By Jock Finlayson, ICBA Chief Economist
As a new year beckons, Canadian policymakers and business leaders find themselves staring at an unsettled economic landscape that renders the task of forecasting more perilous than usual.
The past two years have been underwhelming for Canada’s $3 trillion national economy. Growth in inflation-adjusted gross domestic product (GDP) has lagged well behind the country’s surging population, leading to serial declines in real GDP per person – the most common measure of prosperity. In fact, on a per person basis Canada arguably has been in a recession since the end of 2022, even though top-line economic growth has remained modestly positive. Business investment – an area of chronic weakness under the Justin Trudeau government – has continued to languish. Housing starts have failed to gain traction, despite the unprecedented policy attention being lavished on Canada’s housing supply and affordability crisis. Meanwhile, productivity – the principal driver of long-run gains in real wages and incomes – has been going backwards, with Canada’s shortfall relative to the U.S. on labour productivity (GDP per hour) reaching record levels.
The sharp uptick in inflation in 2021-22 set the stage for a rapid tightening of monetary policy by the Bank of Canada beginning in early 2022 and extending into the early months of this year. Higher interest rates and constraints on the availability of credit quickly cooled economic growth, putting a squeeze on heavily indebted households, dampening business investment, and triggering a fall-off in residential construction and other real estate-related activity. With inflation pressures ebbing, the central bank shifted to an easing stance by mid-2024, lowering its short-term policy interest rate from 5.0% to 3.25% as of December. This has provided a much-needed lifeline to a faltering economy that recently has been growing at a tepid 1% pace (annualized) — and where the unemployment rate has been marching steadily higher.
For 2024 as a whole, ICBA Economics expects Canada to post real GDP growth in the vicinity of 1.2%, down from 1.5% last year, with an expanding public sector and small gains in consumer spending serving as the main factors keeping the economy afloat. Employment growth should reach 1.6% on an average annual basis — a respectable showing given the generally weak economy, although strongly tilted toward the public sector. Because of Canada’s still expanding working-age population, net job creation is running behind growth in the labour force, resulting in higher unemployment (set to average 6.5% this year, vs 5.4% in 2023). Total CPI inflation should come in at 2.3% for 2024, an improvement from 3.9% last year and almost 7% in 2022. Housing starts nation-wide are projected at 242,000, little changed from the year before.
Looking to 2025, two major “known unknowns” cloud the Canadian economic picture.
The first is the return of Donald Trump to the U.S. Presidency. The incoming President has made all manner of promises to restrict trade and levy steep tariffs on imports to the U.S. This includes a recent pledge to slap a 25% tariff on all Canadian and Mexican merchandise exports to the U.S., allegedly for national/border security reasons. Canada currently exports almost $600 billion of goods to the U.S. annually (measured on a balance of payments basis), representing more than three-quarters of total export sales. Should Mr. Trump carry through with his tariff threat after taking office in late January, Canada’s economy will be catapulted into a recession, eliminating any hope for sturdier growth in 2025 after a lacklustre 2023-24.
A second “known unknown” stems from the federal government’s decision to sharply dial back immigration, after three years of record inflows. Specifically, Ottawa plans to reduce the intake of new permanent immigrants by more than one-fifth (going from 500,000 to less than 400,000 per year), while simultaneously implementing more dramatic cuts in “temporary” immigrants admitted on student and work-related visas. The government has also committed to expediting the departure of vast numbers of temporary migrants currently resident in Canada but whose visas have expired or will soon do so – amounting to at least 1.3 million people. There are well-founded doubts about Ottawa’s ability to achieve these goals – particularly whether the creaking federal immigration and border management machinery can quickly pare the ranks of temporary residents. Should it somehow manage to do so, the result would be zero or slightly negative Canadian population growth in the next two years, compared to 3% plus in each of 2023 and 2024. This altered demographic profile would have a material impact on overall economic activity, including on the level, composition and growth of consumer spending on goods, services and housing. Two years of near-zero population growth would create a significantly weaker economic backdrop, pushing the annualized growth of nominal GDP down to 2.0-2.5%, vs. 3.0-4.0% in a scenario where the population continues to rise by 1.0-1.5% per year. ICBA Economics, like the Bank of Canada, does not believe Ottawa will meet its immigration targets, meaning we expect the population to keep increasing over 2025-26, albeit more slowly than in recent years.
ICBA Economics’ base case Canadian forecast assumes President-elect Trump’s proposed 25% across-the-board tariffs are not applied broadly to Canadian exports, and that population growth in Canada slows to a little over 1% next year and into 2026. In this scenario, we see real GDP expanding by around 1.5% in 2025, a slight improvement from 2023-24. The small growth pick-up reflects the impact of lower interest rates and – particularly in 2025 — continued government fiscal stimulus. (See Figure 1). The job market weakens further next year, with the unemployment rate edging higher. Housing starts stay close to recent levels, business investment remains sluggish, and interest rates drift lower. With population growth assumed to drop to about 1%, per capita GDP and per capita consumer spending adjusted for inflation should move back into positive territory in 2025-26 after several quarters of declines.
Figure 1
Our discussion of the economic outlook for B.C. and Alberta below flows from the Canadian base case forecast summarized in Figure 1.
Should the U.S. end up levying sweeping tariffs on Canadian goods shipped stateside, a recession (defined as at least two consecutive quarters of declining economic output) would descend upon Canada in 2025 and a period of tepid growth would likely follow through mid-2026 if not longer. In that case, the forecasts for B.C. and Alberta presented in the next section would need to be revised down significantly.
