The recent economic data paints a very different picture as Canada heads into 2025. On the positive side, growth in Europe has surprised to the upside, while growth in China is still foundering. While overall inflation rates in Canada are definitely on the decline, core inflation is still a bit stubborn. The labour market continues to tighten, with strong monthly job gains continuing to pull down unemployment. In light of this, the Bank of Canada (BoC) has decided to leave its policy rate on hold. This decision is a sign of cautious optimism buoyed by global economic concerns.
Europe and China: Diverging Economic Paths
Europe’s huge economic underperformance has caught economists off guard with better than expected growth. This surprising increase is a reason for optimism. It powers the global economy, which is reeling from crisis after crisis in the last few years. In comparison, China is underwhelming, struggling with chronic structural problems that have weighed on its long-term growth potential. The difference between these two areas highlights the challenges that set the current global economy apart.
As Canada begins to think about its own 2025, the country finds itself caught up in these ongoing international developments. The Bank of Canada is watching these trends with great interest. It knows that what happens in foreign markets can have an immediate and brutal effect on U.S. economic fortunes. Policymakers must continue to be on guard to ensure that Canada is best placed to weather any fallout from these wide-ranging global changes.
Inflation and Employment Trends
In October, Canada’s approach to curbing inflation paid off, as inflation dropped to 2.2%, a welcome sight for consumers and businesses across the country. Underlying pressures largely not in the Fed’s purview have kept core inflation steadily above 2.5% and these deep-seated forces still shape our cost of living. The Bank of Canada anticipates some near-term volatility in inflation readings but expects these pressures to gradually ease toward the target of 2%.
As the national labour market continues to experience extraordinary strength, recent back-to-back monthly job gains have kept the national unemployment rate at a pre-pandemic 6.5%. This month’s decline indicates a tightening labor market and is a welcome sign of employers’ growing confidence. As businesses grow and bring new employees on board, the picture naturally becomes more positive, adding to the improved outlook for the Canadian economy.
The Canadian Gross Domestic Product (GDP) growth skyrocketed to 2.6% for the third quarter. This rapid recovery demonstrates the spirit and resilience of the country’s people in the face of external hardships. This growth highlights the effectiveness of previous monetary policies and suggests that the Canadian economy entered 2025 on firmer footing than previously believed.
Bank of Canada Holds Steady on Interest Rates
Meanwhile, the Bank of Canada, 2.25% has been on hold since its September 2022 hike. This decision comes at a time of mixed economic signals. This decision continues our overall strategy to establish certainty. We’re in the active process of figuring out these complicated domestic and international markets. By holding the line on its key interest rate, the BoC is signifying its desire to foster economic development without incurring further inflationary pressures.
The Canadian Dollar (CAD) was little moved following the announcement, indicating continued calm in light of still tumultuous waters ahead. The BoC meets regularly, with eight scheduled meetings per fiscal year. It can even summon emergency meetings on short notice, offering the flexibility to respond to dramatically shifting economic circumstances.
Policymakers at the Bank of Canada have indicated some guarded optimism about the outlook. Notably, they do concede that despite still serious challenges ahead, a few have pointed to signs that the underlying price pressures are starting to cool. Taken together, the momentum from better employment numbers and inflation holding steady offers a basis for continued, solid growth.