The Weekly Bottom Line: Anticipating Economic Changes

Canadian Highlights

• Canada’s economy gained momentum in the latter half of 2024, setting a positive tone for the current year. We project that real GDP growth will approach a more typical rate by 2025.
• The Bank of Canada has additional rate cuts planned, with reduced borrowing costs likely aiding household consumption and the housing market. However, this may put downward pressure on the Canadian dollar compared to the U.S. dollar.
• This year, the Canadian federal election will be closely monitored. Still, it is expected that Canadian financial markets will be significantly influenced by political events in the United States.

U.S. Highlights

• The 119th Congress has begun, with the House of Representatives starting the process to elect a new Speaker.
• The suspension of the debt ceiling, in place since June 2023, has expired, prompting the U.S. Treasury to implement extraordinary measures to prevent a potential default.
• Pending home sales saw an improvement in November; however, high mortgage rates continue to limit the housing sector's growth.

Canada – Key Themes for 2025

As we welcome the new year, let's examine five significant themes that will shape Canada’s economy in 2025.

Tariffs

Incoming president Trump has indicated intentions to impose tariffs on various trading partners, which includes a potential 25% tariff on Canadian exports. Our analyses suggest that Canada may not face the full tariffs, but the potential threats could dampen business sentiment and investment. Global trade dynamics also appear fragile.

Interest Rate Cuts

The Bank of Canada has already lowered rates significantly, starting in June 2023, with cumulative reductions totaling 175 basis points (bps). The current policy rate stands at 3.25%, and with inflation stabilizing around 2%, the BoC plans to continue easing rates into 2025 at a gradual pace. Forecasts suggest rates could drop to 2.25% by the end of 2025 to balance growth concerns while controlling inflation.

Consumer & Housing Growth

We anticipate that Canada’s growth will increase to 1.7% in 2025 compared to 1.3% in 2024, driven by favorable conditions in consumer spending and housing. A key risk remains the projected slowdown in population growth, which could dampen demand if it occurs too rapidly.

Political Changes

The political landscape in Canada will be a focus in 2025 due to the federal election scheduled for October 20. While PM Trudeau is facing pressure amid ongoing challenges, we believe that shifts in U.S. fiscal policies and trade relations will have a more substantial impact on Canadian markets rather than internal politics.

Canadian Dollar Outlook

The widening interest rate gap between Canada and the U.S. is affecting the Canadian dollar's strength, with projections suggesting a weak dollar might hover around 70 cents in 2025—the lowest since 2002. While this could negatively impact purchasing power and business investments, a weaker Loonie could also help mitigate export losses if tariffs are enacted.

U.S. – Transitioning in 2025

As we move into 2025, financial markets are closely watching developments in Washington as the 119th Congress kicks off. However, market activity remains low following the holiday season, and key indexes, like the S&P, experienced a slight decline.

Economic indicators show that the housing market is gradually improving, with pending home sales up for the fourth month in November. Yet, high mortgage rates, near 7%, continue to constrain housing market growth. The Federal Reserve is also taking a cautious approach for 2025, implying a pause in interest rate changes in the next meeting.

The federal government is currently operating under a continuing resolution effective until mid-March. However, the expiration of the debt ceiling suspension requires urgent attention; the U.S. Treasury is expected to implement extraordinary measures soon to avoid default.

This session of Congress has set an agenda that includes electing a new Speaker of the House and addressing the twelve appropriations bills for the fiscal year. Preliminary sessions for cabinet confirmations under President-elect Trump will also occur shortly, with the inauguration less than three weeks away.

Data releases will resume a regular schedule next week, with the December employment report predicted to show an addition of 153,000 jobs. The minutes from the Federal Reserve's last meeting will also provide insights into future monetary policy directions. Overall, 2025 appears to be positioned as a year filled with significant developments.

economy, Canada, U.S.