Monthly Economic Letter

The countdown to the February 1 imposition of 25% U.S. tariffs on Canadian goods sent shockwaves through the economy. While a last-minute, 30-day reprieve was welcome, this latest episode of trade tension has provoked a climate of uncertainty that is likely to persist.

Uncertainty has always been a fact of life for entrepreneurs. However, disruptive events have become more frequent over the last two decades. 

Periods of great uncertainty can have profound economic repercussions not only for financial markets, but also for companies and their customers. Learning to navigate these times is no longer a luxury, but a necessity for entrepreneurs. The good news is that businesses can respond to turmoil with resiliency and even find ways to capitalize on them by finding new opportunities.

In times of crisis, companies need to adapt quickly to survive. They must rely on innovation to meet short-term challenges and benefit from long-term opportunities. The pandemic is a recent example. Faced with health restrictions and forced closures, many companies turned to e-commerce to maintain their operations.

As a result, e-commerce saw spectacular growth. Online retail sales in Canada soared by the 68% from February 2020 to July 2022. Companies innovated by improving their websites, offering new payment options and optimizing their supply chains to meet online demand.

The pandemic forced businesses to be creative and accelerated trends already underway in the economy, including the adoption of e-commerce. This demonstrates that, even in difficult and uncertain times, businesses can find ways to adapt and thrive. 

The threat of tariffs has highlighted Canada's dependence on the U.S. market and the need to diversify our export markets. It has also focused attention on the harmful impact of non-tariff barriers within Canada. 

While increased interprovincial trade alone can’t compensate for potential losses in the U.S. market, it can soften the blow.

So how can companies adapt and find new growth opportunities in the current climate?

1. Stay informed. It's hard to adapt to changes you don’t see coming. The first step in becoming more agile is to keep abreast of developments that may affect your industry.
2. Develop a strategic plan and act on it. Articulate your strategy and seek expert advice on executing it. Make sure your employees are onboard with your vision and plan.
3. Diversify your customers, your suppliers, your offering. Just as Canada needs to diversify its export markets, your business should cut risk by finding new customers, opening new markets and dealing with a greater number of suppliers. Reducing your dependence on any one partner is just smart business. 
4. Improve operational efficiency. To better navigate in uncertain times, it’s important to optimize your internal processes. An efficient company is more agile and better prepared to face unforeseen challenges by reducing costs, adopting technologies and increasing productivity. 
5. Strengthen financial resilience. Prepare for unforeseen developments by ensuring your company has access to credit and other financial resources. This will enable you to not only to weather economic uncertainty but also invest in growth opportunities.

It's possible to thrive in uncertain times. It's all about building a stronger company by being proactive in reducing your risk and preparing for future challenges, whatever they may be.

The Canadian economy will be called upon to show resilience once again this year. While uncertainty has picked up sharply in recent weeks, a 30-day reprieve on the imposition of tariffs on both sides of the border was good news for both Canada and the U.S.

Canada's economic foundation remains solid

The Canadian economy stands on solid ground. Despite the challenges posed by global economic uncertainties, Canada has started the year in a good and stable economic position.

A great deal of the economy’s resilience can be attributed to a strong labour market. The national unemployment rate decreased to 6.6% in January when the economy added 76,000 jobs

Meanwhile, moderate growth in the Consumer Price Index (CPI) indicates that inflation is well under control. The Bank of Canada has set an inflation target of 2% and the current rate is well within its target range, reaching 1.8% in December.

Interest rates and monetary policy

Interest rates have significantly decreased, providing the Bank of Canada with more flexibility to manoeuvre in response to economic turbulence. The central bank's key interest rate stands at 3.0% after another 25 basis-point cut at the end of January. The rate is now significantly lower than it was just six months ago. The lower rate environment should support economic growth by making borrowing more affordable for businesses and consumers.

Canadians with variable-rate loans are already feeling the difference. They have more money to spend elsewhere other than on interest. 

Overall, we can expect easier monetary policy to have an even greater impact in the months ahead as longer term interest rates come down further, supporting borrowing over saving.

Moreover, starting January 30, Canada's deposit rate was slightly below the main policy rate and the Bank of Canada stopped its quantitative tightening. These technical moves are aimed at making monetary policy more impactful since earlier rate cuts didn't reduce effective interest rates as much as expected.

