Early signs show growth carrying into the new year
Canada’s economy posted stronger-than-expected growth in the final quarter of 2024, with gross domestic product (GDP) expanding at an annualized rate of 2.6%, according to new data. The increase, which surpassed market forecasts, was attributed to broad-based gains in both household and business spending. Early estimates suggest continued growth in early 2025, though potential US tariffs and shifting inflation trends may influence the Bank of Canada’s (BoC) monetary policy decisions, according to the Royal Bank of Canada (RBC) Economics.
Consumer spending surged 5.6% in Q4, following a 4.2% rise in Q3. Growth was balanced between goods and services, with service-related expenditures climbing 5.8%. Residential investment saw a sharp 16.7% increase, marking its strongest performance in nearly four years as home resales and new construction activity rebounded.
Business investment also outperformed expectations, jumping 8%, led by a 17.9% rise in machinery and equipment investment. This was a surprising result, given earlier reports of weaker equipment imports. Corporate profits surged at an annualized rate of 34%, while household disposable income grew 4.3%, despite a slowdown in wage growth and a decline in the household saving rate.
Economic momentum continues into 2025
GDP grew 0.2% in December, consistent with Statistics Canada’s preliminary estimate, as the retail sector and utilities drove gains. The manufacturing sector, however, declined 0.9% month-over-month. Preliminary data indicates a further 0.3% GDP increase in January, though estimates remain subject to revision. The resolution of labour disruptions, including the Canada Post strike, is expected to provide additional support to economic output, RBC noted.
On a per-capita basis, GDP growth remains a concern. While per-capita GDP fell 1.4% for 2024 as a whole, it showed signs of recovery in Q4, rising at an annualized rate of 0.8%.
Policy implications
With inflation readings still broadly aligned with the BoC’s 2% target but occasionally exceeding expectations, the central bank faces a delicate balancing act. The unemployment rate edged lower in early 2025, suggesting the economy’s output gap may be narrowing—an important factor in the BoC’s inflation outlook.
Nathan Janzen, assistant chief economist at a major financial institution, said that the latest data suggests the BoC may hold off on further interest rate cuts in its March decision. He noted that, absent significant US tariffs, the strength in consumer and business activity raises the bar for additional policy easing. Future rate decisions will depend on whether growth remains robust or moderates in the coming months.
“The data increases the odds that the BoC will not cut the overnight rate further in March, and the onus may now be on future data to soften to justify additional cuts,” said Janzen.
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