According to TD Economics, Canadians might feel like 2024 has given them whiplash, as expectations for interest rates turned on a dime from one quarter to the next.
Changes to housing policies and immigration were also announced this year, as the policymakers recalibrate from the upheaval created by the pandemic.
And now that U.S. President-elect Donald Trump has said he will impose additional tariffs on Canadian exports, 2025 is already looking to be a significant year.
So, what might Canada’s economy look like in 2025? Here are some predictions and insights from TD Economics.
How might Trump’s proposed tariffs affect Canada’s economy?
Tariffs are on the minds of many Canadians.
While Trump was on the campaign trail, he said he would impose a 10% tariff on Canadian exports to the U.S. At the time, TD Economics’ research indicated that those tariffs would lead to a 5% hit to Canadian export volumes and risk sending the Canadian economy into a period of extended stagnation through 2025 and 2026.
There is $3.6 billion in goods and services flowing between Canada and the U.S. every day, with 30 U.S. states having a trade interdependency with Canada, according to TD Economics.
Trump is now threatening a 25% tariff on Canadian goods with the emphasis on tighter border security between the two countries. This step-up in tariffs would lead to even greater economic hardship within Canada’s economy, particularly since trade ties have deepened since the Canada-United States-Mexico Agreement (CUSMA) came into effect in 2020.
“At the same time, U.S. policies that lower corporate taxes, reduce red tape, and favour domestic manufacturing would further compromise Canada's attractiveness for investment over the longer term,” said Beata Caranci, SVP and Chief Economist at TD Economics.
“These policies would hinder long-term production capacity and productivity, while potentially resulting in a brain drain of top talent out of Canada and into the U.S.”
Caranci said the Loonie will remain under pressure as long as tariff threats remain front-and-center for Canada.
“It would not be a surprise for the Loonie to push below the 70 U.S. cent threshold if threats become reality, further dampening investment sentiment towards Canada,” she said.
But, the silver lining is that Canada currently has a window to begin negotiations to circumvent this outcome before Trump takes office. Caranci said that it is presumed that Canada will have some success with negotiations – otherwise the economic stakes would get high for both countries.
Will there be more interest rate cuts in 2025?
In June 2024, the Bank of Canada (BoC) began a series of rate cuts. The central bank cut its lending rate by 25 basis points three times in a row in June, July, and September, and then cut it by 50 basis points in October.
In December, at its final rate announcement, the BoC cut its lending rate by 50 basis points, bringing it down to 3.25%.
So, what could this mean for 2025?
“Fortunately, inflation is starting in a good spot, having settled around the 2% target,” Caranci said. “Unfortunately, rising bond yields in the U.S. are bleeding into Canada, and the Loonie has slumped. Now, new risks are mounting with Canadian population growth set to stall amidst the threat of U.S.-imposed tariffs.”
Still, TD Economics predicts more rate cuts are on the way in 2025. Caranci said that she and her colleagues predict that the BoC’s lending rate will come down to 2.25% by the end of 2025.
She said, however, that the heavy lifting doesn’t all sit at the central bank. Should the effect of government stimulus prove larger than expected, TD Economics is prepared to remove another rate cut from their forecast.
What might housing in Canada look like in 2025?
In recent months, the federal government has introduced policy changes on mortgage rules and immigration that are intended to provide push-and-pull forces to housing markets, Caranci said. “The impacts of these policy changes will differ within different segments of housing demand (e.g., entry into home-buying versus renters),” she said.
One policy change involves loosening rules around insured mortgages, beginning in December 2024. Specifically, first-time homebuyers (and buyers of new builds) will be able to stretch their amortization periods from 25 to 30 years. Also, the price cap at which a 20% down payment is required will be increased from $1 million to $1.5 million.
“This latter policy should disproportionately lift B.C. and Ontario markets, given their large share of homes priced in that space,” Caranci said.
Caranci said these measures will add a “secondary tailwind” to a market that's already sprung back to life from lower interest rates and household income resilience. In other words, the housing market in 2025 could see more growth in demand.
November 2024 marked the fourth consecutive month that Canadian home sales rose, which is recovering more swiftly than expected.
But with this housing momentum, there is concern that Canadians could return to old habits of escalating their debt-to-income ratios, which can lead to financial risks for borrowers and increased sensitivity to potential changes in interest rates, Caranci said.
On the flip side, housing demand will have a constraint coming from the federal government's immigration changes, which seeks to pause population growth in the short term.
Caranci said that likely impacts of these immigration changes include slower rent growth, which could reduce the attractiveness of rental properties to investors.
“In contrast, the direct impact on home ownership demand will likely be small, given that newcomers largely rent. However, keeping the population steady for a few years will offer an opportunity for builders to cut the sizeable gap between housing completions and underlying demand that opened up from 2022-2024," Caranci said.
“This gap is more likely to be narrowed than eliminated. The shift in immigration policy will not, by itself, be a panacea for Canada’s housing affordability problem, even if it’s a step in the right direction.”