Canada’s economy in 2025 continues to send mixed signals as it navigates a complicated interplay of global trade pressures, persistent inflationary dynamics, and policy recalibration from the Bank of Canada. Although some early indicators suggested resilience, recent data points toward a deceleration in growth momentum, and the central bank is threading a narrow path between supporting economic activity and taming sticky price pressures. Retail investors are watching closely, looking for direction amid macroeconomic uncertainty.
Economic Growth: Momentum Fades
Canada’s GDP rose by 2.3% in Q1 2025, but recent monthly data suggests that momentum is waning. The BoC’s latest Monetary Policy Report revised its annual forecast down to 1.6% growth, citing weakening exports, sluggish consumer demand, and declining manufacturing output. Cross-border trade has been hampered by the reimplementation of U.S. tariffs on Canadian steel, aluminum, and automobile parts—amounting to over $12 billion in affected exports. In response, Canada levied retaliatory tariffs targeting U.S. consumer goods, which is expected to reduce bilateral trade volume by nearly 8% this year alone.
Business confidence has also deteriorated, with capital investment declining 4.5% quarter-over-quarter in the energy and industrial sectors. Export-dependent provinces like Alberta and Ontario are reporting slower hiring and scaled-back forecasts, while the tech sector—once a major engine of growth in cities like Toronto, Montreal, and Vancouver—is experiencing a wave of layoffs amid cautious VC funding.
Inflation: Cooling on the Surface, But Not Beneath
Headline inflation dropped to 1.7% in April, down from 2.5% earlier in the year, largely driven by falling gasoline prices (down 11% year-over-year) and the removal of the federal carbon tax. However, beneath the surface, core inflation remains a concern. Prices for services—including rent, insurance, and healthcare—have continued to rise. Core CPI excluding food and energy stands at 3.15%, well above the BoC’s 2% target.
The housing affordability crisis in major cities has not abated despite interest rate relief. Toronto and Vancouver continue to see double-digit year-over-year increases in rental prices, and national housing starts have stalled due to labour shortages and high material costs. This persistence in housing inflation contributes significantly to the sticky nature of core CPI.
Monetary Policy: Holding Fire for Now
The Bank of Canada cut its benchmark interest rate six times between July 2024 and March 2025, bringing it from 5.0% down to 2.75%. These cuts were intended to stimulate growth, but the central bank has since paused its easing campaign, citing elevated core inflation and global uncertainty. Governor Tiff Macklem indicated in the latest policy press conference that while inflation has moderated, “premature easing risks re-accelerating price growth.”
Money markets are now pricing in only one more cut by year-end, likely in the 25bps range, contingent on another consecutive drop in core inflation metrics. Analysts from Scotiabank and RBC are projecting the overnight rate to stay within the 2.50–2.75% range for the remainder of 2025. Meanwhile, the yield on the Canada 5-year bond has remained relatively stable at 3.2%, suggesting the market is anticipating rate stability.
Retailer Sentiment
Retailers across Canada are adjusting to a shifting economic backdrop by adopting leaner inventories and rethinking expansion plans. High borrowing costs throughout 2024 had already constrained new store openings, and while the recent rate cuts offer modest relief, most operators remain cautious. Many retail chains are focusing on enhancing e-commerce infrastructure and optimizing logistics rather than aggressive brick-and-mortar growth. Consumer demand is showing signs of fatigue, particularly in non-essential categories. Executives from several national retailers, including Canadian Tire and Hudson’s Bay, have cited “mixed consumer signals” and “ongoing cost challenges” in recent earnings calls.
Investor Outlook
From an investment standpoint, equity markets remain turbulent, with the TSX Composite stuck near the 21,000 level. Institutional and retail investors alike are favoring defensive sectors—utilities, telecoms, and consumer staples—given their stable earnings and relative insulation from economic shocks. Dividend-paying large caps such as Fortis, BCE, and Bank of Nova Scotia have attracted capital inflows from income-focused investors amid lower rate expectations.
On the fixed-income side, Canadian government bonds have gained appeal. With yields in the 3–3.5% range on 5- and 10-year maturities, they present a solid hedge as equity volatility lingers. Meanwhile, REITs continue to face refinancing headwinds, but select residential and logistics-focused trusts with conservative balance sheets are still considered investable by fund managers targeting long-term value.
Final Stance on Rates
All eyes remain on the Bank of Canada’s next move. While it has paused rate cuts for now, its language suggests a deeply data-dependent approach going forward. A re-acceleration in core inflation or further escalation in trade disputes could delay further easing. On the other hand, if GDP growth continues to weaken and core CPI trends downward into the low 2% range, a final 25bps cut could materialize by Q4 2025.
In short: rates are likely to remain at 2.75% through the summer, with modest easing possible in late fall—but no aggressive pivot is expected. Retail investors should not bet on a return to ultra-low rates and should instead prioritize resilient assets with stable cash flows and low sensitivity to rate fluctuations.
Conclusion
Canada’s economy may not be in crisis, but it is certainly at a crossroads. Navigating this environment will require a steady hand, both from the Bank of Canada and from investors looking to position portfolios for stability and select growth in a cautiously evolving macro climate.
Marc has been involved in the Stock Market Media Industry for the last +5 years. After obtaining a college degree in engineering in France, he moved to Canada, where he created Money,eh?, a personal finance website.
