Canadian monthly GDP rose by a solid 0.4 per cent in January, the largest gain in nearly a year, following an upwardly revised 0.3 per cent advance in December (initially reported as +0.2 per cent). The Bank of Canada’s easing measures appeared to be having the desired effect, signalling that the economy was turning a corner.
However, a preliminary estimate suggests that growth stalled in February, as the looming threat of a trade war cast a chilling effect on economic activity.
The broad-based strength across goods sectors showed that the January increase reflected genuine economic improvement and not a statistical aberration driven by pre-emptive manufacturing activity ahead of potential tariffs.
Despite February being flat, recent activity suggests that first quarter GDP growth will be slightly above 2 per cent (quarter-over-quarter, annualized). With population growth having slowed significantly in recent quarters, per capita GDP should see a modest improvement at the start of 2025. However, extreme uncertainty in February and March suggests that growth is likely to be weaker going into Q2, which could lead to an economic contraction.
Overall, the strength of the economy at the start of the year does not change the Bank of Canada’s view that it must balance the deflationary impact of weaker economic activity due to tariffs against the inflationary pressures arising from higher costs and any countermeasures by Canada.
For now, the Bank of Canada is more concerned about inflation risks. Unless significant new tariffs are imposed in the coming weeks, it is likely to keep its policy rate unchanged at its April meeting. However, this stance could change following the April 2 tariff announcements.
While the Bank of Canada may take a pause, we believe that the general direction for interest rates is downward. Slower population growth in 2025 and 2026 will be a drag on the economy, pushing potential growth – and the neutral rate – lower. As a result, the current policy rate is likely to become increasingly restrictive. We expect the Bank of Canada could cut the overnight rate to 2 per cent by the third quarter of this year. The scope for decline in 5-year bond rates is likely to be around 30 to 35 basis points, bringing 5-year rates down to 2.25 per cent by the third quarter of 2025. This leaves some room for fixed mortgage rates to decline in the coming months.
Housing Affordability Watch
CMI monitors the latest developments and offers insights on solutions to Canada’s housing affordability crisis
As the federal election approaches, discussions around how to address the housing crisis are heating up. This week, we examine two recent proposals from BC—one focused on addressing down payment challenges and the other on spurring activity in the presale condo market.
Are these ideas the solutions we’ve been waiting for, or do they miss the mark? Our latest Housing Affordability Watch dives into the details and explores the potential impact of these proposals.
Read it here: Popping Trial Balloons in the Housing Market
Independent Opinion
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