardholder spending data suggests retail sales hit an inflection point at the end of 2024 with year-over-year spending moving back into positive territory after two consecutive quarters of annual declines.
Ontario’s housing market has also seen renewed activity and stabilizing prices as borrowing costs float down, setting the stage for modest price appreciation in the year ahead. Stimulus cheques from provincial and federal governments will be a bonus as well—injecting nearly $4 billion into the economy next year.
But, not all households will feel financial pressures ease. The mortgage rate reset will still sting many Ontario households as mortgages are renewed at higher rates. We see this offsetting some of the gains from easing monetary policy and is one of the reasons we expect growth to remain restrained in the year ahead.
Ontario’s recovery will likely be slower on the business side. Manufacturing sales have taken a serious hit and were still on a downtrend as of Q3 (-5.8% YTD). Recovering consumer sentiment at home will help limit further declines in demand for Ontario-made goods, but it won’t be enough to make external challenges irrelevant.
International destinations have historically accounted for the bulk of demand for Ontario exports—with roughly 80% destined for the U.S. As such, weakening economic activity in the U.S. and threats of new tariffs may weigh on exports next year and further bog down sluggish investment in the province.
QUEBEC – Next recovery stage could be challenging
Quebec’s economy has positive results from the rebuilding initiated in 2024—unlike the Montreal Canadiens’ laborious reconstruction project.
Improved internal and steady external demand saw growth nearly double from a meagre 0.6% recorded in 2023. Reaching the next stage will be more challenging, though. We expect headwinds from trade uncertainty and immigration cuts to effectively stall the re-acceleration in 2025. We forecast growth to pick up only marginally from 1.1% in 2024 to 1.2% in 2025.
To be sure, the economy has more solid foundations entering 2025 than it had at the end of 2023. The strongest population growth since the late 1950s has reinvigorated household spending and a series of interest rate cuts set the housing market on a sustained recovery course. The lower value of the Canadian dollar is supporting Quebec exporters, especially in industrial goods businesses (including aerospace) and consumer goods producers (including food). A year ago, large-scale labour strikes in the education and public service sectors were significant stresses that impeded activity in the wider economy.
The BoC’s rate-cutting campaign will further boost interest-sensitive sectors over the coming year. We expect sales of motor vehicles and other big-ticket items to rise, home resale transactions to surpass solid pre-pandemic levels, and housing construction to sustain 2024’s rebound.
Persistent weakness in the loonie would normally maintain a favourable environment for provincial exporters. However, the threat of U.S. tariffs will add a thick layer of uncertainty that will likely make it a bumpy ride.
The outlook for capital investment has dimmed. The construction of a $7-billion electric vehicle battery manufacturing plant—scheduled to kick into high gear in 2025—is being delayed. We expect non-residential capital spending to lose momentum after four years of strong increases.
Another potentially bigger trend shift will be a slowdown in population growth. Substantial cuts to immigration targets could bring Quebec’s population growth close to a standstill in 2025—significantly diminishing a key engine of economic activity.
NEW BRUNSWICK – Facing challenges amid U.S. dependency
Growth in New Brunswick is expected to slow marginally next year to 1% from an already modest 1.1% in 2024—keeping it at the back of our provincial growth ranking.
Heavy reliance on U.S. demand, slowing population growth, and muted household spending are key factors weighing on the 2025 outlook.
New Brunswick’s economy is deeply tied to trade with the U.S., which serves as its largest and most important international export market. This relationship has long fueled the province’s economic engine, but could expose it to potential turbulence. As the U.S. economy softens, demand for some exports will likely wane, putting additional pressure on its key resource-based industries.
A depreciating Canadian dollar against the U.S. dollar may not offer much for provincial growth either. Though it may reduce input costs for American importers, softer U.S. growth could offset this gain—contributing little to overall growth.
Homebuilding activity in Canada isn’t expected to pick up the slack. We forecast housing starts will remain relatively unchanged at 48,800 in the year ahead, limiting demand for New Brunswick’s forestry products.
Household spending, another critical growth driver, is expected to remain tepid as well. New Brunswick households carry the lightest debt burdens in the country—which cushioned consumer demand during the high interest rate period. But, this characteristic also suggests a smaller accumulation of pent-up demand to fuel a strong rebound in the household sector. We see consumption remaining relatively subdued, even as inflation eases and interest rates continue to decline. Slowing population growth may exacerbate this further.
NOVA SCOTIA – Growth to continue to moderate
We see Nova Scotia staying in the middle of the pack in our 2025 growth rankings with relatively stable growth of 1.5%—outperforming the national average for another year.
While population growth slows, strength in construction and increasing household purchasing power will continue to support economic momentum.
Nova Scotia’s economy stayed on a moderate growth path in 2024, and we expect 2025 to continue on the deceleration trend we’ve seen since 2021. Rapid population growth—an essential driver of recent economic strength—is now easing from record highs. This slowdown, combined with the fading effects of the post-pandemic recovery, is expected to soften economic gains tied to construction activity, leaving overall growth below its peak.
