Canada’s economy was on a path of solid growth in late 2024 and early 2025, according to a new report from RBC Economics.
“The positive effect of lower interest rates had been showing up earlier than we expected a quarter ago,” reads the report. “Canadian gross domestic product growth in Q4 2024 was significantly stronger than we assumed, led by a surge in household spending and a jump in business investment."
"Labour markets showed clear signs of improvement with the unemployment rate dropping to 6.6% over January and February from a recent peak of 6.9% in November.”
And then, the US tariffs went from suggestions to reality, putting the brakes on the Canadian economy for the foreseeable future, says the RBC report.
“Our base case outlook continues to assume that severely disruptive blanket tariff increases imposed briefly this month will be avoided, because tariffs would also be damaging for the US economy. But actual and threatened tariff increases are compounding and weighing on consumer and business confidence.”
“The 25% blanket tariffs were changed by the US, which took the tax off products compliant with the Canada-US-Mexico Agreement (CUSMA),” says the report, adding the CUSMA deal will help.
“By our count, over 90% of Canadian exports to the US last year should be eligible for no tariffs under CUSMA rules. It has been widely reported that only 38% of Canadian exports last year actually used CUSMA, but that is likely because other general non-CUSMA tariff rates were already zero.”
“By our count, about 6% of Canadian exports to the US are not protected under CUSMA including a large chunk of the aerospace sector,” says the report. “Tariff measures targetting specific industries like steel and aluminum are more likely to stick for longer.”
Scheduled to be added on April 2 are reciprocal tariffs.
“Details on what those might look like are still vague, but reports suggest they could include targetting trade barriers (not real but perceived) posed by consumption taxes like Canada’s GST/HST as well as other non-tariff barriers,” says the report, adding “Canada’s (partial) retaliatory measures are designed to encourage substitution away from US produced goods, but will still add to Canadian costs.”
RBC says the Canadian economy will likely remain stalled, due to significant tariff risks and a slower rate of population growth.
“Our base case assumption continues to forecast slow Canadian output growth in 2025,” says the report. “Consumer spending is expected to expand at less than half of the pace seen in the prior year as population growth slows and households facing uncertainty from the trade wars save more as a precaution.”
Some economic growth is expected in the third quarter of this year.
“We expect growth in 2025 will still look better in per-capita terms than it did in 2024 or 2023,” says RBC. “Improvements are expected in the second half of the year as interest rates continue to move lower."
“But we expect escalating tariff risks will significantly derail planned increases in business investment, particularly in the highly trade-sensitive manufacturing sector. We anticipate both imports and exports will be negatively impacted by threats of a trade war.”
The effect of threats and tariffs will vary across the country, says RBC.
“Provinces with a diverse mix of trading partners and sectors are likely to fare better as falling interest rates unlock pent-up demand and exports are redirected to new markets,” says the report. “Still, spillover effects from weaker performing provinces are likely to weigh on growth.”
RBC’s provincial overview: (rate of GDP growth in parentheses.)
BC is one of the few provinces poised for a recovery this year. High household debt makes it especially sensitive to interest rate movements, making space for growth to accelerate 1.5% in 2025. BC is also among the least exposed to US demand, giving it a layer of insulation from the ongoing trade conflict.
Alberta (2.4%) and Saskatchewan (1.9%) are expected to remain among the top provincial performers this year, driven by resilient resource sectors despite potential headwinds from US tariffs. Manitoba (1.4%), however, is likely to see growth below the national average as its close economic ties to trade-sensitive provinces weighs on momentum.
We expect growth in Ontario (1.2%) and Quebec (1.1%) to be most impacted by new trade disruptions, given their manufacturing bases have been at the centre of the dispute.
In the Maritimes, we see most economies shifting gears lower as population growth slows and spillover effects from decelerating growth in neighbouring Ontario and Quebec hamper demand. Growth is still expected to remain above the national average for most of the region, except for New Brunswick (1%) which is expected to be hard hit with its heavy reliance on US demand.
