Richter’s Canada Economic Forecast 2025: Tariffs, Trade, and Trends

Richter’s annual Economic Forecast featured an informative and comprehensive discussion with Mr. Andrew Grantham, Executive Director, Senior Economist with CIBC, hosted by Richter partner Joe Triolo. Mr. Grantham covered everything from the local real estate markets to tariffs and potential recession projections. Here are some highlights of their discussion.

TARIFFS, TRADE AND A FEDERAL ELECTION

Starting off with the main headline-grabbing topic on everyone’s minds: tariffs. The Trump administration is threatening to impose 25% on most Canadian imports and 10% on energy, beginning in March 2025. Why? Canada remains an easy target, so to speak, for U.S. tariffs due to its economic dependency on the American market, as well as being in a “political vacuum” as Canada heads into a federal election this year, and in the view of many experts, the need for a quick win for Trump to deliver on his campaign promises. While a change in Canada’s federal government may bring more certainty on direction to navigate these tariffs, the extent of the tariffs remains unclear at this time.

• Trade and Economic Diversification
  Canada’s over-reliance on U.S. trade remains a concern, as we export roughly 75% of our goods to the US. This trade dependency has only deepened over the years. Expanding trade with the EU and other markets should be a focus for businesses and the in-coming government, in order to increase diversification and decrease our dependency on the US.
• The Federal Election
  The upcoming federal election could impact various sectors, with all parties and potential leaders discussing carbon tax reductions to reduce inflationary pressures, albeit temporarily. Our federal deficit is not huge relative to GDP, so huge spending cuts aren’t necessary if an in-coming government is set on balancing the budget. A small reduction year-over-year can help achieve a balanced budget. Spending cuts in the near term could hinder growth.
• Interprovincial Trade Barriers
  There are current barriers for interprovincial trade – language differences and certification requirements, for example – not to mention the geographical challenges in moving across Canada. While opportunities exist, the potential is likely to be only about 1-2% of GDP. Even so, given the uncertain trade relations with the US, it is something worth exploring

THE BANK OF CANADA

Inflation
The inflation picture has been a challenging one in recent months. The Bank of Canada (BoC) is still focused on managing inflation. The temporary tax holiday has pulled inflation down at the moment. However, an acceleration in the economy and labour market recently, and an increase in gasoline prices are pushing inflation up again. We are at 1.9% year-over-year right now, which is in line with the overall 2% target, but if the GST relief measure is excluded from that data, then we’d see a rate closer to 2.5%. The BoC relies on core measures of inflation which strip out monthly volatility. It tracks three main measures of inflation, and looking at those numbers, they’ve been slightly stronger in the last few months, indicating a stronger economy now versus the middle of last year. It’s expected that the BoC will continue to cut the overnight rates three more times this year.

Mortgages & Real Estate Trends
The BoC needs to cut interest rates more than financial markets are expecting. If we get three cuts as expected, then 5-year fixed mortgage rates can come down further. Why should this be a consideration? There is refinancing risk expected in the latter half of this year and into 2026, as many homebuyers from 2020 will face refinancing challenges, given they purchased homes when mortgage rates were at historic lows. However, the increase that may be seen in mortgage payments is actually in line with the increase in wages in the last three to four years. So, it is expected that overall, people will be able to afford their new payments, albeit it may impact lifestyles or discretionary spending slightly. The Canadian real estate market overall is experiencing mixed trends. Low-rise housing demand is improving with lower interest rates, while high-rise demand is weak, particularly in Toronto and Vancouver. Builders here have delayed high-rise projects, and investor interest has been lacking. However, this isn’t being felt as significantly throughout the rest of the country. Looking ahead, we need to see lower interest rates to make larger projects more viable and bring back demand.

RECESSION AND ECONOMIC PROJECTIONS

Generally, in any given year, the probability of a recession is 15%. Recessions are usually seen every 10 years. With tariff threats, this becomes a lot higher, with some projecting as high as 25-30% if tariffs are imposed. A 10% tariff scenario could weaken growth to 1% over the next two years (relative to 2% on average) but avoid a recession, while a 25% tariff would likely result in a mild recession. If tariffs were to be imposed on more countries and global growth weakens, we’d see lower commodity prices, which would also affect Canada’s resource-based economy more significantly.

LABOUR, AI, AND RETAIL GROWTH

The labour market is improving relative to 2023-24, with unemployment dropping to 6.6% from a peak of 6.9%, though it remains about 1% higher than optimal levels that would be consistent with a 2% inflation rate. There are two big ‘if’ situations which could affect the labour market in the coming year. One, if the BoC positions interest rates correctly, and two, if we can avoid the worst-case scenario of tariffs. If we do face 25% broad-based tariffs, the labour market may be impacted negatively in the months ahead. The introduction of AI is expected to cause a gradual transition rather than mass unemployment. While AI may disrupt certain sectors, it will also create new opportunities, similar to past technological advancements. The changes seen though will be gradual. Consumer spending is expected to slow, though population growth may sustain demand for essential goods. Retail growth will hinge on interest rates and tariff outcomes. There is potential for discretionary spending to improve in the second half of 2025 and into 2026 if we are able to weather those two big ‘ifs’.

LOOKING AHEAD: UNCERTAINTY AND ECONOMIC PATHWAYS

The coming years can be pivotal in shaping economic resilience and trade diversification. Canada’s economic trajectory depends largely on U.S. tariff policies, BoC rate decisions, and the federal government’s fiscal strategies. The economy has room to grow without significant inflationary risks, but tariff escalations could lead to a minor recession. A global trade war would likely weaken the Canadian economy, which may then necessitate more aggressive BoC rate cuts.