We are only three weeks into the year, but 2025 appears to already be a year of change and uncertainty. Changes to governments in the US and Canada are likely going to bring about policies designed to grow and protect their respective economies. Whether this is good or bad for Canadians remains to be seen, however. In Canada a possible Spring election will likely focus on protecting and growing the private sector, reducing government spending (debt) and promoting deregulation to match efforts promised by the Trump administration. A strong US economy will likely come as a net benefit to Canadians, despite the rhetoric around tariffs. Canada will have to contend with a very pro-business US administration and align our economy to compete, as Canadian GDP, productivity and economic growth have fallen substantially behind that of our neighbors to the south over the last decade.
Inflation
The domestic inflation rate is hovering around the 2% mark, but we should also keep in mind that inflation has gone up 20%+ over the past few years. Although today’s inflation is inline with what the Bank of Canada states is their goal, we have to remember that Canadians wake up to prices that are significantly higher than just a few years ago. The recent drop in inflation to 1.8% was due to the temporary GST break on certain goods, but that loss in revenue for the government was estimated at $2.7 billion dollars (which adds to the deficit). Also of note is that US inflation could rise if policies such as reduction of tax on tips, overtime and social security are implemented. This could lead to the Bank of Canada taking a more subdued approach to rate cuts. A weakening Canadian dollar will also make the importing of goods from the US more expensive. But at least we didn’t pay GST on beer for a couple of months!
Jobs and Growth
The Canadian economy added a surprisingly high 91,000 jobs in December. While the gain was impressive, it came more from an increase in public-sector hiring rather than the private sector. In December, the population rose 67,000, the smallest increase in two years and suggests federal immigration policy changes are starting to affect the number of newcomers entering the country. Canada is adding new, well paid jobs to the economy but these jobs are being paid for by your tax dollars.
Mortgage Rates
Every week comes new economic data that drives the variable rate and the fixed rate mortgage markets. Sometimes it’s not even empirical data, but potential data (tariffs, anyone?). We still believe that rates are going to trend lower in Canada, and the majority of our clients are looking at the variable rate mortgage as their choice with the strategy to lock in when rates reach an optimal point. This may not be right for everyone, but a year ago a vast majority of mortgages we wrote went into a 3-year fixed term. That number is now under 50%. The Bank of Canada meets again on January 29th. The expectation is 0.25% cut in the Prime rate.
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