The year ahead: extreme turbulence with a chance of hurricanes

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The year ahead: extreme turbulence with a chance of hurricanes

March 14, 2025

It was a kind of pick-your-own-adventure approach to economic prognostication.

By John Lorinc

It was a kind of pick-your-own-adventure approach to economic prognostication.

Clouds over the sea

In late January, as is its custom, the Bank of Canada issued a forecast¹ for 2025, which projected modest GDP growth (1.8%) and stronger household spending that is expected to remain "robust" thanks to successive interest rate cuts and an end to the inflation surge of the past two years. Despite some potential price volatility early in the year, the only significant shadow in this business-as-usual outlook had to do with slightly lower overall demand because of the federal government's move to dial back immigration in response to mounting concerns about housing affordability and unwieldy spikes in foreign student enrolment.

Yet the Bank also took the somewhat unusual step of offering up a counter-narrative², this one based on an entirely different scenario starring U.S. tariffs, Canadian reprisals, reprisals to the reprisals, and a host of x-factors. "While many important elements are unknown," noted the Bank's January 2025 monetary policy report, "these measures could be highly disruptive to the Canadian and US economies." The ripple effects, it said, went well beyond inflation, to weaker demand on both sides of the border, reductions in investment in equipment and machinery by Canadian manufacturers, and two years of depressed GDP growth in Canada that is attributable to a new season of global trade conflicts. "The ultimate scale, breadth, timing and duration of any US tariffs remain highly uncertain," the Bank concluded. "It is also unclear how affected countries, including Canada, will react."

That was late January. By early March, businesses around the world were scrambling to adjust to scenario two, which included 25% tariffs against Canada and Mexico, a further 10% tariffs against China (on top of existing 10% tariffs), and reciprocal tariffs against any country levying tariffs on American imports, due for April 2. Taking a first pass at quantifying the impact of all this uncertainty, the Organisation of Economic Cooperation and Development (OECD) downgraded its global GDP forecasts for both 2025 and 2026. Canada, according to its estimates, will see its GDP growth halved, from 1.5% in 2024 to 0.7% for this year and next.

Whether due to the anticipation of Trump-induced turmoil or other more subtle forces rippling through the economy, it also looks as if the coming year will see more insolvencies, consumer proposals and restructurings, despite falling bankruptcy rates late last year.

According to Statistics Canada, the number of insolvencies for December, 2024, fell by fully a fifth compared to the previous month, although the month's figures represented a 1.2% increase compared to December, 2023.³

Yet that trend line doesn't look nearly as healthy for the year ahead, according to an MNP consumer survey published in mid-January.⁴ The firm found that fully half of all Canadians reported being just $200 away from some kind of cash flow crash. Fifty percent said they were pessimistic about being able to pay their debts this year -- a marked shift from the early phase of the pandemic, when many Canadians sharply reduced their credit card debt, largely because there was so little to spend on. While MNP's latest consumer debt index⁵ has plunged to an "all time low," two-thirds of respondents felt that falling interest rates hadn't done much to relieve financial pressure, especially around skyrocketing housing costs.

American consumer confidence is also sliding down the hill. BMO senior economist Jennifer Lee notes that the decline in recent months has been worse than expected,⁶ and a growing number of people say they are expecting inflation, a data point that worries economists as much as inflation hikes themselves because those expectations can set in motion wage increase demands that, absent economic growth, do produce inflation.

Armine Yalnizyan,⁷ an economist and Atkinson Fellow on the Future of Workers, adds that business insolvencies were also trending up, even well ahead of the bracing tariff shocks that landed in March but were quickly deferred. "What you are going to see in the coming weeks and months, irrespective of the tariffs being imposed or punted down the road, is falling investment, falling hires or growing layoffs, and falling purchasing power," she says. "That will mean you will continue to see more businesses closings than openings in hospitality, and rising insolvencies in retail trade and more corporate consolidation."

With tariffs, business closures and bankruptcies will jump. "If the tariffs come in at 25%, and remain at that rate," Yalnizyan observes, "most exporting businesses would shut down. That's about 14.5% of businesses⁸ that sell outside Canada. There would be few and far between that could sustain a hit to their profit margins plus a reduction in sales."

You don't need to be an economist to understand why the global economy now seems to be experiencing anxiety attacks following the up-beat mood that settled over many countries when the post-pandemic inflation spike ebbed. For much of 2024, global stock markets were surging and the high-level economic indicators all looked good. Yes, the Euro-zone economies seemed a bit sluggish,⁹ but not dramatically out of step with past performance. But China's economy¹⁰ was going full out, building on huge advances in EV technology and clean energy manufacturing. Likewise, the American economy, in the waning months of the Biden Administration, was also running hot,¹¹ thanks to massive capital investment in AI infrastructure and robust consumer spending. The Inflation Reduction Act and the CHIPS and Science Act, both showcase Biden achievements, were leveraging tens of billions of dollars in capital investment to the clean technology sector while on-shoring computer-chip manufacturing.

