Canadian Highlights
- Canada’s economy gained momentum in the latter half of 2024, providing a decent hand-off into the current year. We expect real GDP growth to move closer to a trend-like pace in 2025.
- The Bank of Canada has more rate cuts in the tank. Lower borrowing costs should continue to support household consumption and the housing market, though rate spreads to the U.S. will likely pressure the Loonie lower.
- The Canadian federal election comes into focus this year, but Canadian financial markets will likely continue to be heavily influenced by stateside political developments.
U.S. Highlights
- The 119th session of Congress commenced this week, with the House of Representatives beginning the process of electing a Speaker of the House.
- The debt ceiling suspension that had been in place since June 2023 expired this week, with the U.S. Treasury expected to begin implementing extraordinary measures in the coming weeks to avert a potential default.
- Pending home sales improved in November, but elevated mortgage rates continue to restrain the housing sector.
Canada – Staying Alive in 2025
Happy new year to all! To commemorate the transition into the fifth year of the decade, we highlight five key themes for Canada’s economy in 2025.
Tariffs
Incoming president Trump has promised to levy tariffs on trading partners across the globe, with Canada currently under the threat of a 25% tariff on all exported goods. Our recent research (here and here) highlight why we think Canada will avoid the full tariff and what the most likely outcomes are for Canada’s economy. Tariff threats alone are enough to weigh on sentiment and negatively impact business investment. Meanwhile, the global trade picture sits on shaky ground.
More Interest Rate Cuts
The Bank of Canada (BoC) kicked off their easing cycle in June 2023, delivering a cumulative 175 basis point (bps) of cuts to date, bringing the policy rate to 3.25% which is the upper end of its neutral target range. With inflation having settled at around 2%, the BoC has signaled a more gradual pace of easing in 2025. At present, we expect the BoC to continue lowering the policy rate, to the tune of 25 bps per quarter, landing at 2.25% by end-2025 (Chart 1). The goal for the BoC now is to follow a rate path supportive enough to balance downside risks to growth while keeping inflation at bay.
Consumer & Housing Bright Spots
Our forecast for Canadian growth to step up to 1.7% in 2025 (from 1.3% in 2024) is driven by year-end momentum in the country’s traditional growth drivers—consumption and housing. 2025 should be a firm year for both categories, supported by falling borrowing costs, federal measures, and continued economic growth. A key risk to the spending outlook is the sharp planned slowdown in population growth, which could stifle aggregate demand if population growth slows too rapidly and without an offsetting bump in per-capita spending.
Shifting Political Landscape
The election spotlight shifts from the U.S. to Canada in 2025. As it stands, the Canadian federal election will take place on October 20, 2025. It is too early to know if Canada will see an earlier election, but PM Trudeau has been facing pressure to resign, which escalated after finance minister Chrystia Freeland stepped down in the hours before delivering the Fall Economic Statement. All told, we don’t think Canada’s political backdrop will have a big impact on Canadian financial markets. Instead, U.S. fiscal policy and the Trump trade will continue to drive spillover into Canadian yields.
Loonie Weakness
Widening interest rate spreads to the U.S. has put downward pressure on the Canadian dollar over the last several months. Our forecast for a weak 70 cent dollar in 2025 would be the lowest since 2002 (Chart 2). The depreciating dollar has offsetting effects on our outlook. Aside from the damaging effect to purchasing power and the ability of businesses to invest, it imparts a secondary path for inflation. At the same time, a weaker dollar could buffer export declines in the event that the incoming U.S. administration does follow through on its tariff threats.
U.S. – Awaiting the Changing of the Guard
Turning the page on 2024, we eased into the new year this week with limited updates on the state of the economy. For that reason, the attention of financial markets was more attuned to developments in Washington as the 119th session of Congress kicked off. However, the holiday period continued to weigh on trading volumes overall, with the S&P falling 1.1% on the week, while U.S. Treasury yields declined modestly.
Economic data releases this week showed that housing market activity continued to gradually recover from its current subdued state. Pending home sales improved for a fourth consecutive month in November, although gains have moderated recently as rates ticked higher through the fourth quarter. With mortgage rates remaining near 7% (Chart 1) and the Federal Reserve shifting into a more cautionary stance in 2025, the housing market’s recovery is expected to remain gradual this year (see report). As of the time of writing, market pricing implies a nearly 90% probability of the Fed pausing at their next meeting at the end of the month, but the ultimate trajectory of monetary policy this year will likely depend on the fiscal policies implemented by the incoming administration and the impact they have on the economy.
Shifting over to D.C., the federal government continues to be funded by the continuing resolution passed by Congress on December 20th, which will remain in effect until March 14th. This means the twelve appropriation bills for the current fiscal year will be one of the first priorities of the new session of Congress which commenced this week. In addition, the debt ceiling suspension that had been in place since June 2023 expired with the start of the new year. The U.S. Treasury put out a statement last week stating that they anticipated that the debt ceiling would become binding in the next 2-3 weeks, at which time they would begin taking extraordinary measures to avoid defaulting on their fiscal obligations. These measures would likely last until the summer (as they did when the debt ceiling was last hit in early 2023 – Chart 2), but the timely implementation of measures to suspend, raise, or eliminate the debt ceiling will be of paramount importance in the first half of 2025.
With a full legislative agenda already taking form, the first order of business for the new Congressional session this week was electing a new Speaker of the House, with a vote expected Friday afternoon. Looking ahead, Senate confirmation hearings for President-elect Trump’s cabinet nominees are likely to begin in the coming weeks, with the much-anticipated presidential inauguration day set for two weeks from Monday.
On the economic front, we’ll return to a more normal schedule of data releases next week, with the December employment report expected to show 153k new jobs added for the month – down from 227k in November. FOMC December meeting minutes will also be released next Wednesday, which will provide further insights on the Fed’s updated projections. All-in-all, 2025 already looks set to be an eventful year.