Our Base Case: Weak Growth in Store for B.C., Better in Alberta
As of late 2024, Alberta is leading the country on most economic metrics, while B.C. is lagging.
That said, last year B.C. did beat most other provinces in economic growth, with real GDP climbing by 2.3% vs 1.5% for Canada as a whole. In part, this was due to above-trend population growth and a fast-expanding public sector that’s been adding jobs at a torrid (and unsustainable) pace. On a per person basis, economic output in B.C. continues to diminish, in line with the Canada-wide trend.
British Columbia’s economy lost a step in 2024 and looks set to expand by around 1% this year (after inflation), well below its 3% population growth and slightly below the Canadian average. It’s been a rough year for much of the B.C. private sector, with per capita retail sales firmly in negative territory, many households retrenching in the face of higher borrowing costs, housing starts slipping, real estate sales softening, and many residential and commercial projects delayed or shelved. On the non-residential investment front, several large energy-related capital projects that have propped up B.C.’s economy for the past several years have been winding down, and at this point there is nothing comparable to replace them. However, provincial government capital spending has risen steeply, helping to offset the weakness in private sector capital outlays. In dollar terms, B.C.’s international exports have teen trending lower in 2024.
Ignoring the possibility of steep U.S. tariffs, the outlook for B.C. brightens a bit in 2025-26, after a disappointing 2023-24. While population growth will slow, the shift to more accommodative Canadian monetary policy promises to produce outsized gains for B.C., where household debt burdens are the highest in Canada and the housing market plays a big role in shaping consumer confidence and spending patterns. Tourism is benefitting from the cheap Canadian dollar and an ongoing recovery in offshore visitor numbers. Slightly stronger economic growth in the U.S. and globally in 2025 should be positive for commodity prices and provide a lift to B.C.’s international exports. Completion of the TMX pipeline expansion project and the imminent start-up of production at LNG Canada’s giant Kitimat facility will deliver a welcome boost to B.C.’s energy exports in 2025-26 and beyond. The NDP government’s plan to run large operating deficits and keep borrowing for capital projects at an elevated level is destined to create problems down the road, but in the short-term the government’s lax fiscal policy will provide support to economy-wide spending. The province’s job market will put in another mediocre performance, with the unemployment rate climbing and net employment growth again tilted to the public sector. ICBA Economics believes private sector investment in B.C. will be hampered in 2025-26 by an increasingly unfavourable domestic business environment that is linked to the NDP government’s tax, labour, climate, housing, and land use policies. We also see a risk from lower Canadian immigration targets, particularly given accelerating outflows of B.C. residents to Alberta and the rest of the country. Fewer newcomers arriving in B.C. will mitigate upward pressure on the unemployment rate even as a struggling private sector keeps a lid on hiring activity.
The top half of Figure 2 summarizes our base case forecast for the B.C. economy (assuming no new U.S. tariffs).
Figure 2
Economic prospects are better in Alberta, with the province poised to lead the country over 2025-26 thanks to rising energy production, continued population and labour force growth, and increased investment in non-energy sectors. Within Canada, Alberta has emerged as an attractive location for people to live, find reasonably affordable housing, and develop their careers. With competitive taxes and a provincial government that supports free enterprise and is keen for local businesses to succeed, Alberta is also the best place in the country to establish and grow an enterprise.
Alberta’s energy output continues to set new records as oil production and exports ramp up, boosted by the expanded Trans Mountain Pipeline as well as previously completed oil sands projects. The looming commencement of LNG production in British Columbia will also benefit Alberta’s energy sector, since a sizable share of the natural gas required to support west coast LNG production is likely to be sourced in Alberta owing in part to an increasingly unfavourable operating environment for the upstream gas industry in next-door B.C.
Even amid a slowdown in Canadian immigration, Alberta is expected to set the Canadian pace for population and labour force growth in 2025-26. This should create a positive backdrop for business activity in sectors that serve consumer-facing domestic markets. ICBA Economics projects that Alberta will post the biggest increase in residential investment spending (in percentage terms) among the provinces again next year, building on a strong 2024. On the capital spending side, there are more than $150 billion of current/potential projects on the books, spanning upstream energy, downstream energy-based industrial activity (e.g., petrochemicals), “alternative” energy (e.g., hydrogen, carbon capture/storage), transportation and logistics, manufacturing, agri-food, and the public sector. We expect most of these projects to advance over the next few years.
Mention should also be made of Alberta’s relatively healthy public finances. The province has eschewed operating deficits and kept its net debt/GDP ratio in check, supported by substantial revenues from the oil and gas sector. Unlike the situation in B.C., residents and business owners do not face the likelihood of large tax hikes to address record provincial budget deficits.
The bottom half of Figure 2 summarizes our forecast for the Alberta economy.
Finally, as discussed above, our B.C. and Alberta forecasts assume that President-elect Trump’s threatened 25% across the board tariffs do not end up being imposed on Canadian exports. Should these tariffs be applied to 100% of Canada’s merchandise exports to the U.S., the economic outlook for both provinces would be considerably bleaker than indicated in Figure 2.
For more analysis from Jock, visit www.icba.ca/economics, our ICBAIndependent.ca news portal, or our ICBA social media feeds (Facebook, LinkedIn, Instagram, X).
