Don’t Panic, but Buckle Up

To make sense of 2025, we must first examine the forces that defined 2024. In the US, the arduous “last mile” of disinflation lived up to its reputation, with progress coming in fits and starts. Even so, the Federal Reserve (Fed) made some progress towards its target—core PCE inflation has dipped below 3%—and the Fed managed to bring inflation down while limiting the rise in the unemployment rate, which remained low at 4.2% as of November. This accomplishment validated the “soft landing” thesis—aside from a brief mid-summer scare—and gave a significant boost to US equities. As of this writing, the S&P 500 is on course for a gain that will rank safely among the top 10 performances since 1950.

Yet beneath the exuberance in equity markets, the story is more complex. The lingering weight of price increases since 2021 has left consumer sentiment bruised. The stark disconnect between financial market exuberance and the economic struggles experienced by many US households played a decisive role in November’s election outcome.

The Trump administration’s agenda introduces significant uncertainty into the economic outlook. Chief among these is the possibility of tariffs on trading partners, with threats having taken various forms since election day. Even our assumption of a 10% universal tariff (but with key exemptions) would have a measurable negative effect on US economic growth and drive inflation higher.

We assume such tariffs to be applied only in late 2025, but anything more aggressive in terms of scope and/or timing would make a recession hard to avoid for countries that trade extensively with the US. Additionally, tighter immigration policies are likely to constrain US labour supply growth, and the anticipated extension of Trump-era tax cuts could push the federal deficit north of 7% of GDP. Deregulation is usually supply-side-friendly, but that supposes there isn’t a critical mass of headwinds otherwise impeding business investment.

The Fed faces the challenging task of navigating these dynamics. We anticipate a continued but slightly more measured easing cycle, with rates likely reaching the 3.50%–3.75% range by September. There may be some noise around the question of whether the Fed sustains a cautious pace of easing amid potential political pressure for more aggressive easing, although we think there is a very high bar for the Fed to become politicized.

Meanwhile in Canada, it isn’t a cliché to say that the economy is at a crossroads. Despite welcoming immigrants at a breakneck pace (with population growth exceeding 3%), the economy has been spinning its wheels. GDP per person age 15 or older and above has fallen by 3.5% since its mid‑2022 peak. For the Bank of Canada (BoC), there has been no room for second thoughts from the moment it began its easing cycle in June.

But the outlook is about to grow even more complex. There is of course the tariff threat, which we cover extensively in the Canada section of this Economic and Financial Outlook. Our baseline forecast builds on our previous work, and we will also be publishing a report exploring downside and upside alternative tariff scenarios and their impact on Canada. (See Alternative Scenarios.)

But in addition to the tariffs, Canada’s immigration-driven population boom, which arguably helped the country stave off an outright recession, is poised to be deliberately scaled back. The government’s new target of 395,000 permanent residents for 2025 marks a notable reduction from the prior level of 500,000. We expect the immigration cooldown to relieve pressures on essentials like rents and public services and to make GDP per capita grow again.

It still raises the question: what will drive growth in an economy already struggling to regain its footing? With the mortgage renewal wall, a trade sector likely to face tariffs and persistent uncertainty weighing heavily on the outlook, the path forward seems increasingly fraught. Yet our 2025 growth forecast is far from gloomy for Canada. There are four main reasons behind this. First, recently announced temporary fiscal stimulus measures will soon hit consumers’ pocketbooks. Second, the introduction of 30‑year mortgage terms and the increase in the mortgage insurance limit should uplift housing market activity. Third, the lagged effects of recent rate cuts, combined with the additional easing from the BoC that we expect in 2025, will provide further support to growth—loonie depreciation included. Lastly, our assumption that tariffs only take effect late in 2025 suggests a temporary mechanical boost to growth during the year, as exporters benefit from front-loaded demand. Of course, this gain comes at the expense of 2026, when we anticipate a significant reversal, but the key point is that there are enough tailwinds to avoid losing sleep over the near-term outlook.

This doesn’t mean that we’re bullish about Canada’s underlying fundamentals. Challenges won’t just be economic but also political. Canada faces a federal election that could reshape its own economic and fiscal policies. The current Liberal government appears to have made some progress in identifying areas that merit spending cuts. It may well be a new government implementing them. Should the Conservatives topple Liberals and secure a majority government in 2025, they might interpret it as a strong mandate to pursue such measures. Meanwhile, the Quebec government needs to chart a path to dig itself out of the record $10.8B deficit it expects for this fiscal year, and multiple expense lines may be on the chopping block. Simply put, a shift to fiscal austerity by some governments after the largesse of the first half of the decade is a risk we firmly keep on our radar. These things take time to unfold, however, and therefore might also be more of a story for 2026 than 2025. Indeed, if we have one piece of advice for navigating 2025, it’s don’t panic, but buckle up.