President Donald Trump's arrival to the Oval Office has laid waste to what seemed like an accelerating global recovery, mainly due to his compulsion to up-end global political alignments and international trading arrangements that have been in place for decades.

At the same time, Canadian public and political reaction has been encouraging, while the labour market here remains, in the words of TD senior economist, James Orlando, "a key pillar of strength."¹² The buy-Canadian movement is growing rapidly, and holds out opportunities for Canadian entrepreneurs who can take advantage of nationalist consumer sentiment. There's a renewed consensus about removing inter-provincial trade barriers. And with exports to the U.S. now endangered, a growing number of Canadian firms will look to other foreign markets, especially those in regions that have entered into free trade agreements with Canada, including the European Union, the Asia Pacific block and several nations in Latin America. As Jonathan Price, a senior Canadian mining executive, said soon after the tariffs took effect, "We'll send our metals elsewhere."¹³

Herewith, a survey of four topics that will be attracting attention in the year to come:

Productivity

Almost a year before Trump took office, Bank of Canada senior deputy governor Carolyn Rogers said, during a speech to a Halifax business audience¹⁴, that it was time to "break the glass" on the subject of Canada's laggardly productivity performance -- an indicator she (and others) have described as tantamount to an emergency. According to Rogers, Canadian productivity -- defined as economic output per hour of labour¹⁵ -- has fallen precipitously. "Back in 1984," she said, "the Canadian economy was producing 88% of the value generated by the US economy per hour. That’s not great. But by 2022, Canadian productivity had fallen to just 71% of that of the United States. Over this same period of time, Canada also fell behind our G7 peers, with only Italy seeing a larger decline in productivity relative to the United States."

While the debate over Canada's productivity deficit continues, Rogers argued that there are two strategies to reduce that gap: One, deploy policy that focuses on high-value added industries. Two, find ways to encourage workers to do their jobs more efficiently. Some of these gains can be achieved through investments in labour-saving equipment, as well as tax measures calibrated to encourage firms to re-direct profits into these kinds of investments. It also seems likely that some Canadian firms, facing high tariffs and reduced access to U.S. customers, may seek to bolster their own productivity and thus reduce their cost structure.

With Mark Carney, a long-time central banker, in the prime minister's office, there's good reason to expect that the next government will aim to reverse declining productivity as part of Canada's bid to counter American protectionism.

Competition

One of the culprits when it comes to Canada's low productivity, according to some analysts, is the relative lack of competition in parts of the Canadian economy, due to market concentration, foreign ownership restrictions and a traditionally lax approach to policing dominant players that abuse their market position.

For much of the past three decades, competition and anti-trust regulators in both Canada and the U.S. embraced a bigger-is-better outlook and avoided dismantling monopolies or oligopolies that could show they weren't gouging consumers. But in the past several years, European and U.K. policy-makers have cracked down on tech giants like Google, levying billions in fines for abuse of dominant position.

The Biden Administration likewise adopted a tougher approach, using an activist Federal Trade Commission to curb the monopolistic power of tech giants. Canada has also begun to take a similar view, with more intense scrutiny by competition regulators on highly concentrated sectors, like groceries and telecom.

While the Trump Administration quickly moved to reverse course, Canada's Bureau of Competition Policy, under commissioner Matthew Boswell¹⁶, is continuing with its more aggressive stance, according to Vass Bednar¹⁷, a competition policy expert and executive director of McMaster University’s Master of Public Policy Program. "We have bipartisan or cross-partisan support for competition reform and more competition," she says.

For Carolyn Rogers, increased competition is perhaps the most important means of cracking Canada's productivity riddle. "Simply put," she said in her Halifax speech last year, "businesses become more productive when they’re exposed to competition. Competition drives companies to become more productive by innovating and by finding ways to be more efficient. In doing so, competition can make the whole economy more productive."

Housing

In the past three or four years, housing affordability emerged as one of the most acutely felt concerns for Canadians, especially younger people without access to inter-generational wealth transfers who were permanently locked out of the home buying market. In major metropolitan areas, rents also surged, while rising home building costs -- due to labour shortages, inflation, interest rates, interrupted supply chains and costly municipal levies -- have meant that supply lagged well behind demand. To add insult to injury, Canada's official inflation barometer, the Consumer Price Index, has tended to understate the impact of rising shelter expenses on households, according to a 2024 study published in the Queen's Business Review.¹⁸

However, with falling overnight interest rates and inflation now subdued, some forecasters expect improvements in the housing market. According to the Canada Mortgage and Housing Corp.'s 2025 outlook¹⁹, housing market activity will improve, despite the economic headwinds from tariffs and other domestic factors. "The combination of lower mortgage rates and changes to mortgage rules²⁰ introduced in 2024 should unlock pent-up demand from homebuyers previously priced out of the market," CMHC economists wrote in the national 2025 outlook. "However, some of these homebuyers may face longer loan terms, higher interest costs over the duration of the loan and larger down payments as prices continue to rise."

