Canada: Growth Finishes Strong but the Path Ahead Is Uncertain

Canadian GDP growth came in roaring at the end of the year and the economic engine is working just fine. Under the hood, household spending was the strongest we’ve seen in over two years (graph 1), thanks to higher spending on durable goods (mostly autos) and services. This substantial increase in household spending could be partly driven by recent government supports such as the GST and HST tax holiday, but also the effect of cumulative interest rate cuts, as well as a resilient job market. Residential investment also increased at the fastest pace in over a year, led by strong resale market activity. Non-residential business investment rose on the back of strong building construction activity as well as investment in machinery and equipment and aircraft and other transportation equipment and parts, coinciding with higher imports of aircraft and ships. Net exports were a tailwind to growth this quarter, driven by higher exports of precious metals, crude oil, bitumen and vehicles. Meanwhile, there were extensive withdrawals from non-farm inventories in Q4, with drawdowns in manufacturing, wholesale and retail inventories. In other news, corporate income recovered from its Q3 slump, led by increases in the manufacturing and wholesale sector. The advance in compensation of employees slowed down this quarter from 10.4% to 4.3% annualized. As a result, the savings rate edged down slightly to 6.1% from 7.3% in Q3.

Thanks to the strong GDP print to end the year and the rapidly slowing pace of population growth, real GDP per capita edged higher in Q4, reversing declines in previous quarters (graph 2). The same is true for per-person consumption. Add to that solid data to start 2025, and the Canadian economy looks to have been firing on all cylinders at the turn of the year.

However, that’s where the good news stops. The economy faces significant headwinds from the imminent threat of stiff US tariffs, in addition to the slowdown in population growth and the mortgage renewal wall. In particular, the tariff threats cast significant downside risks to economic growth and upside risks to inflation External link.. As such, while we currently expect the Bank to hold rates steady in March, much will depend on whether the Trump administration moves forward with applying tariffs on imports from Canada next week.