Monthly Economic Letter

The warm weather is slowly settling in across the country, and spring usually brings a pick-up in the real estate market. This year, the stage seemed set for a strong spring market, but economic uncertainty has dashed those hopes.

The volume of residential sales has fallen by 20% from a recent high in November, with the number of transactions falling steadily each month since the beginning of the year. 

Trade tensions with the U.S. are taking a growing toll on domestic demand and causing households to put moving plans on hold. That spells trouble for the Canadian economy where industries directly linked to real estate account for 13% of GDP.

From recovery to bust —Rates don't help

Six months ago, the Canadian housing market was on the rise, supported by repeated interest rate cuts by the Bank of Canada. Over the past year, the bank has lowered its key interest rate by 225 basis points, from 5.0% to 2.75% today. Falling rates would normally give a big boost to the resale market.

However, the uncertain trade situation has led to rising interest rates in the bond market which, in turn, has resulted in stubbornly high mortgages rates.

Bond yields—the interest paid to investors to hold bonds—vary according to a series of economic factors. Currently, investors are seeking higher yields because they fear tariffs will rekindle inflation.

Interest rates for longer-term loans, including mortgages, reflect prevailing rates in the bond market. That’s why three-year and five-year rates for conventional mortgages have fallen by just 35 and 45 basis points, respectively, over the past twelve months, despite the aggressive easing by the Bank of Canada.

Elsewhere in the economy, the bank's efforts to control inflation have paid off. Inflation measured by the annual change in consumer prices has been within the target range for over a year. 

However, housing-related inflation has been slower to come down and remains at +3.9%. It’s difficult to find savings when it comes to your rent or mortgage payments and that translates into tight budgets at the end of the month for many Canadian consumers.

The slowdown extends beyond real estate

Despite the drop in the number of real estate transactions, prices in the resale market have continued to rise. Of course, there are important differences between markets.

The Ontario and British Columbia markets have experienced price corrections, but elsewhere, average prices are at record highs.

High housing costs will continue to reduce consumer demand for discretionary goods and services. In April, almost half of Canadians (47%) expected to cut back on spending over the next year, while one in four were worried about their jobs, according to a BDC survey. 

When confidence in the economy or in one's own financial situation deteriorates, households tend to slow their pace of spending and postpone major purchases, including buying a home. However, our survey indicates that the main reason for reduced spending remains the high cost of living.

While these findings suggest that even if trade tensions with the U.S. were to ease, consumers would remain cautious. Still, the economy began to recover nicely in the final quarter of 2024, and entered 2025 on a solid footing. 

Once uncertainty diminishes and confidence improves, consumers will be in a better position to spend more freely, supporting stronger economic growth. The residential market could even get an extra push from pent-up demand.

For the time being, however, ongoing trade turbulence along with lower immigration levels make the real estate outlook uncertain. We expect economic activity to be modest in 2025 as consumers and the housing market remain skittish.

Why it matters for businesses?

• The real estate market can have a significant impact on the wider economy. Indeed, in Canada, it has a more pronounced wealth effect on the economy than the stock market. Paying close attention to this market enables entrepreneurs to better understand economic trends and plan accordingly.
• Spending on housing has a direct impact on consumers' purchasing power. Understanding this dynamic enables companies to better adapt their offerings. What’s more, housing affordability is an important factor in your ability to attract and retain the staff you need.
• Learn the steps you need to take to ensure your company's survival and prosperity when the economy doesn't cooperate.

Canada’s economy grew by 0.4% in March, according to preliminary estimates from Statistics Canada, fully offsetting a slowdown in February and taking growth in the first quarter to 1.9%. 

The Canadian economy regained momentum in December as lower interest rates encouraged stronger residential investment and household consumption.

Then, as tariff announcements south of the border stoked uncertainty, the Canadian economy went on a roller-coaster ride in the first three months of the year.

Despite the turbulence, the first quarter growth in Canada was in stark contrast to the U.S. economy, which recorded a 0.3% decline in GDP over the same period. 

The drop in the U.S. was entirely due to an increase in imports in anticipation of the introduction of tariffs. U.S. consumption and business investment remained strong contributors to growth, meaning that the economy continued to stand on solid foundations.

Exports rise in advance of tariffs

Canada’s international trade benefitted from American companies and customers stocking up on goods before tariffs came into effect. The result was a meteoric rise in Canadian goods exports in January and February, before dropping back to a level closer to historical norms in March.
 
The Canadian dollar also rose but remains at a level that is favorable to U.S. exports, holding below US72 cents throughout the quarter. 

