Canada's Economic Outlook: A Slow Growth Trajectory Amid Rising Unemployment

The Canadian economy is set to face a period of subdued expansion in 2025, according to BMO Capital Markets, which forecasts GDP growth of just 0.7% this year. This muted outlook, paired with an expected rise in unemployment to 5.4%—up from 5.2% in 2024—paints a picture of an economy navigating the lingering effects of high interest rates and cautious consumer behavior. For investors, the path forward requires a nuanced approach to sectors poised to weather this slowdown.

GDP Growth: A Delicate Balancing Act

BMO’s GDP projection of 0.7% for 2025 reflects a deliberate slowdown, driven largely by the Bank of Canada’s (BoC) decision to keep its policy rate at 5.0%—the highest in nearly 30 years. This restrictive monetary policy, aimed at curbing inflation, has dampened consumer spending and housing activity, two pillars of Canada’s economic health. The housing market, in particular, remains under pressure: . These metrics have declined sharply since 2022, underscoring the drag on GDP.

Unemployment: A Gradual Increase, but Still Resilient

While unemployment is projected to rise to 5.4% in 2025, this rate remains historically low, reflecting the economy’s underlying resilience. Sectors such as healthcare, technology, and resource extraction are expected to maintain hiring, offsetting job losses in interest-rate-sensitive industries like construction and retail. However, reveals a trend of slower job creation as the economy adjusts to higher borrowing costs.

Interest Rates: The Elephant in the Room

The BoC’s reluctance to cut rates—even as growth slows—highlights its commitment to inflation control. With the policy rate anchored at 5.0%, borrowing costs for businesses and consumers remain elevated, limiting spending and investment. This environment favors sectors with pricing power or defensive characteristics, such as utilities and telecommunications, over cyclical industries like automotive or real estate.

Investment Implications

For investors, the 0.7% GDP forecast demands a focus on stability over growth. Consider the following strategies:
1. Dividend Stocks: Canadian companies with steady cash flows, such as , offer shelter from volatility.
2. Resource Sectors: Canada’s energy and mining industries, which account for nearly 10% of GDP, may benefit from global demand for commodities, though they face headwinds from geopolitical risks.
3. Defensive Sectors: Utilities and telecom stocks, such as BCE (BCE.TO), typically outperform in low-growth environments.

Conclusion

BMO’s 0.7% GDP growth projection underscores a Canadian economy in transition—a shift from pre-pandemic expansion to a new reality shaped by high rates and global uncertainty. While unemployment will edge higher, it remains manageable by historical standards, suggesting the labor market’s strength could buffer against a sharper downturn. Investors must prioritize sectors with stable income streams and avoid overexposure to cyclical industries.

The data is clear: in 2025, Canada’s economy will grow, but only modestly. Success for investors hinges on recognizing this moderation and aligning portfolios with the new economic landscape—one where patience and diversification are the ultimate rewards.