State of Canada’s economy: fundamentals good; outlook bad
Alberta Finance Minister Nate Horner presents the Alberta 2025 budget in Edmonton, Thursday, Feb. 27, 2025. THE CANADIAN PRESS/Jason Franson
A raft of recent data, including Statistics Canada’s latest quarterly GDP release and earnings reports from the six major banks, provides an opportunity to assess the nation’s economic health ahead of what promises to be a tumultuous few months.
The data show a solid performance in late 2024, but with business and consumer confidence rapidly deteriorating amid the looming threat of U.S. tariffs.
In other words, while Canada’s economic fundamentals remain strong for now, sentiment is shifting rapidly—and with trade tensions escalating, the outlook is growing more uncertain by the day.
(While Trump has threatened to impose duties on Canada on March 4, the week ended with some optimism that paths to avert tariffs remain.)
Amid good GDP news, one big red flag
Canada recorded a strong fourth quarter in terms of economic activity, with output growing at an annualized pace of 2.6% in the final three months of 2024, according to Statistics Canada data released on Friday.
That was much stronger than expected by economists and the Bank of Canada. The agency also revised its estimate for third-quarter growth upward to 2.2%, from an initially reported 1%.
Lower interest rates have clearly buoyed businesses and consumers, fueling spending. Even on a per capita basis, the economy recorded a 0.2% increase in the final three months of last year—the biggest quarterly gain in two years.
The expansion has been broad-based but led by consumers. Household spending jumped 5.6% annualized in the fourth quarter—the strongest increase since early 2022. Business investment, a longstanding weak spot, also showed signs of life. New housing investment jumped 17%, while non-residential investment rose 8%. Meanwhile, exports grew at an annualized 7.4%.
These are robust figures, aligning with a labour market that has added 211,000 jobs over the past three months — also an impressive performance. So there are clear signs the economy has emerged from a downturn that had lasted almost two years after the Bank of Canada began aggressively hiking interest rates to tame inflation. Now that the central bank has reversed much of that tightening, the economy is responding.
However, due to a weak start in 2024, overall growth for the year averaged just 1.5%—matching 2023’s growth rate. That marks two consecutive years of sluggish expansion. On a per capita basis, GDP declined by 1.4% in 2024, following a 1.3% drop in 2023.
While the economy did end 2024 on a strong note, one ominous sign has emerged in the data: the first outright drop in inventories since 2020. Rather than ramping up production, businesses are meeting the strong demand by drawing down existing stock, a trend typically seen in economic downturns. Judging from the export numbers, some firms may also be accelerating shipments to the U.S. ahead of potential tariffs. Either way, the business community is still showing plenty of worry.
Banks are bracing for tariffs
This dynamic of solid numbers but weakening sentiment was also evident in bank earnings this week. Canada’s big six banks beat analyst expectations, driven by strength in capital markets. At the same time, they increased provisions for bad loans and warned of economic headwinds from tariffs.
“We are seeing signs of lower business confidence, with some of our commercial banking clients opting to delay investment decisions,” RBC CEO Dave McKay said on a call with analysts, as reported by the Globe and Mail. “Furthermore, Canadian housing activity remains modest despite tailwinds from lower interest rates and changing mortgage rules.”
Bank earnings often serve as a bellwether for economic health—and clearly, Trump’s trade agenda remains top of mind for Bay Street. Bloomberg’s Christine Dobby has a nice wrap of the earnings, with this awesome statistic. “The word `tariff’ came up a total of 133 times on bank conference calls with analysts this week, while mentions of `uncertain’ clocked in at 103. That’s up from seven references to tariffs and 28 mentions of uncertain back in early December when the banks last reported.”
Sentiment trending negative
Warning signs are also flashing in the sentiment data. The Canadian Federation of Independent Business’ latest survey shows confidence dropping into negative territory, while rising mortgage default rates, as reported by Equifax, indicate growing financial stress among households, especially in Ontario.
Consumer sentiment is also in decline. The Bloomberg Nanos Confidence Index fell into “negative view” territory, with two-thirds of Canadians expecting the economy to worsen over the next six months—raising the risk of restrained spending.
Headwinds hit U.S. stocks
Canada isn’t alone in facing economic uncertainty. Concerns about tariffs are rattling markets south of the border as well, contributing to a sharp decline in U.S. equities and turning consumer sentiment bearish. The Conference Board’s measure of U.S. consumer confidence saw its steepest drop since August 2021, triggering a market selloff. The S&P 500 fell 1.4% last month, erasing most of the gains since Trump’s re-election in November.
Alberta sees red in budget
The negative trend in sentiment will likely start showing up in provincial fiscal plans as budget season begins. This week, Alberta — Canada’s richest province as measured by GDP-per-capita — projected a return to deficit, forecasting a shortfall of $5.2 billion for the fiscal year that begins April 1, versus an earlier projection of a $1.4 billion surplus. This reflects buffers that were applied to the budgeting framework in the form of a $4 billion contingency fund and conservative assumptions for the price of oil.
“We hope that our American friends and neighbours will understand the value of our trading relationship,” Alberta Finance Minister Nate Horner said in his budget speech. “But we cannot depend on it.”
Alberta’s baseline outlook assumes a “moderate trade conflict,” with 10% tariffs on energy and 15% on all other goods.
