Canada’s Economic Outlook 2025: A Balanced Story of Challenges and Resilience 1. Current Economic Performance

• GDP Fluctuations: Canada’s economy contracted by approximately 1.5–1.6% in Q2 2025, mainly due to the impact of U.S. tariffs that dented export volumes after a surge in Q1 driven by tariff anticipation and “front-running” exports.

• Sectoral Landscape: Service industries dominate Canada’s output, accounting for nearly 70% of GDP, with growth around 2.1% in 2025. Manufacturing and natural resources continued to expand, though more modestly.

• Manufacturing Weakness: August 2025 saw a seventh consecutive month of contraction in the manufacturing sector, though the PMI slightly improved from 46.1 to 48.3, offering some cautious optimism.

2. Monetary Policy & Inflation

• Stable Inflation: Consumer price inflation sits close to the Bank of Canada’s 2% target, while core measures (excluding indirect taxes) are a bit higher at around 2.5%.

• Monetary Strategy: The central bank confirms it will maintain the 2% inflation goal and not consider revising it in the upcoming policy review, reinforcing commitment to stability.

3. Outlook & Growth Forecasts

• Projected Growth: The Bank of Canada and other forecasters anticipate GDP growth near 1.8% in 2025 and 2026, driven by easing monetary conditions, residential investment, and increased export capacity like LNG and pipelines.

• Investment Dynamics: While residential investment is expected to gain strength, business investment remains subdued due to uncertainty.

• Recovery Hurdles: Growth is projected to remain below trend, with a full return to balance likely only by 2027, as lingering trade and demographic concerns weigh on momentum.

4. Challenges Ahead

• Trade Uncertainty: U.S. tariffs continue to undercut non-commodity exports and dampen business sentiment.

• Labour Market Pressure: Unemployment is rising, with long-term unemployment climbing and forecasts peaking at around 7.3%

• Structural Headwinds: Slow productivity growth and subdued business investment remain key impediments to long-term economic performance.

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