Intelligent Investment

Tariff Trepidation

Canada Monthly Market Commentary

January 30, 2025 2 Minute Read

The threat of significant 25% U.S. tariffs on all Canadian imports has weighed heavily on Canada’s outlook these last couple of months. How these threats will actually materialize on the currently proposed start date of February 1st remains highly uncertain, however, the Bank of Canada has not taken these threats lightly. In the central bank’s most recent policy decision meeting, the interest rate was cut for the sixth consecutive time with a 25 bps decrease to 3.00%. Throughout the Bank of Canada’s accompanying statements and economic projections, it was repeatedly stressed how U.S. trade policy has become a major source of uncertainty for Canada’s outlook. Even though the central bank’s latest forecasts do not factor in the impacts of tariffs, it has acknowledged that just the threat of tariffs have already been weighing on business confidence and investment decisions. In the scenario of a prolonged trade conflict with the U.S. alongside retaliatory measures, the central bank said Canada would see “a substantial negative impact on economic activity.”

Given the difficulty in predicting the full scope and duration of a trade conflict, the Bank of Canada’s base current case forecast expects economic growth to accelerate slightly in 2025 in the absence of tariffs. Annual GDP growth is projected to strengthen to 1.8% in 2025 and 2026 from 1.3% in 2024. However, these growth forecasts were also revised down 30 bps and 50 bps, respectively, from the previous projections in October, largely due to lower population growth from the new federal immigration policies.

In terms its interest rate outlook, the Bank of Canada maintained a cautious stance and cited the already “substantial” cumulative rate cuts to date that are starting to boost the economy. Speculation has risen that the central bank may pause interest rate cuts at their next scheduled meeting on March 12th. The Bank of Canada will be closely monitoring further developments and awaiting clarity on U.S. trade policy. Meanwhile, the Canada 10-year bond yield has continued to be volatile rising as much as 32 bps in January before reversing course, influenced by swinging sentiment in the U.S. and a rout in tech stocks.

As a result of the bond market volatility, real estate cap rate spreads shrunk to 345 bps at the end of 2024 according to the CBRE Canadian Cap Rates & Investment Insights report. Aggregate average cap rates held relatively steady throughout 2024, rising marginally in comparison to the much larger increases seen in the prior two years. While overall real estate investment sentiment had continued to improve in late 2024, the considerable headwinds that have emerged are elevating uncertainty and suggest a rockier path forward for the investment market recovery.

Economic Highlights:

  • Employment rose by 90,900 jobs in December 2024 and the unemployment rate ticked down slightly to 6.7%.
  • Headline inflation lowered to 1.8% in December 2024, impacted by the temporary sales tax break.
  • Retail sales growth was flat in November 2024 with advanced estimates suggesting a 1.6% increase in December 2024.

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