Growth despite uncertainty

Real GDP slowed by 0.2% between November and October, but on an annual basis, economic activity likely increased by 1.2% for all of 2024. While the outcome of latest tariff threat remains unclear, we still expect Canada’s economy to grow in 2025 and even improve relative to last year. BDC Economics now expects GDP to reach 1.5% this year.

There has been a significant improvement in the outlook since the U.S. announced a 30-day pause on the imposition of tariffs on Canadian goods. It’s a less risky environment than feared and, while investment intentions will likely remain depressed for some time, household consumption continues to be the engine of growth for the Canadian economy. The lower interest rate environment should continue to generate momentum in the housing market and improved household spending through 2025.

What it means for your business?

• Tariffs or not, consumers remain the engine of growth and should continue to increase their spending this year. Keep a close eye on your inventories to make sure you don’t get caught with too much or too little as the economic situation evolves. 
• Interest rates are still trending downward, this is a good time to review your strategic plan and consider moving ahead with postponed investments.
• Uncertainty is running high, but the 30-day pause in the imposition of tariffs created a less risky environment than where we ended January. It's not too late to adopt good financial practices and adjust your company accordingly.

Quebec’s economy started showing signs of recovery before the Banks of Canada started cutting interest rates. Following a short lived downturn in 2023, the province quickly bounced back in 2024. Solid consumption, higher residential investment and strong exports contributed to solid growth last year.

Looking ahead, we should see continued growth in Quebec. Rate cuts should lighten household debt burdens, stimulate consumer spending and boost actvitiy in the real estate market. Additional support will also come from major investments in power generation, electric vehicles and battery plants

Solid household fundamentals should drive consumption 

Despite higher interest rates, households in Quebec have managed to maintain their spending since the first quarter of 2022.

Robust wage gains and relatively lower indebtedness helped Quebecers weather tighter financial conditions, supporting the growth we saw in 2024

Households entered 2025 on a solid footing with untapped savings, lower interest rates and moderate inflation in the province.

Additionally, federal stimulus coupled with the Quebec government’s increases to the basic personal amount exempt from income tax and family allowance payments will provide support in 2025. Overall, the stage is set for stronger consumer spending this year.   

Momentum in the real estate market should continue

Residential construction played an important role in last year’s growth, with housing starts picking up significantly at the start of 2024. Population growth and new urban planning rules supported stronger residential investment. The province added almost 10,000 additional housing units in 2024 compared with 2023. The resale market recovered as well in 2024. Home sales were up 19% as activity accelerated after the Bank of Canada started easing rates. Despite caps on immigration, the market remains unbalanced (as supply is running low and demand, high). Lower borrowing costs should bolster activity in the housing market and maintain the pace of construction in 2025. 

Weaker dollar will provide support to exports but uncertainty looms

The province benefitted from an exceptionally strong U.S. economy during the period of high interest rates. Exports reached their highest level since 2021 in Q3 2024. Demand from the U.S is expected to remain solid in 2025 and sustained weakness in the loonie will favour exports. However, uncertainty generated by potential U.S. tariffs is putting pressure on the export sector. At the time of writing, details about tariffs remains up in the air.

The new targeted tarrifs on aluminum espacially could be adding extra pressure on the province economy. 

Still, we foresee an uptick in exports in the first quarter of the year as U.S companies frontload their imports while waiting for the final outcomes of trade talks between the two countries.  

Headwinds will keep the province from reaching potential but growth is still set to accelerate

Uncertainty is creating a lot of unknowns for businesses and dampening investment intentions. We expect subdued investments in 2025 and a bumpy performance for Quebec exports. On the manufacturing side, the outlook is mixed. Future performance will be impacted by changes in demand from the U.S. for top products such as wood, aerospace and certain metals. Internal demand for durable goods will increase, supporting parts of the industry. 

On the brighter side, as previously mentionned, consumer spending and housing will continue to support growth this year. Large-scale battery plant and power genertation projects will drive non-residential investment in Quebec. These projects have the potential to boost the province's role in the battery supply chain and benefit the broader economy. 

The impact on your business

• Lower interest rates are reducing consumer debt and freeing up cash for spending. This should boost sales in consumer markets. 
• Major investments in certain sectors will have ripple effects through the economy. It’s a good time to assess how your business can take advantage of opportunities in your sector. 
• Any time is a good time to review your strategic plan. Ask for advice and seek guidance.  See how your business can benefit from easier credit conditions and lower rates to strengthen its financial position. This will provide a buffer against economic uncertainty and position you to invest in growth opportunities