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Dive into EY-Parthenon's economic insights to understand macroeconomic trends and impacts through in-depth data analysis for informed strategic decisions.
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Read moreAs we progress into the second quarter of 2025, the Canadian economy finds itself at a crossroads, influenced by the complex interplay of economic, political, and trade dynamics. The recent federal election introduced a new political landscape, potentially reducing uncertainty stemming from domestic policy expectations. However, the implications of these changes, coupled with ongoing trade tensions with the United States, continue to pose challenges to the economy.
The recent elections may stabilize the domestic political environment, fostering predictability that can encourage business investment. A government focused on addressing domestic economic challenges could enhance confidence among consumers and businesses. However, the effectiveness of the new administration in managing trade relations with the US will be critical in determining the extent of this positive impact.
The ambiguity and uncertainty associated with US trade policy, including baseline tariffs on nearly all countries, are expected to have far-reaching global economic effects. The interconnectedness of global trade means these trade tensions will impact Canada and reverberate through international markets. Additionally, ongoing tariffs on aluminum, steel, and automobiles are likely to exert further pressure on Canadian industries, complicating the road to economic recovery.
Canadian counter-tariffs on various goods, including aluminum, steel and automobiles, such as the 25% tariffs on non-CUSMA-compliant automobiles imported from the US are likely to create inflationary pressures in Canada, leading to increased costs for consumers and businesses, which may dampen consumer spending and business investment.
As a result of continued trade tensions, the Canadian economy may enter a technical recession through mid-2025, finishing the year with a modest growth rate of 0.5%. However, a recovery is anticipated in 2026, with growth projected to reach 1.6%.
In response to slower economic growth over the past year, the Bank of Canada has engaged in policy easing, lowering the policy rate from a high of 5.0% to the current rate of 2.75%. In April, the Bank refrained from further rate cuts as inflation expectations had increased, mainly driven by the expected effects of the US tariffs. Moving forward, the Bank of Canada is likely to maintain a cautious approach, monitoring economic conditions closely before making any additional adjustments to the policy rate due to tariff-induced inflationary pressures.
Geopolitical tensions have introduced economic uncertainty for Canada, impacting the momentum of employment growth. Some investments in the automotive sector have been postponed in the face of sector-specific tariffs, including a new electric vehicle project in Ontario, while several other factories are operating at reduced capacity. This situation could lead to increased unemployment in affected regions, further complicating the economic landscape.
The impact of geopolitical tensions is expected to persist throughout most of 2025. As a result, the unemployment rate is projected to peak at 7.0% in Q3 2025. Further, real wages and household spending are projected to experience stagnant growth through mid-2025.
As job market challenges persist, with rising unemployment rates and stagnant wage growth, consumers are likely to feel increasingly insecure about their ability to maintain their standard of living. Job insecurity can lead to a cautious approach to spending, as households prioritize saving over discretionary purchases. In Q1 2025, consumer confidence experienced a significant decline of 27.4%, marking the largest drop in the past two years.
The decline in consumer confidence driven by job market challenges and inflationary pressures poses significant issues to the broader economy. As consumers become more cautious and conservative in their spending, businesses may face increased pressure to adapt to changing market dynamics.
Trade-related ambiguity remains top of mind for businesses, particularly in an era marked by heightened geopolitical tensions and shifting policies. This uncertainty has not only created a complex landscape for international trade but has also led to significant disruptions in supply chains and market dynamics. As businesses grapple with fluctuating tariffs and the potential for retaliatory measures, many are finding it increasingly challenging to plan for the upcoming years. This unpredictability can lead to hesitation in making strategic investments, as businesses weigh the risks associated with potential tariff hikes
The findings from our recent CEO Outlook Survey highlight the gravity of the situation: 88% of surveyed Canadian CEOs expressed that they have made changes to strategic investment plans driven by geopolitics and trade policy developments. This shift indicates a proactive approach to mitigating risks, as leaders seek to adapt to the evolving landscape.
The ripple effects of tariff-related ambiguity extend beyond immediate financial implications. They can influence hiring decisions, innovation strategies, and overall corporate growth trajectories. As businesses strive to remain agile in the face of uncertainty, the long-term impacts of these challenges could reshape Canadian industries and redefine competitive landscapes. Ultimately, the ability to navigate this ambiguity will be crucial for businesses aiming to thrive in an increasingly interconnected and unpredictable global economy.
The ripple effects of tariff-related ambiguity extend beyond immediate financial implications. They can influence hiring decisions, innovation strategies, and overall corporate growth trajectories. As businesses strive to remain agile in the face of uncertainty, the long-term impacts of these challenges could reshape Canadian industries and redefine competitive landscapes. Ultimately, the ability to navigate this ambiguity will be crucial for businesses aiming to thrive in an increasingly interconnected and unpredictable global economy.
