New challenges abound for 2025, says four senior economists for Farm Credit Canada:  Leigh Anderson, Graeme Crosbie, Amanda Norris, Justin Shepherd. 

Slower population growth will dent economic growth

After a rough couple of years, when real GDP growth averaged a meagre 1.5 per cent, Canada’s economy is unlikely to get much better this year. Reduced immigration levels are expected to slow population growth, significantly reducing potential GDP growth - the economy’s speed limit, which is estimated as the sum of available labour (i.e., population) growth and productivity growth. 

The Bank of Canada currently estimates potential growth to be just 1.7 per cent in 2025, but even that seems optimistic given the central bank’s expectation of productivity bouncing back significantly this year (Figure 1). It’s unclear what will rekindle productivity, more so considering business investment has been treading water. With such a low speed limit, don’t count on Canada’s real GDP growth to bounce back significantly in 2025.

Figure 1: Economy’s speed limit has been lowered for 2025

Tariffs, trade, and the Canadian dollar 

As if slowing population growth wasn’t enough, Canada also has to contend with a more uncertain trade environment. With Donald Trump’s return as U.S. president, Canada is facing the prospect of punitive tariffs and a resulting slump in exports. Look for U.S. tariffs, if any, to be imposed for a few months on selected products as a negotiating tactic, as was the case in 2018, before being lifted. If 2018 is any guide, cool heads will prevail in the end because negotiators know all too well how interconnected the two economies are. We expect both parties to eventually agree on a deal, which will provide a framework for CUSMA 2.0. But any tariff drama will be enough to restrain exports temporarily and depress investment, further restraining real GDP growth this year.

With such a cloudy economic outlook, it’s difficult to be optimistic about the Canadian dollar. While the underperforming loonie helps to boost Canada’s export dependent economy, imports or any trips to the U.S. will cost a lot more. The loonie’s correlation with oil has broken down over the last three years (Figure 2). But only part of that breakdown is due to Canada-U.S. interest rate differentials. In fact, the differential is similar to what it was in early 2007, and the WCS oil price is much higher than 18 years ago. And yet the C$ is now trading at just 70 U.S. cents or so, versus 90 cents back in 2007. Clearly there’s more to the ailing loonie than just oil and the interest rate spreads. That casts doubts about the likelihood of a significant rebound for the loonie this year.

Figure 2: Loonie’s correlation with oil has diminished over the past three years

Source:  Farm Credit Canada January 15, 2025 news release