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How Interest Rate Cuts Will Impact Canada’s Economic Path



ECONOMIC SPOTLIGHT // Q4 2024


In the global economic landscape, Canada’s outlook has improved slightly for 2024, with the U.S. following suit. However, other major economies like China and Germany are facing more significant downturns. The Bank of Canada has taken a proactive approach by leading with interest rate cuts, while inflation control remains a priority across global central banks. Canada’s economic growth has been slow but steady, with the easing of inflationary pressures providing relief. The 200-basis point interest rate reduction expected by the Bank of Canada will likely support further economic activity in the coming quarters.


Canada's labor market has cooled, reflecting broader global trends. The unemployment rate rose to 6.6%, with young workers being disproportionately affected. Meanwhile, Canada’s population growth, driven by immigration, continues to surpass consumer spending growth, creating challenges for economic balance. While consumer spending is forecasted to improve slightly, businesses are seeing mixed results. Residential investment is expected to recover in the latter half of 2024, following a prolonged slump, and renewable energy investments may contribute to a brighter outlook in 2025.


Looking forward, the forecast suggests Canada’s economic performance will hinge on several key factors, including interest rate reductions and controlled population growth. While a restrictive monetary policy remains in place, further rate cuts will ease borrowing costs and stimulate demand, especially in housing. The unemployment rate is expected to stabilize as population growth slows, and inflation is projected to reach the 2% target by the end of the year. However, risks remain, particularly in managing labor force expansion and housing supply, as Canada continues to navigate through global uncertainties and domestic challenges.


Future Outlook


The Canadian economy is positioned for moderate growth heading into 2025, supported by further interest rate cuts and a more stable labor market. Housing demand is expected to increase, and business investments, particularly in infrastructure and renewable energy, will drive activity. However, policymakers will need to carefully balance immigration trends and economic slack to prevent overheating in the market. The potential for fiscal policy changes, particularly around taxation, could further influence the long-term growth trajectory. Overall, Canada’s economy is set to gradually gain momentum, but it will require careful navigation of key variables in the year ahead.


Stay tuned for updates as we monitor these developments closely.


Source – TD Economics*

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