RBC Forecasts Brighter Economic Prospects for Canada in 2025

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Canada's economy is poised for brighter days ahead, according to a new report by RBC, one of Canada's largest banks.

While 2024 brought challenges, the bank’s economists predict a more robust economic landscape in 2025, driven by easing inflation, lower interest rates, and improved regional performance.

However, long-term structural hurdles persist, requiring careful navigation.

RBC highlights several factors contributing to a more optimistic outlook for 2025:

Easing Inflation and Rate Cuts: "Canada’s economic growth challenges are expected to ease as the Bank of Canada continues to lower interest rates further and more quickly than other advanced economy central banks—but not right away, and longer-run challenges remain," RBC noted. The decline in inflation has allowed the BoC to reduce rates faster than the U.S. Federal Reserve. Lower rates are expected to rejuvenate interest-sensitive sectors like housing and bolster consumer spending.

End of the Per-Capita GDP Slump: "Strong population growth in Canada (up 10% since 2019) has prevented outright declines in Canadian GDP, but on a per-capita basis, output has been falling like it historically would in a recession," RBC stated. The bank predicts this slump will likely reverse by mid-2025 as lower interest rates stimulate economic activity.

Prairie Economies Remain Resilient: Alberta, Saskatchewan, and Manitoba are expected to maintain strong growth, supported by robust energy markets, potash prices, and ongoing infrastructure investments.

Improved Export Competitiveness: A weaker Canadian dollar is enhancing the competitiveness of Canadian exports, attracting foreign direct investment and driving export growth.

B.C.’s Recovery: British Columbia is set to rebound in 2025, with a recovering housing market and favorable prospects for natural gas exports leading the way.

Persistent Challenges

Despite the brighter outlook, RBC cautions that several challenges could dampen long-term growth:

U.S. Trade Protectionism: "Renewed tariff threats from the next U.S. administration are adding downside growth risks in 2025," RBC explained. "They essentially make the North American manufacturing ecosystem uncompetitive with offshore supply chains." While RBC expects negotiated solutions, the threat remains a downside risk.

Population Growth Slowdown: "That support from population growth is about to make a sharp U-turn...turning demographics from a tailwind to a headwind," RBC warned. While strong immigration has supported economic growth, planned reductions in immigration could create significant challenges.

Ageing Population and Productivity Concerns: Structural issues, including an ageing workforce and weak productivity growth, pose long-term challenges, exacerbating government funding gaps and limiting economic potential.

Weak Business Investment: Business investment remains a concern, with trade uncertainty and structural barriers discouraging significant capital expenditure.

Slower Recovery in Central Canada: Ontario and Quebec are expected to lag in economic growth in 2025 due to reduced business investment, slower immigration, and dependence on U.S. demand.

RBC’s report underscores the divergent economic outlook across provinces. While the Prairie provinces are projected to thrive, Atlantic Canada faces challenges related to slowing population growth, muted household spending, and reliance on U.S. markets.

"Canada’s growth prospects are improving, but significant risks remain," reads the report.

Key Forecast Numbers from the RBC Report

The RBC report provides several key economic forecasts for Canada in 2025, particularly focusing on GDP growth:

National GDP Growth: The report projects Canada's overall real GDP to grow by 1.2% in 2025.

While this represents an improvement from previous years, it acknowledges the continued influence of structural challenges and external risks.

Per-Capita GDP Growth: The report expects the slump in per-capita GDP growth to end by mid-2025.

While a specific growth figure isn't given, this turnaround signifies an important shift from the consecutive declines experienced in previous quarters.

British Columbia GDP Growth: B.C.'s real GDP is projected to grow by 1.5% in 2025, exceeding the national average.

This rebound is attributed to factors like interest rate cuts, a reviving housing market, and positive prospects for natural gas exports, notably LNG.

Alberta GDP Growth: Alberta's economic growth is forecasted to remain robust at 2.8%, ranking it as Canada's top-performing province in 2025.

This continued strength is linked to the energy sector, particularly the expanded Trans Mountain pipeline reaching near-full capacity.

Saskatchewan GDP Growth: Saskatchewan's real GDP is predicted to reach 1.9% in 2025, exceeding the previously estimated 1.5% growth.

This upward revision is driven by expectations of modestly rising fertilizer prices and ongoing major construction projects.

Manitoba GDP Growth: Manitoba's economy is expected to expand by 1.4% in 2025, slightly up from 1.2% in the prior year.

This growth is attributed to public sector construction investment and the positive effects of additional interest rate cuts.

Ontario GDP Growth: The report revises Ontario's 2025 growth forecast downwards by 40 basis points to 1.2%.

While falling interest rates are expected to benefit consumers and the housing market, the province faces challenges from stricter immigration targets and weak business investment.

Quebec GDP Growth: Quebec's GDP growth is predicted to increase marginally from 1.1% in 2024 to 1.2% in 2025.

While interest rate cuts will boost certain sectors, the province will face headwinds from trade uncertainties and reduced immigration.

New Brunswick GDP Growth: Growth in New Brunswick is projected to slow down to 1% in 2025, positioning it at the bottom of the provincial growth ranking.

Factors such as heavy reliance on U.S. demand, slowing population growth, and muted household spending contribute to this subdued outlook.

Nova Scotia GDP Growth: Nova Scotia is expected to maintain relatively stable growth at 1.5% in 2025, exceeding the national average.

This continued momentum is driven by strength in construction and increased household purchasing power, even as population growth moderates.

Prince Edward Island GDP Growth: P.E.I.'s economic growth is forecasted to decelerate to 1.6% in 2025.

Moderating population growth, subdued gains in major trading partners, and a mixed outlook for trade contribute to this slowdown.

Newfoundland and Labrador GDP Growth: While 2024 growth is revised upwards to 2.2%, the report anticipates a moderation to 1.7% growth in 2025 for Newfoundland and Labrador.

The completion of major construction projects, coupled with lower prices for key commodities like oil, are expected to dampen growth.

In addition to GDP growth figures, the report mentions:

Natural Gas Price: The report forecasts a nearly 50% increase in natural gas prices in 2025, positively impacting B.C.'s energy sector.

Population Growth: The report highlights a 10% population growth in Canada since 2019, attributing it to strong immigration.

However, it anticipates a significant slowdown in population growth due to the federal government's plans to reduce immigration.