What's driving the slow recovery in the economy?
Canada’s economy faces a challenging road ahead, with slower growth expected to define the nation’s economic trajectory for the next few years, according to Frances Donald, chief economist at the Royal Bank of Canada (RBC). Despite the Bank of Canada’s recent interest rate cuts providing some relief, high prices, geopolitical uncertainties, and structural issues remain significant hurdles.
In an interview with the Financial Post, Donald described a “new normal” of sluggish growth, driven by stagnant productivity and changing demographics. “Canada actually has really terrible productivity growth, it’s actually been negative; and in the next three years, Canada has changed its immigration policy to such a significant extent that we’re actually going to see population declines for the next few years,” Donald said.
She warned that while overall economic growth may slow, per capita GDP could see a modest rebound as the population contracts.
Inflation and high prices persist
Although the Bank of Canada made strides in reducing inflation in 2024, Donald cautioned that prices remain elevated—20% higher than pre-pandemic levels. These lingering costs are poised to remain a central economic theme in 2025.
Donald noted that the pressure is compounded by external factors, including geopolitical shocks and potential US tariff threats, referencing concerns about Donald Trump’s presidency in the US and its economic implications for Canada.
Interest rates and tariff uncertainty
RBC projects that Canada’s interest rates could drop as low as 2% by mid-2025, as the Bank of Canada moves from restrictive to easing territory. However, Donald highlighted the uncertainty surrounding potential US tariffs, which could significantly impact Canadian exports and economic growth.
“The combination of [high tariffs and weakening economic momentum] could be impactful at the margin or throw Canada into a recession depending on their size,” she said, noting that policymakers face challenges in navigating these headwinds.
Currency and housing risks
The Canadian dollar has also faced significant pressure, dropping below $0.70 US in late 2024 due to tariff threats and diverging monetary policies between Canada and the US. Donald attributed much of the currency’s decline to the strength of the US dollar rather than domestic issues alone.
Meanwhile, the housing market faces risks tied to job security rather than rising mortgage payments. Donald emphasized that layoffs pose a greater threat to mortgage affordability than interest rates. “What we’re watching more closely is the sort of melting up of the unemployment rate and whether we start to see layoff activity occur. If that happens, then it’s more difficult for folks to pay their mortgage,” she said, urging the Bank of Canada to act decisively to prevent widespread economic weakening.
A fragile but resilient outlook
Despite these challenges, Donald expressed cautious optimism about Canada’s long-term prospects. She highlighted the country’s stable political environment, educated workforce, and abundant natural resources as assets that could spark economic recovery.
“While many of the factors that influence Canada are outside our control and are impacting economies globally, there’s also enough tinder in Canada to help bring back the fire in this economy,” Donald said.
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