The outlook for Canada's economy in 2025 suggests a mixed picture, with potential challenges and opportunities across various sectors. The equity market is expected to be driven by strong earnings growth expectations, supported by reasonable valuations. However, the Canadian economy may lag behind the U.S., partly due to a slowdown in productivity and reduced immigration targets that could impact GDP forecasts.
RBC Economics notes that "the recently announced reduced immigration targets, while potentially helpful in rebalancing the housing market, could subtract nearly one percentage point in total from GDP forecasts over the next three years." Additionally, potential economic headwinds from Donald Trump's return to the White House are noted as concerns.
Interest rate cuts by the Bank of Canada have eased investor concerns about consumer spending, leading to a rebound in bank stocks. RBC Wealth Management advises diversification across banks to prepare for varying outcomes. They state: "A pivot to a more cautious equity market backdrop could see the banks that are currently performing well continue to outperform relative to peers."
In terms of productivity, Canadian performance has been declining relative to the U.S. since the 1980s. A chart indicates that both Canadian productivity and per-capita GDP have trended downward since reaching near 85% of U.S. levels in 1970.
Commodity prices will likely influence energy sector performance again. Oil prices are expected to remain within a range due to geopolitical risks and excess capacity. RBC Wealth Management believes this range provides sufficient cash generation for attractive energy stock returns.
The fixed income market is also impacted by interest rate cuts from the Bank of Canada, which were more significant than those by other G7 countries in 2024. Despite these cuts, Canada's economy continues contracting on a per-capita basis compared to U.S.'s robust growth.
Bond yields between Canada and the U.S. have widened significantly, with further widening anticipated as policy rates diverge between their central banks. This divergence may affect Canadian dollar strength against its U.S counterpart.
Corporate bond spreads tightened amid improved risk appetite but may face challenges if economic conditions worsen or risk sentiment changes negatively.
Finally, Canada's preferred share market saw strong performance early in 2024 but lost momentum later on; moderate returns are expected for 2025 given current valuations appear less attractive now than before.