Government and private sector capital investments, much of which has been underpinned by a rapidly growing headcount, will continue to support growth, but likely at a slower pace than in 2024. Supply constraints in construction will limit further gains in homebuilding activity. Meanwhile, government capital expenditures may taper off from record highs as new fiscal pressures emerge and the backlog of infrastructure projects is worked through.
The abundance of construction projects has also had a positive impact on the labour market, boosting construction jobs and limiting the broader rise in unemployment. Nova Scotia’s jobless rate has been below Ontario’s throughout most of 2024—a rare occurrence that hasn’t happened in decades (outside of the pandemic).
Strong real wage growth—the fastest in Canada—will bolster household purchasing power. This, alongside lower interest rates, should provide a cushion against slower population growth, sustaining consumer spending.
PRINCE EDWARD ISLAND – Economic momentum is waning
We’ve lowered our 2024 growth forecast for Prince Edward Island to 1.8% from 2.1%, reflecting weaker than anticipated farm cash receipts and a sharper slowdown in retail sales.
We expect P.E.I.’s economy to continue decelerating in 2025 with real GDP expanding by 1.7%. Moderating population growth is expected to have trickle-down effects, easing household spending. Subdued gains among major trading partners—like Ontario, Nova Scotia, New Brunswick, and the U.S.—will hold back the expansion of exports and tourism.
In recent years, P.E.I. has thrived on booming population growth and relatively low sensitivity to interest rate changes. These factors have fuelled demand across the economy from housing to infrastructure projects. We expect these segments will continue to support the economy in 2025, but momentum is expected to ease.
Growth in crop and livestock receipts, which ramped up significantly in recent years, is on track for a moderate decline this year. Part of this can be attributed to easing inflation. We think a similar trend will prevail into 2025 as payouts from Hurricane Fiona Recovery funds continue tapering off.
A mixed outlook for trade is tempering expectations for exports as well. A strong U.S. dollar could benefit P.E.I.’s trade, but weaker growth in U.S. demand will likely weigh on key exports—including agri-food—as a cyclical slowdown in the U.S. weighs on restaurant spending.
A soft labour market in Ontario—home to nearly a third of P.E.I.’s visitors—also won’t offer a dramatic lift to the tourism industry next year.
NEWFOUNDLAND & LABRADOR – Still making up for lost ground
We’re boosting our growth projection for Newfoundland and Labrador in 2024 to 2.2% from 1.5% as the economy shows welcome signs of vigour following two consecutive years of negative real GDP growth.
Consumers have been surprisingly active this year and the return of operations from offshore oil platforms has boosted oil production. But, there have been weaknesses in other segments of the economy—like construction and the mining sector—preventing a full reversal of two years of negative growth.
Moving into 2025, we see growth moderating to 1.7%, reflecting a wrap-up of major construction projects, which is likely to weigh on the labour market. Lower prices for key commodities, like oil and select minerals, will also be a drag.
Oil production is on track to expand modestly this year, interrupting three consecutive years of declines as the Terra Nova floater continues to ramp up production after undergoing maintenance—a trend we see prevailing into 2025. Lower oil prices, however, may keep a lid on production despite increased capacity.
The province’s mining sector may not add much to GDP either. Prices for its main mineral exports—iron ore and nickel—are expected to weaken in 2025 amid rising global supply. We see this weighing on production of key minerals despite modest capacity boosts from the expansion of the Voisey’s Bay Mine in 2025.
The wrap-up of major mining construction projects is likely to pull up the unemployment rate in the upcoming year (10.4%) after reaching a record low in 2024 (9.9%). We see this holding back household spending after a particularly strong year.
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Robert Hogue is an Assistant Chief Economist, responsible for providing analysis and forecasts on the Canadian housing market and provincial economies.
Rachel Battaglia is an economist at RBC. She is a member of the Macro and Regional Analysis Group, providing analysis for the provincial macroeconomic outlook.
Claire Fan is an economist at RBC. She focuses on macroeconomic analysis and is responsible for projecting key indicators including GDP, employment and inflation for Canada and the US.
Carrie Freestone is an economist at RBC. She provides labour market analysis, and is a member of the regional analysis group, contributing to the provincial macro outlook.
Abbey Xu is an economist at RBC. She is a member of the macroeconomic analysis group, focusing on macroeconomic forecasting models and providing timely analysis and updates on economic trends.
This article is intended as general information only and is not to be relied upon as constituting legal, financial or other professional advice. A professional advisor should be consulted regarding your specific situation. Information presented is believed to be factual and up-to-date but we do not guarantee its accuracy and it should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the authors as of the date of publication and are subject to change. No endorsement of any third parties or their advice, opinions, information, products or services is expressly given or implied by Royal Bank of Canada or any of its affiliates.
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