Canada’s economy surged last quarter, but tariffs cloud forecast

Canada’s economy showed promising growth in the last quarter of 2024 and is poised to have a robust 2025—provided U.S. tariffs don’t take effect.

Should these measures not come to pass, Canada can expect to enter the first quarter on solid footing due to price stability, decreasing interest rates, the recently concluded tax holiday and strong hiring. Firms are also seeing a resurgence in per-capita consumer demand.

In the fourth quarter, Canada’s real gross domestic product grew by 2.6% on an annualized basis.

On a monthly basis, December had a 0.2% gain—partially offsetting the decline in November—mainly because of the uptick in retail activity. Retail trade grew by 2.6%, the largest monthly growth since June 2021. As well, food and beverage stores grew by 2.9%.

Thanks to the two-month GST/HST holiday, retail trade and food and beverage stores both grew in December and are expected to continue growing into the first quarter until the tax holiday’s mid-February end date.

Growth was broad-based across consumers, housing and business investments.

Consumers painted a particularly positive story, as their spending surged with higher income, price stability and lower interest rates. While immigration slowed, per-capita and per-household spending are expected to remain robust.

In the fourth quarter, services-producing industries were the main driver of growth, increasing by 0.5%, while goods-producing industries grew by 0.4%.

What comes next?

The threat of tariffs could hinder growth and investment decisions. The first quarter could see weaker capital investments solely on trade policy uncertainty.

Industrial sectors are expected to post strong growth into the new year as well, since businesses are pulling forward orders and stocking up in preparation for possible tariffs.

The Bank of Canada’s next interest rate decision will come down to whether tariffs come into effect next week. Absent a broad-based tariff, the central bank could feel comfortable taking a pause—although another cut might be necessary if tariffs occur.

Broad-based tariffs on most Canadian exports into the U.S. could undo all the progress made by lower interest rates and price stability. This could lead the economy to contract by the middle of the year.

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