Rising Wages in Canada: Implications for Consumer Spending and Equity Valuations

The Canadian economy in 2025 is navigating a delicate balancing act. On one side, wage growth has outpaced inflation, offering a rare reprieve for households and sustaining consumer spending. On the other, trade tensions with the United States and geopolitical uncertainties threaten to undermine this resilience, creating volatility in equity markets and investor sentiment. For investors, the challenge lies in assessing whether the current economic trajectory—a mix of wage-driven consumption and stretched equity valuations—can withstand the headwinds of a slowing global economy.

Wage Growth and Consumer Spending: A Fragile Equilibrium

According to a report by the Bank of Canada, real wage growth in Canada has outpaced inflation in 2025, with average hourly wages rising 3.3% year-over-year in Q2 2025, compared to an inflation rate of 1.9% [1]. This divergence has preserved purchasing power, allowing households to maintain spending on essentials and discretionary items. The RBC Consumer Spending Tracker notes that cardholder spending in Q2 2025 remained positive, with gains in dining and entertainment, despite broader economic caution [2].

However, this optimism is tempered by structural challenges. The OECD Employment Outlook 2025 highlights that real wages remain 1.4% below pre-pandemic levels, and trade tensions have dampened consumer confidence [3]. A survey by the Bank of Canada in Q2 2025 found that 60% of consumers expect to reduce spending on non-essentials due to fears of job losses linked to U.S. tariffs [4]. This duality—strong wage growth coexisting with cautious consumer behavior—reflects a market where households are prioritizing security over expansion.

Equity Valuations: Resilience Amid Uncertainty

Canadian equity markets have shown resilience in 2025, with the TSX’s forward price-to-earnings ratio climbing to 15.8x, above its 10-year average of 15x [5]. This premium valuation is partly driven by expectations of sustained wage growth and a return to price stability. However, analysts caution that the market’s optimism is fragile. As stated by RBC Wealth Management, the TSX’s elevated valuations leave limited room for error, with any economic softening likely to trigger sharper corrections [6].

Consumer-sensitive sectors, such as retail and hospitality, have benefited from wage-driven demand. Yet, these industries remain vulnerable to trade policy shifts. A report by Edward Jones notes that U.S. tariffs could disrupt supply chains, particularly in low-cost labor sectors, forcing employers to raise wages further and potentially reigniting inflationary pressures [7]. This creates a paradox: while wage growth supports consumption, it also risks fueling inflation, which could prompt tighter monetary policy and erode corporate margins.

The Role of Monetary Policy and Geopolitical Risks

The Bank of Canada’s policy trajectory adds another layer of complexity. After delivering 225 basis points of rate cuts since mid-2024, the central bank faces a dilemma: maintaining accommodative rates to support wage growth while guarding against inflationary shocks from trade tensions [8]. The OECD forecasts Canada’s GDP growth to weaken to 1.1% in 2026, with unemployment rising to 7% by mid-2025 [9]. These projections suggest a prolonged period of economic caution, where wage gains may not fully offset the drag from external shocks.

Investors must also contend with divergent inflation trends between Canada and the U.S. While Canada’s inflation is expected to stabilize near 2%, U.S. inflation is projected to hover between 2% and 3% [10]. This differential could widen valuation gaps between cross-border trade-exposed sectors, favoring Canadian companies with stronger domestic demand.

Strategic Implications for Investors

For equity investors, the key lies in balancing exposure to wage-driven sectors with hedging against trade-related volatility. Consumer staples and essential goods industries, which have shown resilience in Q2 2025, may offer safer havens. Conversely, discretionary sectors and export-heavy industries face heightened risks from U.S. tariffs and currency fluctuations.

Fixed-income investors, meanwhile, should monitor the Bank of Canada’s policy response to inflationary shocks. A return to rate hikes, even if delayed, could pressure bond yields and corporate borrowing costs. As highlighted in the Bank of Canada’s Financial Stability Report, the interplay between wage growth and inflation will remain a critical determinant of market stability [11].

Conclusion

Canada’s wage growth in 2025 has provided a buffer against inflation, sustaining consumer spending and supporting equity valuations. Yet, the broader economic landscape—marked by trade tensions, geopolitical uncertainty, and stretched market multiples—demands a cautious approach. Investors must weigh the short-term benefits of wage-driven consumption against the long-term risks of policy-driven inflation and supply chain disruptions. In this environment, diversification and a focus on defensive sectors may prove essential for navigating the uncertainties ahead.

Source:
[1] Actalent Canada Labour Market Brief: A Look at Trends in Q2 2025 [https://www.actalentservices.com/en/insights/market-intelligence/actalents-ca-economy-and-labour-market-brief-q2-2025]
[2] RBC Consumer Spending Tracker [https://www.rbc.com/en/thought-leadership/economics/featured-insights/rbc-consumer-spending-tracker/]
[3] OECD Employment Outlook 2025: Canada [https://www.oecd.org/en/publications/oecd-employment-outlook-2025-country-notes_f91531f7-en/canada_7843efa6-en.html]
[4] Canadian Survey of Consumer Expectations—Second Quarter of 2025 [https://www.bankofcanada.ca/2025/07/canadian-survey-of-consumer-expectations-second-quarter-of-2025/]
[5] Global Insight 2025 Midyear Outlook: Canada [https://ca.rbcwealthmanagement.com/troy.edwards/blog/4577590-Global-Insight-2025-Midyear-Outlook-Canada]
[6] Will the economy's 2025 resilience continue? [https://ca.rbcwealthmanagement.com/anthony.galluzzo/blog/4638818-Will-the-economys-2025-resilience-continue]
[7] 2025 Outlook: Solid fundamentals amid policy uncertainty [https://www.edwardjones.ca/ca-en/market-news-insights/stock-market-news/annual-market-outlook]
[8] Economic and Capital Markets Outlook - Q3 2025 [https://www.lba.ca/us/perspective/economic-and-capital-markets-outlook-q3-2025/]
[9] Canadian Quarterly Economic Forecast [https://economics.td.com/ca-quarterly-economic-forecast]
[10] 2025 Outlook: Solid fundamentals amid policy uncertainty [https://www.edwardjones.ca/ca-en/market-news-insights/stock-market-news/annual-market-outlook]
[11] Financial Stability Report—2025 [https://www.bankofcanada.ca/2025/05/financial-stability-report-2025/]