As Canada’s economy struggles with below-trend growth and increasing unemployment, many are looking ahead to 2025, wondering if the country’s economic performance will improve. Unfortunately, experts are warning that Canada may face continued challenges next year, with slower growth and rising unemployment expected to weigh heavily on the economy. This article examines the factors contributing to Canada’s current economic slowdown and what experts predict for the coming year.
Slower Growth Expected to Continue
Canada’s economic growth in 2024 has been underwhelming, with GDP growth tracking at an annualized rate of 1% in the third quarter. This is well below both the Bank of Canada’s (BoC) earlier forecast of 2.8% and the country’s long-term growth potential of 2.3%. Despite optimistic projections at the beginning of the year, the economy has continued to underperform, largely due to weak productivity gains and a cooling labor market.
Looking ahead to 2025, experts are not expecting a significant rebound. The BoC’s latest forecast predicts that GDP growth will remain sluggish throughout the first half of 2025 before beginning to recover in the second half. Even then, growth is expected to remain below trend, with GDP growth forecasted at just 1.4% for the year. This slower growth is a reflection of both global economic headwinds and domestic factors, such as declining business investment and soft household spending.
One of the key drivers of this slowdown is Canada’s slowing population growth. The country’s rapid population increase over the past few years has helped prop up GDP even as per-capita demand weakened. However, as the rate of population growth slows—driven by a reduction in non-permanent residents—Canada’s economy will face new challenges in sustaining its productive capacity.
Rising Unemployment: A Growing Concern
A major factor contributing to Canada’s economic slowdown is the rising unemployment rate. Over the course of 2024, the Canadian labor market has weakened, with job openings plunging below pre-pandemic levels. This has led to increased concerns that unemployment could rise further in 2025, particularly as businesses pull back on hiring in response to weaker economic conditions.
According to experts, the Canadian labor market is showing signs of further deterioration. The Beveridge curve, which tracks the relationship between job vacancies and the unemployment rate, suggests that job openings are likely to decline at a faster pace, which could lead to a sharp rise in unemployment. As businesses scale back their hiring efforts, particularly in sectors like construction, retail, and hospitality, more Canadians could find themselves out of work in the coming year.
By 2025, the unemployment rate is expected to rise further, reaching 6.5% or higher as job openings continue to shrink and business investment remains weak. This increase in unemployment will put additional pressure on household finances, particularly for those who are already struggling with high levels of debt and rising living costs. The combination of rising unemployment and slow economic growth could create a challenging environment for both businesses and consumers.
Inflation Under Control, But Risks Remain
One positive development in Canada’s economic outlook is the return of inflation to the BoC’s target range. After peaking at 8% in 2022, inflation has steadily declined throughout 2023 and 2024, with year-over-year consumer price growth slowing to 2% by August 2024. This faster-than-expected return to target has been driven by a combination of lower energy prices and weak domestic demand.
However, while inflation appears to be under control for now, there are risks that it could fall too low in 2025. With the economy growing below its potential rate for several consecutive quarters, the output gap—the difference between actual economic output and potential output—has widened. This gap suggests that the economy is operating below its capacity, which could lead to further downward pressure on prices in the coming year.
The BoC is particularly concerned about the risk of undershooting the inflation target in 2025. While lower inflation is generally seen as a positive development, deflationary pressures can have negative consequences for the economy, leading to reduced business investment and weaker consumer spending. In response, the BoC is expected to continue cutting interest rates throughout 2024 and 2025, aiming to stimulate demand and prevent inflation from falling too far below target.
Population Growth Slowing: A New Challenge for Canada’s Economy
Canada’s rapid population growth over the past few years has been a key factor in sustaining GDP growth despite weakening per-capita demand. The country has added over three million new residents since 2020, thanks in large part to high levels of immigration. However, this trend is expected to slow significantly in the coming years, creating new challenges for the economy.
The Canadian government is planning to reduce the number of non-permanent residents entering the country, aiming to lower their share of the population from 7% to 5% by 2027. This would represent a significant drop in population growth, which is projected to slow to just 1.3% in 2025, down from 2.8% in 2024. The reduction in population growth will have a direct impact on the economy, as fewer new workers and consumers enter the labor market, reducing demand for goods and services.
The slowdown in population growth is also expected to weigh on potential GDP growth—the maximum level of GDP that the economy can sustain over the long term without adding inflationary pressures. According to the BoC, potential GDP growth is expected to slow to 1.4% in 2025, down from 2.4% in 2024. This means that the economy will need to rely more on productivity gains to drive growth, which is a significant challenge given Canada’s historically weak productivity performance.
What Experts Expect for 2025
Given the various headwinds facing the Canadian economy, experts are warning that the recovery in 2025 may be slow and uneven. While interest rate cuts are expected to provide some relief to businesses and consumers, they are unlikely to fully offset the negative impact of rising unemployment, slower population growth, and weak business investment.
The BoC’s efforts to stimulate the economy through rate cuts will be critical in preventing a deeper slowdown, but additional measures may be needed to support long-term growth. Experts suggest that fiscal policy interventions, such as increased government spending on infrastructure and social services, could help boost economic activity and create jobs. Additionally, efforts to improve labor productivity—such as investing in technology and workforce training—will be essential in driving future growth.
Despite these challenges, there are some reasons for optimism. The BoC expects the economy to begin recovering in the second half of 2025, with GDP growth projected to rise above potential growth by the end of the year. However, this recovery will likely be gradual, and it will take time for the economy to fully rebound from the current slowdown.
Conclusion: A Slow Road to Recovery in 2025
Canada’s economy is facing significant challenges as it heads into 2025, with slower growth, rising unemployment, and slowing population growth all contributing to a subdued outlook. While the BoC’s interest rate cuts are expected to provide some relief, the broader economic recovery is likely to be slow and uneven. For businesses, consumers, and policymakers, the focus in 2025 will be on navigating these challenges and finding ways to support long-term growth in an increasingly uncertain environment.
