(Editor's Note: S&P Global Ratings believes there is a high degree of unpredictability around policy implementation by the U.S. administration and responses--specifically with regard to tariffs--and the potential effect on economies, supply chains, and credit conditions around the world. As a result, our baseline forecasts carry a significant amount of uncertainty, magnified by ongoing regional geopolitical conflicts. As situations evolve, we will gauge the macro and credit materiality of potential shifts and reassess our guidance accordingly [see our research here: spglobal.com/ratings].)
This report does not constitute a rating action.
Key Takeaways
- We forecast Canadian real GDP growth of 1.5% in 2025 and 2026.
- Elevated level of business uncertainty will keep unemployment averaging 7.1% over the next three quarters, before improving to 6.5% by the end of next year.
- We anticipate the Bank of Canada will make two additional quarter-point cuts in the second half of this year as economic fallout from U.S. tariffs becomes evident, taking the overnight rate to 2.25%.
We believe Canada’s economy is still set to slip into below-potential GDP growth in the near term, even as it avoids a recession. A higher U.S. tariff on Canada’s auto exports, in addition to consumers’ and businesses’ ongoing concerns about future U.S. trade policy, has strained economic momentum and is set to continue in the near term. The tariffs Canada will face are highly uncertain. A steep slowdown in population growth, which is expected to persist in the near term, also remains a key factor underpinning weak growth.
While headline economic expansion in Canada looked fairly strong in the first quarter—with GDP growth at a 2.2% annualized rate—underlying conditions suggest weakness in domestic demand. Small business confidence has begun to recover from tariff-induced collapse but remains relatively weak.
We expect annual average GDP growth for Canada of 1.5% this year and the next. We expect growth momentum to weaken substantially in the second quarter onwards, leading to a 0.9% fourth-quarter-over-fourth-quarter growth by the end of 2025. However, S&P Global Ratings Economics sees momentum returning next year, boosted by a trade truce and lower interest rates, with growth bouncing back to 2% (quarter-over-quarter percent change) by year-end 2026.
The higher tariffs that the U.S. has imposed on most other countries means Canada is no longer at the competitive disadvantage it appeared to be in before April. Still, the tariffs Canada will face remain highly uncertain.
Specific “strategic” products--including steel and aluminum, energy products not qualified under the United States-Mexico-Canada Agreement (USMCA), and the non-U.S. content of finished motor vehicles--remain subject to significant U.S. tariffs of 10%-50%. However, a broader duty-free exemption for U.S. imports from Canada since early March (under USMCA) appears likely to remain in place for the foreseeable future, cushioning most Canadian exports.
The effective tariff rate currently stands at a little over 10%. But assuming 85% of Canadian exports to the U.S. would get certified duty-free by late this year, the import weighted average tariff on U.S. imports from Canada is likely to settle at 7%-8%--much lower than the 25% feared in March but still higher than 2024 tariff rate. Nonetheless, companies will likely keep major investment projects on hold ahead of the USMCA renegotiation.
Exports to the U.S. have plummeted after surging through the winter. As of April, exports to the U.S. are down 14% from a year ago. Consumer sentiment is sour, and households’ spending on big ticket items such as houses, autos, and major appliances has been tepid.
Business investment in machinery and equipment had a better-than-expected start to the year, likely representing some spending to get ahead of tariff-related price increases. But as is typical during a softening in the economic cycle, business investment will likely contract the rest of the year as uncertainty about Canada’s access to its biggest market weighs on business outlays.
The pace of job gains has slowed significantly this year, with businesses pausing hiring plans amid uncertainty. The unemployment rate has risen to 7%, but job openings as indicated by Indeed Job Postings have stabilized following a downward trend. We think Canada’s unemployment rate will stay at roughly 7% through the end of the year, up from the 6.4% average for last year.
Scrapping the carbon tax and lower oil prices have helped keep a lid on headline inflation, but the underlying core inflation (CPI mean and CPI median) has been rising recently, toward 3%. Still, we project the Bank of Canada will make two more 25-basis-point interest-rate cuts before year-end, taking the policy rate to 2.25%. This should provide more support to growth down the line, particularly in residential investment, which should resume contributing to growth again in this year and next following three consecutive years of contraction.
