Lower interest rates drove growth in late 2024, but economists warn tariffs could slow momentum in 2025
Canada's economy expanded at an annualized rate of 2.6 percent in the fourth quarter of 2024, exceeding the Bank of Canada's projection of 1.8 percent, according to Statistics Canada.
The unexpected growth was driven by increased consumer spending, stronger business investment, and rising exports.
Pierre Cléroux, chief economist at the Business Development Bank of Canada (BDC), told BNN Bloomberg that the strong performance was a result of lower interest rates boosting consumption, real estate investment, and business spending.
“The numbers are very good; this is the impact of lower interest rates,” he said. “Consumption is increasing, real estate investment is increasing as well, even business investment.”
However, he cautioned that economic momentum could slow in early 2025 due to potential tariffs.
Household spending, which makes up more than half of Canada's GDP, rose by 1.4 percent in the fourth quarter—its highest increase since mid-2022.
The biggest contributors were purchases of new trucks, vans, and SUVs, along with increased spending on financial and telecommunication services.
For 2024 as a whole, household spending rose by 2.4 percent. Goods purchases increased by 1.6 percent, while spending on services rose by 3.0 percent, largely due to rent, telecommunications, and financial services.
On a per capita basis, household expenditures rose 1.0 percent in the fourth quarter but declined by 0.6 percent over the year.
Residential construction surged 3.9 percent in the fourth quarter, its strongest quarterly growth since early 2021. Ownership transfer costs, which reflect activity in the resale market, jumped 12.5 percent, while new construction rose 2.2 percent, driven by single-home projects in Ontario.
Despite the fourth-quarter rebound, residential construction fell 1.1 percent for the year, following an 8.5 percent drop in 2023. Spending on alterations and improvements declined by 4.7 percent, while new construction remained nearly unchanged with a 0.1 percent increase.
Business investment in non-residential structures grew by 0.7 percent in the fourth quarter, with building construction increasing 1.6 percent.
Investment in machinery and equipment surged 4.2 percent, supported by higher spending on industrial machinery, aircraft, and transportation equipment.
However, on an annual basis, business investment fell 1.8 percent, led by a 3.4 percent drop in building construction.
The completion of the Trans Mountain Expansion Project in May 2024 contributed to a 1.1 percent decline in engineering structures investment. Machinery and equipment investment dropped 2.1 percent, while spending on intellectual property products edged down 0.1 percent.
Exports of goods and services rose 1.8 percent in the fourth quarter, recovering from a 0.2 percent decline in the previous quarter.
Statistics Canada reported that higher exports of unwrought gold, silver, platinum group metals, crude oil, bitumen, and passenger vehicles were the main drivers.
Imports also increased, rising 1.3 percent in the fourth quarter after a 0.3 percent decline in the previous quarter. The increase was led by higher imports of metal ores and concentrates, pharmaceuticals, and transportation equipment.
For the year, exports rose 0.6 percent, driven by crude oil, bitumen, travel services, and pharmaceutical products.
Imports also increased by 0.6 percent due to higher demand for travel services and clothing, footwear, and textiles. The terms of trade fell 1.0 percent in 2024 as import prices rose 2.2 percent, outpacing the 1.2 percent increase in export prices.
Corporate gross operating surplus rose 4.6 percent in the fourth quarter, recovering from a 0.5 percent decline in the third quarter.
Growth in the manufacturing and wholesale sectors, particularly in the motor vehicle industry and construction-related businesses, contributed to the increase.
The transportation sector also posted strong gains, led by courier and rail services.
Meanwhile, wage growth slowed. Compensation of employees increased by 1.0 percent in the fourth quarter, down from a 1.7 percent gain in the third quarter.
Wage growth in services-producing industries offset a decline in transportation and storage services, which were affected by the Canada Post strike during the holiday season.
For the full year, wages grew 5.9 percent, marking the slowest annual pace since 2020. In the education sector, wages surged 13.8 percent due to retroactive payments and negotiated pay increases for education workers.
The household saving rate fell from 7.3 percent in the third quarter to 6.1 percent in the fourth quarter as disposable income growth (1.1 percent) lagged behind spending growth (2.1 percent).
Investment earnings dropped 1.8 percent in the fourth quarter, marking the first decline since 2020.
Despite the fourth-quarter decline, the average saving rate for 2024 was 6.1 percent, significantly higher than 2023’s 3.7 percent.
Property income payments, including mortgage and non-mortgage interest expenses, rose 11.1 percent in 2024 but at a slower pace than 2023’s 56.6 percent surge.
The Bank of Canada cut its policy interest rate five times in 2024.
While Canada’s economy outperformed expectations in late 2024, potential trade tensions with the US could slow momentum in early 2025.
On Thursday, US President Donald Trump announced plans to impose a 25 percent tariff on all Canadian and Mexican imports and a 10 percent tariff on Canadian energy products starting Tuesday.
According to BNN Bloomberg, economist Tu Nguyen of RSM Canada said the Bank of Canada’s next rate decision will hinge on whether these tariffs are implemented.
“Absent a broad-based tariff, the bank could feel comfortable taking a pause, although another cut might be necessary if tariffs occur,” she stated.
The Bank of Canada has been adjusting its monetary policy to support economic growth. Since June 2024, it has reduced its key policy rate from 5.0 percent to 3.0 percent as of January 2025.
Cléroux noted that inflation has stabilized at 1.9 percent, keeping it close to the bank’s 2.0 percent target. “We’re back to price stability in Canada,” he said, adding that the policy rate could fall to 2.5 percent by summer 2025 if conditions remain stable.
However, if US tariffs take effect, Canada’s economy could face new headwinds, potentially impacting business investment and export growth.
Economists warn that trade disputes could limit the Bank of Canada's ability to continue cutting rates.
