Market commentary
Waiting on clarity.
Canada quarterly economic outlook for the second quarter 2025.
Waiting on clarity
In our last outlook, we expressed growing concern about the intermediate-term outlook for the Canadian economy, given the Trump Administration’s global trade war against a backdrop of slowing domestic economic growth and rising unemployment. We remain concerned, but hard economic data (primarily economic growth, inflation, and unemployment) have yet to deteriorate meaningfully. While that’s encouraging, it’s early days yet and those risks are still clearly in play. This puts businesses, households, economists, central bankers, and investors firmly in wait-and-see mode as we head into the second half of the year.
Anxiety and uncertainty abound.
While economic surveys tend to be somewhat unreliable in terms of predicting actual future behavior, it is important to note that both business and household surveys are indicating significant anxiety around U.S. tariffs.1 The Bank of Canada (BOC) is in a similar place. While first-quarter economic growth surprised a bit to the upside and inflation has looked fairly tame, final domestic demand was flat—trade data likely distorted these figures as businesses and consumers tried to get ahead of U.S. tariffs—and the BOC’s preferred measures of inflation remain stubbornly at the high end of its desired range. As the BOC put it following its decision to hold its policy interest rate steady in June, “the outcomes of these [trade] negotiations are highly uncertain, tariff rates are well above their levels at the beginning of 2025, and new trade actions are still being threatened. Uncertainty remains high…The Bank’s preferred measures of core inflation, as well as other measures of underlying inflation, moved up. Recent surveys indicate that households continue to expect that tariffs will raise prices and many businesses say they intend to pass on the costs of higher tariffs. The Bank will be watching all these indicators closely to gauge how inflationary pressures are evolving. With uncertainty about U.S. tariffs still high, the Canadian economy softer but not sharply weaker, and some unexpected firmness in recent inflation data, Governing Council decided to hold the policy rate as we gain more information on U.S. trade policy and its impacts. We will continue to assess the timing and strength of both the downward pressures on inflation from a weaker economy and the upward pressures on inflation from higher costs.”2 This aligns closely with views being expressed by monetary policymakers in some other countries.
Not a lot of hiring or firing.
Canada’s labour market is also in a similar spot to many other countries. While there have been clear signs of softening from the strong-labour-demand period that followed the reopenings of national economies after the initial waves of COVID-19, employment conditions in many regions have eased to more normal levels, and labour markets have yet to show signs of significant unravelling. While the duration of unemployment has been worsening in Canada3, job vacancies have actually increased in three of the first four months of 2025, and the job-vacancy rate has been holding steady at around 3.5%—well below the COVID-19 reopening years of 2021-2022, but in line with historic levels outside that period.
While we remain concerned about the trajectory of unemployment, the Canadian economy has managed to avoid recession thus far barring any significant future revisions to economic data. (Official economic growth estimates are revised on a regular schedule but aren’t finalized until nearly three years after the fact4).
Fiscal support on the way?
As with trade policy, there’s still a fair amount of uncertainty around fiscal policy in Canada. The Liberal-led government has released its initial spending plans and “main estimates” of appropriations (also known as the Blue Book), but it doesn’t plan to submit an official budget until this fall. Based on initial figures, there could be a meaningful government spending impulse in 2026, similar to a number of other countries. But the specifics of those spending plans and what they might mean for employment, inflation, and Canada’s longstanding productivity challenge are not yet clear.
Our perspectives on market challenges and opportunities
1See “How Canadian businesses and households are reacting to the trade conflict,” Bank of Canada, 12 March 2025, available at https://www.bankofcanada.ca/publications/consultations-2025-03-12/, and “Business Outlook Survey—First Quarter of 2025 Box 1: Firms anticipate additional detrimental impacts if widespread tariffs are implemented,” Bank of Canada, available at https://www.bankofcanada.ca/2025/04/business-outlook-survey-first-quarter-of-2025/#box1.
2“Bank of Canada holds policy rate at 2¾%,” available at https://www.bankofcanada.ca/2025/06/fad-press-release-2025-06-04/.
3While the current trend of long-term unemployment looks similar to prior recessions, the Canadian economy appears to have escaped recession thus far. Like a number of other historically reliable recession indicators (such as inverted yield curves), the reliability of this measure may also have been undermined by the many distortions associated with the COVID era.
4See “Revisions to Canada’s GDP,” Statistics Canada, 29 February 2024, available at https://www150.statcan.gc.ca/n1/pub/13-605- x/2024001/article/00002-eng.htm.
Important information
SEI Investments Canada Company, a wholly owned subsidiary of SEI Investments Company, is the Manager of the SEI Funds in Canada.