The balance of risks to our growth forecasts are tilted to the downside. Tariffs on Canadian exports could settle at a higher rate than what we have assumed, and the demand for Canadian goods and services could be weaker if the U.S. experiences a sharper slowdown in the second half than what we expect. The USMCA-compliant share of Canadian exports may be much smaller than what we have assumed, which could mean a bigger hit to Canadian output growth. Upside risk to our growth forecast comes from larger fiscal impulse to growth. The new government has telegraphed increased government outlays to cushion headwinds from U.S. trade policies. They include more spending on infrastructure and defense, combined with a modest personal income tax cut.
| S&P Global Ratings' economic forecast for Canada | ||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| June 2025 | ||||||||||||||||||||||||||||||||
| 2019 | 2020 | 2021 | 2022 | 2023 | 2024 | 2025f | 2026f | 2027f | 2028f | |||||||||||||||||||||||
| Key indicator | ||||||||||||||||||||||||||||||||
| (Annual average % change) | ||||||||||||||||||||||||||||||||
| Real GDP | 1.9 | (5.0) | 6.0 | 4.2 | 1.5 | 1.6 | 1.5 | 1.5 | 2.0 | 2.3 | ||||||||||||||||||||||
| Change from May (percentage points) |
0.0 | 0.1 | 0.2 | |||||||||||||||||||||||||||||
| Domestic demand | 1.1 | (5.4) | 7.4 | 5.2 | 0.1 | 1.7 | 1.7 | 1.5 | 2.1 | 2.3 | ||||||||||||||||||||||
| Consumer spending | 1.6 | (6.3) | 5.8 | 5.5 | 1.9 | 2.4 | 2.4 | 1.8 | 2.3 | 2.1 | ||||||||||||||||||||||
| Nonresidential fixed investment | 3.2 | (12.4) | 6.7 | 6.3 | 0.9 | (2.4) | 1.0 | (0.8) | 1.8 | 1.4 | ||||||||||||||||||||||
| Residential investment | (0.8) | 2.9 | 14.0 | (10.6) | (8.5) | (0.6) | 2.4 | 2.1 | 1.8 | 1.9 | ||||||||||||||||||||||
| Government consumption | 1.1 | 1.3 | 5.6 | 3.2 | 2.2 | 3.7 | 2.6 | 1.9 | 1.5 | 1.6 | ||||||||||||||||||||||
| Real exports | 2.3 | (9.0) | 3.3 | 4.2 | 5.0 | 0.6 | 1.5 | 1.1 | 2.0 | 1.6 | ||||||||||||||||||||||
| Real imports | (0.1) | (9.4) | 8.4 | 7.5 | 0.3 | 0.7 | 0.6 | 0.4 | 2.0 | 2.0 | ||||||||||||||||||||||
| CPI | 2.0 | 0.7 | 3.4 | 6.8 | 3.9 | 2.4 | 2.2 | 1.9 | 2.0 | 2.1 | ||||||||||||||||||||||
| Core CPI | 2.1 | 1.1 | 2.4 | 5.0 | 3.9 | 2.6 | 2.6 | 2.3 | 2.2 | 2.1 | ||||||||||||||||||||||
| (Annual average levels) | ||||||||||||||||||||||||||||||||
| Unemployment rate (%) | 5.7 | 9.7 | 7.5 | 5.3 | 5.4 | 6.4 | 6.9 | 6.8 | 5.8 | 5.5 | ||||||||||||||||||||||
| Exchange rate per US$ | 1.33 | 1.34 | 1.25 | 1.30 | 1.35 | 1.37 | 1.39 | 1.35 | 1.32 | 1.26 | ||||||||||||||||||||||
| Housing starts (000s) | 207.4 | 218.9 | 273.2 | 261.8 | 241.0 | 244.3 | 226.0 | 221.0 | 224.0 | 222.0 | ||||||||||||||||||||||
| Bank of Canada policy rate (% year-end) | 1.75 | 0.25 | 0.25 | 4.25 | 5.00 | 3.25 | 2.25 | 2.25 | 2.75 | 2.75 | ||||||||||||||||||||||
| 10-year Treasury (%) | 1.6 | 0.7 | 1.4 | 2.8 | 3.3 | 3.3 | 3.0 | 2.9 | 2.9 | 2.9 | ||||||||||||||||||||||
| Note: All percentages are annual averages, unless otherwise noted. Core CPI is consumer price index excluding energy and food components. f--forecast. Source: Statistics Canada, Bank of Canada, S&P Global Market Intelligence, and S&P Global Ratings Economics forecasts. | ||||||||||||||||||||||||||||||||
The views expressed here are the independent opinions of S&P Global Ratings' economics group, which is separate from but provides forecasts and other input to S&P Global Ratings' analysts. S&P Global Ratings' analysts use these views in determining and assigning credit ratings in ratings committees, which exercise analytical judgment in accordance with S&P Global Ratings' publicly available methodologies.
| Primary Contact: | Satyam Panday, Chief Economist, U.S. and Canada, San Francisco 1-212-438-6009; satyam.panday@spglobal.com |
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