Economic outlook

Geopolitical tremors soften Canada’s economic outlook

Real gross domestic product (GDP) in Canada increased by 0.6 percent on the quarter in Q4 2024, cementing robust gains of 1.5 percent across 2024. This uptick persisted in January 2025 as well, before stalling in February as harsh winter weather, and a wind down of government incentives, impacted the economy.

Despite wider resilience, recent trends perhaps hold less weight on prospects due to the changeable political environment in which Canada currently operates. Uncertainty surrounding April’s federal election and the US’ flippant trade policy are acting as destabilizers on growth, with the latter causing notable stock market jitters.

The crude nature in which tariffs have been set, applied and enforced, will perhaps have a more significant bearing on overall economic performance, however. Initial perceptions are that short-term impacts could cause growth to slow, costs to rise and place employment under duress.

Confidence has already taken a hit as uncertainty surrounding US trade policy has intensified over time. The Bank of Canada’s (BoC) Business Outlook Survey for Q1 2025 reflected this with business activity sentiment falling, price and cost expectations rising and capacity concerns moderating.

Source: Bank of Canada

Initial effects are starting to appear in hard data as well. Employment fell by 0.2 percent on the month in March 2025 while the unemployment rate increased by 0.1 percentage points from February’s posting to 6.7 percent. This may signal potential weak spots in the Canadian economy.

Front loading of purchases in the wake of tariff disruption and supply chain dislocation have also contributed to the 2.3 percent increase in consumer prices in March 2025. Persistent increases, however, may not be a forgone conclusion. Oil prices have reduced due to geopolitical instability and lower revenue generation here can impact economic performance and soften price pressures as global demand eases.

What’s left is a complex, finely balanced and swiftly changeable landscape in Canada. The BoC’s April Monetary Policy Report suggests that the economy could contract for four consecutive quarters in a prolonged trade conflict scenario, highlighting the scale of the challenges ahead. Nonetheless, the Canadian economy has proven resilient to date and will take the evolving tariff threat in its stride, aided by a renewed focus following Mark Carney’s election and his commitment to economic resilience.

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