Canada Report - March 2025
By: Ryan Slattery Quinnipiac University Global Economics Research Team
Executive Summary and Economic Snapshot
Data from Trading Economics.
The Canadian economy, as of December 2024, is growing at around 2.4%, with inflation now down from its 8.1% peak to 1.9% today, just under the Bank of Canada’s 2% target but well within its plus or minus 1% band (see Inflation). This has allowed them to lower their policy rate to 2.8% currently.
Unemployment remains steady at around 6.6%, a little higher than their historic average, which is closer to 6%, but still higher than many peer economies (see Unemployment). Finally, government debt to GDP is down to 108% from its high of 118% during the 2020 Covid crisis. Canada’s pre-Covid trend was around 90% of GDP. Stable debt- and deficit-to-GDP ratios have left bond rates relatively stable even as the Bank of Canada has cut rates (see Government).
GDP Growth
Note: We have attempted to make it clearer through the use of dotted lines, but for extra clarity, we would like to point out that the lines for Switzerland and the United Kingdom very closely (almost exactly) overlap.
Canada has experienced very slight quarterly GDP growth over the last year, in line with the other groups we examined. In 2020, when GDP growth spiked, Canada was in the middle of the pack. However, the growth rates have converged over the last few years.
Unemployment
Canada’s unemployment rate remains elevated and trends upward compared to its peers. Unemployment rose from January to August; a slight decrease in September was followed by worsening unemployment in November, peaking at 6.9%, a full percentage point greater than unemployment in the European Union. Unemployment fell to 6.7% in December and, based on the latest data, is now down to 6.6%.
Inflation
The Bank of Canada targets 2% (YoY) inflation with a plus or minus 1% band. Inflation peaked in 2022 at just over 8% but has been on a general decline since then, reentering the Bank’s range episodically in 2023 and sustainably so in 2024. Through much of 2024, it hovered near the 3% upper bound, but beginning in August, it fell below the 2% target. Inflation currently stands at 1.83% for the month of December.
At a more granular level, after facing sustained inflationary pressures throughout the first half of the year, Canada began to rein in inflation in August and September. Despite an uptick in inflation in October, with prices rising 0.43% compared to the previous month, Canada managed to hold prices steady into November and saw prices decrease by 0.37% in December.
Inflation volatility appears higher in Canada during this period relative to the European Union and Switzerland, as well as perhaps the United Kingdom. Interestingly, the post-July period appeared to be more volatile for all countries.
Government
The 10-year bond rate has remained significantly lower than the Bank of Canada’s target for the overnight rate over the last year. The Bank of Canada has lowered the policy rate five times since May, indicating they feel they are getting inflation under control and are loosening monetary policy.
With inflation well within its target range, rates should normalize and remain around the longer-term market rates. If the 10-year bond rate is any indication, then at 2% target inflation, this suggests markets believe real rates are around 1%–1.5%.
After reaching a low of 2.94% in September, Canada’s 10-year government bond rate rose in the final quarter of 2024. With stable debt- and deficit-to-GDP ratios, it does not appear that markets are overly concerned about Canada’s governmental finances. It has historically maintained debt around 90% of GDP, so 108% or so today should not be alarming. Finally, Canadian bond rates are comparable to European ones but remain between the UK’s (upper end) and Switzerland’s (lower end).
Sources
Further Notes:
MoM and YoY Inflation: Calculated from each region’s CPI
Policy Rate: Accessed from https://www.bankofcanada.ca/core-functions/monetary-policy/key-interest-rate/
Canadian Inflation Target: https://www.bankofcanada.ca/core-functions/monetary-policy/inflation/#:~:text=and%20financial%20welfare.-,Measures%20of%20inflation,1%20to%203%20per%20cent.
GDP Growth Rate: Calculated from each region’s GDP
The code used to produce these plots is available upon request.
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