Yet there will also be considerable variability. In Greater Toronto, for example, the frothy condo investment segment, which featured extensive speculation in pre-sale markets, appears to have seized up, and industry watchers wonder whether falling interest rates will re-kindle pre-condo sales or if the abrupt slow down means a bubble has burst. In Calgary, home sales are falling²¹ despite excess supply. CMHC predicts a slow-down in housing starts across Canada, while other industry players expect to see more investment in purpose-built rental projects.

Meanwhile, in metros across the country, the cost of new homes may be affected directly²² by tariff-induced cost escalation, especially in specialized components made with aluminum or steel -- like windows or HVAC equipment -- that involve complex supply chains that straddle the U.S.-Canada border. “We’re buying all of our fixtures for buildings from the U.S., so we can’t just eat that," a GTA homebuilder told The Globe and Mail²³. We’re going to have to pass that on. So now we’re scrambling, saying, ‘okay, like we obviously don’t want to pass this on to our homeowners.’”

Interprovincial trade

The long-standing barriers inhibiting trade in goods and services between Canada's provinces emerged as one of the early points of consensus about how Canadians and their leaders can respond to U.S. tariffs. These barriers, some of which date back generations, include everything from trucking regulations to product safety standards, professional certification and, infamously, the procurement practices of provincial liquor boards.

Their impact amounts to more than most Canadians realize, according to an evaluation published²⁴ last year by Queen's University's Smith School of Business. "Interprovincial trade represents around one-ﬁfth of the country’s gross domestic product. But it has been estimated that full liberalization of interprovincial trade could increase our GDP per capita by four per cent.²⁵ To make it real for consumers, interprovincial trade barriers add between 7.8 and 14.5 per cent to the price of goods and services we purchase." Other assessments estimate that the cost of trade barriers is equivalent to tariffs ranging from 6.9% to 21%, according to the Royal Bank of Canada. "To put these costs in perspective, Canada’s weighted average tariff rate on international imports was just 1.4% in 2022, while the U.S.’s was 1.5%."

How long it will take to dismantle these internal trade barriers remains to be seen. In early March, federal internal trade minister Anita Anand said negotiations between Ottawa, the provinces and the territories were advancing quickly. A few provinces also passed legislation offering reciprocal arrangements. Nova Scotia was the first out of the gate, in February, with a law that offers to remove barriers to the trade in goods and services from another province if that province provides a matching set of policies. The government of British Columbia is considering similar legislation.²⁶

While she believes that the economic lift attributed to removing trade barriers has been over-stated, Vass Bednar argues that such measures will enable Canadians to buy and trade more with one another. She also says the most effective way to modernize would be to elevate all business-related regulation from the provincial governments to the federal government. "All these problems with interprovincial trade barriers is because in our federated state, most business regulation occurs provincially. That's why we have different regulatory regimes. They don't make as much sense now. If you want to harmonize things, then you have to allow the federal regulation of business environments, full stop. I think that would help Canada."

John Lorinc is a Canadian journalist, whose book Dream States: Smart Cities, Technology, and the Pursuit of Urban Utopias won the Balsillie Prize for Public Policy in 2022. The book was also a shortlisted finalist for the Donner Prize in the same year. Lorinc, who writes on urban affairs, politics, business and technology, has been a contributor to The Globe and Mail, The Walrus, the Toronto Star, Maclean's, Toronto Life and Spacing.

¹ https://www.bankofcanada.ca/publications/mpr/mpr-2025-01-29/

² https://www.bankofcanada.ca/publications/mpr/mpr-2025-01-29/in-focus-1/

³ https://ised-isde.canada.ca/site/office-superintendent-bankruptcy/en/statistics-and-research/insolvency-statistics-canada-december-2024

⁴ https://www.lexpert.ca/news/insolvency-restructuring-law/insolvency-a-growing-concern-for-canadians-in-2025-finds-insolvency-firms-consumer-debt-index/390697

⁵ https://mnpdebt.ca/en/resources/mnp-consumer-debt-index

⁶ https://economics.bmo.com/en/publications/detail/a3153980-2f42-4b1c-9844-5da921fd596a/

⁷ https://www.linkedin.com/in/armine-yalnizyan-a32b42264/?originalSubdomain=ca

⁸ https://www150.statcan.gc.ca/n1/daily-quotidien/250214/dq250214d-eng.htm

⁹ https://ec.europa.eu/eurostat/web/products-euro-indicators/w/2-30012025-ap

¹⁰ https://www.stats.gov.cn/english/PressRelease/202502/t20250228_1958822.html

¹¹ https://www.pbs.org/newshour/nation/u-s-economy-grew-2-3-percent-annually-in-the-last-months-of-2024-the-outlook-for-2025-is-cloudier

¹² https://economics.td.com/domains/economics.td.com/documents/reports/jo/Canadian_Job_Market_and_Lookahead_to_Uncertain_Future.pdf