1Q 2025 Canada Economic Overview

May 28

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Leading Economic Indicators

Canada’s Leading Economic Index (LEI), published by the Conference Board of Canada, declined by 0.3% in March 2025, marking its fifth consecutive monthly drop. Over the six months ending March 2025, the LEI fell by 2.5%, reflecting weakening business investment and soft consumer demand. The economic outlook remains fragile, with forecasts indicating continued tepid GDP growth of 0.7% for Q2 2025.

Monetary Policy and Inflation

The Bank of Canada reduced its policy interest rate to 2.75% during its March meeting, responding to elevated uncertainty related to trade tensions and a continued deceleration in core inflation. CPI inflation stood at 2.6% year-over-year in February 2025. Core inflation, excluding food and energy, was 2.5%, with persistent upward pressures in shelter and services. While inflation continues to moderate, the Bank remains cautious, aiming to guide inflation sustainably toward the 2.0% target.

Business and Consumer Confidence

The CFIB’s Business Barometer® Index plunged to a historic low of 25.0 in March 2025, a reflection of small business anxiety amid deepening trade disputes and weakening demand. Confidence deteriorated across most sectors, particularly retail and manufacturing. On the consumer side, the Conference Board of Canada’s Index of Consumer Confidence edged up to 89.1, with households marginally more optimistic about their future finances due to anticipated rate relief. However, concerns over affordability and job security persisted.

Labor Market

According to Statistics Canada’s March Labour Force Survey, the Canadian economy shed 0.2% of its workforce, marking a net job loss. The national unemployment rate rose to 6.7%, reflecting softening labor conditions. Wage growth eased to 3.6% year-over-year. Youth unemployment remained elevated, although gains in part-time and seasonal employment provided some relief. Public administration and healthcare sectors were among the few to post net employment gains.

Housing Market

Housing starts increased by 2.6% in March to an annualized pace of 215,500 units, led by gains in Ontario and British Columbia. However, existing home sales declined 3.2% month-over-month, and the average national home price dipped by 0.8%. According to CMHC’s Q1 2025 Rental Market Report, rental prices remained elevated, rising 9.5% year-over-year. Major urban centers continued to report tight vacancy rates, putting pressure on affordability.

Manufacturing and Services Sectors

The Ivey Purchasing Managers Index (PMI) rose slightly to 50.6 in March, suggesting marginal expansion in business activity. The manufacturing sub-index remained in contractionary territory at 47.8, as exporters faced weaker global demand and persistent input cost pressures. In contrast, the services sector continued to grow, with healthcare, logistics, and professional services reporting stable demand.

Trade and Retail Sales

Canada posted a merchandise trade surplus of CAD 1.5 billion in February, driven by recovering energy exports. However, total exports fell 1.3% month-over-month as non-energy categories weakened. According to Statistics Canada’s March Retail Trade Report, retail sales rose by 0.6%, supported by gains in personal care and e-commerce, which grew by 7.1% year-over-year. Automotive sales remained soft, continuing their post-holiday decline.

Mining and Oil and Gas Sectors

Crude oil prices climbed to CAD 80.20 per barrel in March, reflecting a moderate recovery from prior-month declines. However, they remain 4.1% below year-ago levels. Natural gas prices also declined year-over-year, down 2.8%, largely due to mild weather and ample inventories. In the mining sector, potash production increased by 4.0%, nickel production was unchanged, and coal mining fell by 3.2%. Exports of precious metals, including gold and silver, remained steady amid continued investor interest in safe-haven assets.

Forestry Sector

Softwood lumber exports to the U.S. grew 2.2% year-over-year in March, driven by repair and renovation demand. However, domestic demand for wood products dropped by 2.4% amid cooling residential construction. Industry players reported continued challenges from elevated transportation costs (+5.6% year-over-year) and labor shortages, which strained operating margins.

Equity Markets

The S&P/TSX Composite Index ended Q1 2025 up 1.8%, led by gains in technology and financials. Despite this quarterly performance, the index remained down 2.5% on a year-to-date basis. Investor sentiment improved modestly in March, with the Canadian Volatility Index (VIXC) averaging 18.9, down from recent highs seen in late 2024.

Key Challenges and Opportunities

Canada’s economy faces multiple challenges, including rising unemployment, declining business confidence, persistent housing affordability issues, and global trade friction—particularly with the U.S. Nonetheless, opportunities exist in emerging clean technology industries, infrastructure development, and workforce retraining initiatives announced in the federal government’s 2025 Budget.

Outlook for 2025

Canada’s real GDP growth is projected at 1.2% in 2025. Inflation is forecast to decline further, reaching 2.3% by Q4 2025. Monetary policy is expected to remain accommodative in the near term. Policymakers are navigating a delicate balance between restoring confidence, managing inflation expectations, and addressing underlying structural weaknesses such as labor productivity and housing shortages.

Sources:

1. Conference Board of Canada, Monthly Economic Indicators Report, March 2025

2. Bank of Canada, Monetary Policy Report, March 2025

3. Canadian Federation of Independent Business (CFIB), Business Barometer®, March 2025

4. Statistics Canada, Labour Force Survey, March 2025

5. Canada Mortgage and Housing Corporation (CMHC), Rental Market Report, 2025 Q1

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