In a surprise turnaround, the Canadian economy expanded 0.2% in December after shrinking 0.2% the month before. Economists think this could prompt the Bank of Canada to pause its overnight interest-rate cuts. Complicating the picture, sweeping US tariffs on Canadian goods could take effect next week. After reviewing the latest Statistics Canada GDP report, analysts say the central bank’s decision is now a coin toss, with both options justified.
On an annualized basis, the economy grew a healthy 2.6% in the fourth quarter of 2024, surpassing economists’ expectations, driven by strong consumer spending (which jumped 1.4%) owing to the sales tax holiday, as well as businesses rushing to export more goods (up 7.4% quarter over quarter) ahead of the potential new 25% US levies.
Economists say that without the threat of tariffs (which US President Donald Trump says will take effect March 4), the Canadian economy would be on solid footing, particularly since January’s advance estimate of 0.3% growth suggests a strong start to the new year. If Trump proceeds with a broad-based 25% tariff and Canada retaliates with similar measures, observers say the economic outlook becomes far more uncertain.
What Does the GDP Report Mean for Bank of Canada Rate Cuts?
The Bank of Canada began its monetary easing cycle in June 2024, cutting overnight interest rates six times, including in January 2025, reducing the policy rate from 5% to 3%. While high unemployment, weak consumer and business spending, and the threat of US levies have pressured the central bank to continue to cut rates, the recent improvements in economic indicators suggest its decision now hinges largely on mitigating potential damage from US tariffs.
Here is some commentary from economists’ notes to clients about the December GDP report.
Avery Shenfeld, senior economist at CIBC Economics
“Canadian economic data, both in this report and in the last jobs tally, have given plenty of reason to be optimistic, with lower interest rates bringing significant relief to sectors that had been earlier held back by monetary tightening. But looming over the horizon, perhaps as early as next week, is the threat of sizable tariffs that could easily snuff out the growth we’ve been seeing.
“Absent the tariff risk, and even the drag on capital spending from tariff uncertainties, the Bank of Canada would have a clear reason to take a pause on rate cuts for several months and see how things develop. But we could still see the need to nudge rates a bit lower over 2025 given the likelihood that the tariff threat will hang around for several quarters, until an extension of the USMCA deal is in place. And a zero-tariff outcome might be too optimistic a scenario to bet on at this point.”
Nathan Janzen, assistant chief economist at Royal Bank of Canada
“The threat of US tariffs remains significant, and even if not actually implemented could choke off early signs of recovery in business investment (measures of business and consumer confidence both declined in February.) But household spending is showing signs of life. Inflation readings are still broadly consistent with the Bank of Canada’s 2% target, but have surprised on the upside in recent months.
“Absent significant broadly based tariffs being imposed on schedule next week (not expected in our own base-case) the data increases the odds that the Bank of Canada will not cut the overnight rate further in March, and the onus may now be on future data to soften to justify additional cuts.”
Charles St-Arnaud, chief economist at Alberta Central
“Today’s GDP shows that the Canadian economy was much stronger than expected at the end of 2024. However, the uncertainty from the US tariffs will affect the economy in the coming months. There are indications that economic activity rose sharply in January as businesses stockpile on various goods ahead of the likely US tariffs. Conversely, the high uncertainty from the US tariffs is also likely to act as a headwind on the economy, as businesses and consumers delay spending and investment decisions.
“In the absence of tariffs, the much stronger economy than initially expected, sticky inflationary pressures, and the recent strength in the labor market would support the Bank of Canada keeping its policy rate unchanged at the March meeting. However, a rate cut would be likely if the US imposed tariffs next week as announced.”
James Orlando, director and senior economist at TD Bank
“The Canadian economy flexed its muscles in the back half of 2024. Consumers were once again the driving force, as lower interest rates and the GST/HST tax break spurred spending on luxuries like autos and dining out. There was also evidence of businesses front-running tariffs, with exports to the U.S. surging in December. All told, it was a strong quarter for Canadian growth. And while some of this momentum appears to have carried forward into 2025, with tariffs potentially on deck next week, today’s report seems to be telling a story of what could have been for the Canadian economy.
“Today’s GDP release isn’t going to sway the Bank of Canada. Yes, the report was strong. But Governor Macklem is more concerned about the risks on the horizon rather than what happened last year. The Bank’s own research shows huge downside risks to the economy should tariffs come to pass. Market pricing is still effectively a coin flip for the Bank of Canada’s meeting on March 12th. This feels right, as the Bank of Canada could go either way. No one would complain if the Bank of Canada took out more insurance against the downside risks with another 25-basis-point cut, while a hold could also be justified should the bank prefer to take a wait-and-see approach.”
Royce Mendes, managing director and head of macro strategy at Desjardins Capital Markets
“Canada’s economy surpassed all expectations in the second half of last year. Not only did GDP growth clock in at 2.6% in Q4, well above the 1.7% consensus forecast, but the third quarter advance was also revised up significantly. Real GDP data now show an advance of 2.2%, a significantly faster pace of growth than the 1.0% previously estimated for Q3. Upward revisions to consumption and residential investment drove that strength.
“All told, this set of data would typically be exactly what the Bank of Canada would be looking for to take a pause in its rate cutting cycle. While our official call is that the central bank holds rates in March, the situation is extremely tenuous, with the possible imposition of US tariffs on Canadian goods as early as next week. That’s limited the market reaction to this surprising set of data.”
Benjamin Reitzes, managing director and macro strategist at BMO Economics
“The Canadian economy had good momentum through the back half of 2024, as aggressive Bank of Canada rate cuts helped juice activity. Q4 GDP growth was well above the Bank of Canada’s forecast (2.6% vs 1.8%), while 2024 growth ended up two ticks better than their forecast as well (1.5% vs 1.3%). Unfortunately, most of this was largely before tariff threats really ramped up. We’ll be watching the February data closely, but it’s clear there was solid economic momentum through the turn of the year. If Canada doesn’t get tariffed next week, the Bank of Canada will pause its rate cut campaign at the March 12 meeting.”
Bradley Saunders, North America economist at Capital Economics
“The 2.6% annualized gain in GDP last quarter was much stronger than the Bank of Canada’s forecast for a 1.8% increase and was accompanied by sizable upward revisions to data in previous quarters. Meanwhile, the flash estimate for January suggests growth accelerated to 0.3% last month. This gives a solid handover to the start of 2025 and puts the economy on track to continue growing at a solid pace in the first quarter.
“Given that the economy is doing well and core price pressures are showing signs of stickiness, we will change our forecast for the Bank’s decision at next month’s meeting from a 25-basis-point cut to a pause if President Trump once again postpones the 25% tariff on most goods imports from Canada due to take effect next week.”
Tu Nguyen, economist at RSM Canada
“Canada’s economy shows promising growth in the last quarter of 2024 and is poised to have a robust 2025 given price stability, decreasing interest rates, as well as the sales tax holiday.
“Without tariffs, Canada will enter 2025 on solid footing. However, the threat of tariffs could hinder growth and investment decisions. The Bank of Canada’s next rate decision will come down to whether tariffs come into effect next week. Absent a broad-based tariff, the Bank could feel comfortable taking a pause, although another cut might be necessary if tariffs occur.”
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