Canadian economy and inflation outlook
Governing Council members discussed recent data on economic activity and inflation in Canada. They noted that the Canadian economy entered 2025 in a solid position, with robust GDP growth and inflation close to 2% since last summer.
Canada’s GDP grew by 2.6% in the fourth quarter of 2024, led by surprisingly strong household spending, business investment and exports. Supported by past interest rate cuts, final domestic demand grew by a solid 5.6% in the fourth quarter, and business investment increased by 6.5%. Members also noted the significant upward revisions to GDP growth for the third quarter of last year, from 1% to 2.2%.
Members were generally encouraged by developments in the labour market since November, noting that growth in employment had strengthened through January, surpassing labour force growth. Job growth stalled in February and the unemployment rate remained at 6.6%. Wage growth continued to show signs of moderation.
Trade tensions and the imposition of tariffs were expected to disrupt a recovery in the labour market. Members noted a decline in job postings. Recent Bank survey results indicated that businesses intended to reduce the pace of hiring in the near term.
Members also discussed the impact of tariff threats on trade. Merchandise trade data for January suggested that businesses on both sides of the border were pulling forward purchases ahead of possible tariffs. This was expected to lead to stronger Canadian exports and imports in the first quarter, with exports rising more than imports. Businesses appeared to be drawing down inventories to meet the demand for exports. This could offset some of the positive contribution of export growth in the first quarter of 2025.
Initial results from recent Bank surveys suggested that intensifying trade tensions and pervasive uncertainty were hurting confidence and leading consumers to be more cautious. A planned increase in precautionary savings was noted along with a shift in consumers’ spending plans for major purchases. Members agreed that these changes in sentiment likely pointed to weaker consumption growth in early 2025.
The Bank’s surveys also indicated that trade uncertainty was prompting businesses to revise down their sales outlooks, especially in manufacturing and sectors dependent on discretionary consumer spending. Many businesses reported scaling back their investment plans and hiring intentions. In addition, businesses were facing higher costs as imported machinery and equipment had become more expensive due to the depreciation of the Canadian dollar since last autumn. Businesses also reported incurring new costs to diversify their markets and suppliers.
Consumer price index (CPI) inflation was 1.9% in January, slightly firmer than expected in the January Report, mostly reflecting strength in prices for goods. Excluding the effect of taxes, CPI inflation was 2.6% in January. Governing Council members expected CPI inflation to be about 2.5% in March, after the GST/HST holiday ends.
Inflation in shelter prices had remained elevated but continued to ease. Members noted that shelter services was the only major component where inflation was above its historical average, while inflation in the other CPI components was generally at or below historical averages. Core measures of inflation remained on the high side with both CPI-median and CPI-trim at 2.7% in January, mainly due to persistently high inflation in shelter prices.
Merchandise trade data indicated that the costs of imported goods and intermediate inputs had increased. This could partly be due to a weaker Canadian dollar, the impact to supply chains of tariffs on other countries and increases in contract prices as businesses account for possible tariffs. Members expected inflation in prices for food and other goods would pick up even more if further tariffs were imposed, but they expected inflation in prices for services to slow, mainly due to declines in mortgage interest costs and rent inflation.