Most of the tariffs between Canada and the United States have only been in place since mid-March. The Canadian economy could, therefore, slow in the second quarter, as U.S. demand for Canadian products is cut by tariffs, a stronger currency and healthy U.S. inventories built up during the previous quarter.

Costs were rising even before tariffs

Higher tariffs will continue to put pressure on business costs in the months ahead, which could ultimately be passed on to the consumer. The Producer Price Index started rising again at the beginning of the year and is approaching the peak reached in 2022, the height of the country's recent inflation surge.
Among SMEs active in international trade, 68% have already put in place a sourcing strategy to improve their resilience in the face of tariffs, but 79% expect to see an increase in their costs, according to a BDC survey. 

At the end of April, three quarters of SMEs said trade tensions and tariffs were already having a negative impact on their sales. The impact is more pronounced among companies directly affected by U.S. tariffs or Canadian retaliatory measures.

The job market stabilizes

Despite the high level of uncertainty and slowing growth prospects, businesse seem to be learning to live with and adapt to this new context. Although the proportion of businesses planning to increase investment in the coming year is still low by historical standards, it rose slightly between January and April. 

Layoffs tend to increase during periods of economic slowdown or disruption. Of those who were employed in March, 0.7% had become unemployed in April as a result of a layoff. That’s a similar proportion as the same period in 2024. 

In another sign that companies are adapting, employment picked up in April. More than 7,000 jobs were created in the country, but that was not enough to compensate for March's losses. 

Even so, the labour market is easing, which is not necessarily negative for business leaders since wage growth continues to slow (+3.4% in April year-on-year), which could help compensate for higher business costs elsewhere.

New Brunswick

The New Brunswick economy held up well in 2024 despite high interest rates. The economy benefitted from robust consumer spending and strength in its manufacturing sector. 

Looking ahead, economic fundamentals favour increased consumer spending thanks to a strong job market, low indebtedness and lower interest rates.  
However, trade tensions and a heavy reliance on the U.S. market will weigh on consumer confidence and businesses in the province, limiting spending and business investment in the coming months. 

On the other hand, government support through non-residential investments will help stimulate economic activity. The public sector benefits from greater fiscal flexibility compared to other provinces. This will allow New Brunswick to increase spending as necessary without putting undue pressure on public finances. Overall, the economy is expected to grow by a modest 0.8% this year. 

Nova Scotia

 Nova Scotia economy slowed in 2024, but growth remained solid thanks to strong consumption, residential investment and recovery in the manufacturing sector. This year, uncertainty about Canada’s trade relationship with the U.S. is weighing on consumer confidence with 30% planning to spend less in 2025. 
Home sales were lower in the first quarter as households reconsider big ticket purchases. On the trade front, while trade exposure to the U.S. is relatively low, the province is facing tariffs from China on its seafood exports, which represent around 13% of total exports.

On the bright side, the government is offering support for households and businesses through tax saving measures. Public infrastructure investments and a potential $1 billion energy project will boost economic activity. Still, growth is expected to remain modest this year expanding by 0.9%. 

Prince Edward Island 

Prince Edward Island's economy began 2025 on a solid footing, thanks to strong growth in 2024. However, the province is encountering challenges from local factors. Population growth is expected to slow this year and there have been no announcements of significant new investment projects. 

Uncertainty is also ramping up in the province. On one hand, the U.S. is a major trading partner while on the other China has imposed tariffs on seafood. Interest rate cuts will help alleviate the impact of uncertainty on consumers and government investments will partly offset uncertainty among businesses. Overall, growth is expected to slow from 2.1% in 2024 to 1.3% this year. 

Newfoundland and Labrador

The province got back on track in 2024 thanks to an increase in oil production. With the White Rose oilfields resuming production, output will remain solid this year, lifting growth in the province. Falling unemployment and interest rate cuts should favour strong household consumption. 

On the trade front, exports are less U.S. dependent than other provinces with about 40% of goods shipped to Europe and 50% to the United States. The diversifaction in trading partners will alleviate some pressure on consumers and businesses from ongoing trade tensions. On the other hand, slowing population growth, coupled with no major investment projects, will limit the economy’s upside this year. Nevertheless, the province is set to lead the Atlantic provinces with real GDP forecast to expand by 1.5% in 2025.  

The impact on your business

• Assess your finances, pinpoint operational challenges and develop strategies for resilience.
• With the tariff picture clearer, plan growth projects and investments to take advantage of lower borrowing costs.