Q4 2024 economic snapshot: Another challenging year for Canada

Earlier this year the focus of the Bank of Canada (BoC) pivoted from tightening to easing monetary policy as inflationary pressures eased and to provide some stimulus to a struggling economy. Will the interest cuts that first occurred in June have their intended impact in 2025? Or are there too many other headwinds that will limit the amount of economic activity? We tackle these questions in this quarter’s FCC economic snapshot.

Slowdown in population growth clouding the outlook for consumption

The surge in Canada’s population in the last few years has inarguably provided a boost to the country’s GDP. At the same time, per capita GDP has declined for six consecutive quarters. Looking ahead, the rate of population growth is set to slow in 2025, yet it is difficult to know exactly to what level. For its part, the BoC projects a growth rate of 1.5%. Additionally, Statistics Canada produces a wide range of population growth scenarios. Their lowest-growth scenario projects a decline of -0.9% while their highest-growth scenario matches the BoC’s assessment of 1.5%.

Regardless of the pace of the slowdown, slower population growth would, all else being equal, equate to slower growth in consumption. However, the BoC is anticipating slower population growth will be offset by higher per-capita spending. More specifically, the BoC believes that interest rate cuts will alleviate some pressure on debt payments which would free up cash that could be spent on consumption of goods and services. While we agree with the directionally of this assessment, the degree to which this will occur is up for debate. For consumers with fixed-rate debt not renewing in 2025, the BoC’s recent cuts will have little to no effect. Furthermore, over 1.1 million additional mortgages are still set to renew in 2025, many of which were taken out when interest rates were at record lows. This will offset variable-rate relief seen elsewhere. So, don’t expect a boom in consumption spending next year.

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