Canadian Consumer Spending Trends: Navigating Near-Term Investment Opportunities in Retail and Consumer Discretionary Sectors

The Canadian consumer landscape in 2025 is a study in contrasts. On one hand, rising inflation, trade tensions, and housing costs have pushed nearly one-third of Canadians to tighten budgets, with 46% citing the cost of living as a barrier to financial New Year's resolutions, according to a Yahoo Finance primer. On the other, 72% of consumers remain optimistic about their financial futures, and 37% report feeling more secure than a year ago, according to a roundup of top AI ETFs. This duality creates a unique investment environment, where caution and opportunity coexist. For investors, the key lies in aligning strategies with BMO's insights on sustained consumer momentum and macroeconomic shifts.

Macroeconomic Tailwinds and Headwinds

BMO Economics anticipates a modest rebound in consumer spending, driven by the Bank of Canada's projected 75-basis-point rate cuts in early 2025. These cuts will reduce debt servicing costs, particularly in housing and motor vehicles, sectors that account for a significant share of discretionary spending. Additionally, Canada's personal savings rate remains elevated at over 7%, bolstered by pandemic-era savings and rising household net worth from equity gains, while BMO's newsroom has highlighted new sector ETF product launches that reflect investor demand. However, these positives are tempered by trade uncertainties. The BMO report's survey highlights a 40% decline in consumer confidence relative to historical norms, with fears of U.S. tariffs and retaliatory measures disrupting cross-border commerce.

BMO's trade scenarios paint a stark picture: a "continental divide" scenario could trigger a 1–2% GDP contraction in 2025, while a "muddling through" scenario limits growth to 1.3%-well below pre-tariff expectations of 2%, as noted in the Canada Retail National Report. Yet, even in the face of these risks, the domestic retail sector shows resilience. Retail vacancy rates hit a record low of 1.5% in 2024, and demand remains strong for essential and discretionary goods, particularly in grocery, quick-service restaurants (QSRs), and healthcare, according to the Marcus & Millichap report.

Investment Opportunities in Domestic Retail and Consumer Discretionary Sectors

For investors, the path forward lies in leveraging BMO's insights to target sectors and assets poised to benefit from both macroeconomic tailwinds and consumer behavior shifts.

1. ETFs Targeting U.S. Consumer Discretionary Exposure

BMO's newly launched SPDR Select Sector Index ETFs provide Canadian investors with access to the U.S. S&P 500's Consumer Discretionary sector, which includes high-growth companies in travel, hospitality, and e-commerce. This ETF replicates the Communication Discretionary Select Sector Index, offering exposure to firms like Amazon and Netflix, which are likely to benefit from post-inflation recovery in discretionary spending. Similarly, ETFs such as the iShares S&P Global Consumer Discretionary Index ETF (CAD‑Hedged) and BMO's global consumer discretionary hedged offerings provide diversified global exposure while mitigating currency risks.

2. AI-Driven Retail and Thematic ETFs

The rise of AI in retail personalization and supply chain optimization has spurred demand for thematic ETFs. The CI Global Artificial Intelligence Fund ETF (CIAI), Canada's largest AI-focused fund with $1 billion in assets, allocates a large share to U.S. tech stocks like Nvidia, which underpin AI infrastructure. For a more diversified approach, the Invesco Morningstar Global Next Gen AI Index ETF (INAI) includes numerous holdings and a meaningful allocation to consumer discretionary stocks, capturing both AI innovation and retail growth.

3. Canadian Retail Stocks with Resilient Business Models

Domestically, companies like Canadian Tire and Dollarama are well-positioned to capitalize on shifting consumer priorities. Canadian Tire's diversified model-combining retail, financial services, and sports-offers stability amid economic uncertainty, while Dollarama's low-price strategy aligns with cost-conscious shoppers, as noted in the Yahoo Finance primer. Additionally, Aritzia, a premium apparel retailer, benefits from its loyal customer base and efficient inventory management, making it a potential outperformer in a selective market, a view echoed in the Marcus & Millichap report.

4. Essential Consumer Goods and Staples ETFs

For investors seeking lower volatility, the Global X Equal Weight Canadian Groceries & Staples Index ETF (MART) provides exposure to essential goods providers like Loblaw and Metro. This ETF's equal-weight structure reduces concentration risk while tapping into the stable demand for staples, even during economic downturns-an advantage highlighted in coverage of Canadian retail stocks.

Balancing Risk and Reward

While the consumer discretionary sector is cyclical and sensitive to macroeconomic shifts, the current environment offers a unique inflection point. BMO's projection of 1.3% GDP growth in 2025, coupled with rate cuts and a stabilizing labor market, suggests a gradual return to confidence. However, trade tensions remain a wildcard. Investors should prioritize assets with strong cash flows, pricing power, and regional diversification to mitigate risks.

Conclusion

The Canadian consumer sector in 2025 is a mosaic of caution and optimism. By aligning with BMO's macroeconomic forecasts and leveraging targeted ETFs and stocks, investors can navigate uncertainties while capitalizing on growth in retail and consumer discretionary sectors. As the Bank of Canada's rate cuts and domestic savings provide a buffer, the key is to balance exposure to high-growth AI-driven themes with the resilience of essential consumer goods. In this evolving landscape, strategic diversification and a focus on long-term trends will be paramount.