OECD Economic Surveys: Canada 2025

Canada’s GDP growth rebounded in 2024 following a period of softness. Inflation has returned to the target rate. GDP growth received continuous support from high population growth. However, the rise in trade barriers with the United States is significantly weighing on the economic outlook.

Economic activity has strengthened in 2024 following a sluggish period in 2023 (Figure 1). Private consumption has been supported by high population growth and lower interest rates in the second half of 2024, though still elevated mortgage costs continue to constrain household spending. Business investment per worker remains weak in Canada compared to other OECD countries. Several policy measures aim to support investment in green sectors. Canada has also failed to take full advantage of the growth of its export markets as of the end of 2024. It has lost market share despite robust growth in exports of crude oil and other commodities.

Labour market pressures have eased. The labour market has softened with job vacancies coming down and the unemployment rate increasing over 2024. Wage growth is also moderating but remains high compared to productivity growth.

Price pressures have decreased, and headline inflation has come down to its target rate. Service inflation remains still above 2%, partly driven by still elevated shelter inflation.

However, trade uncertainty and tariffs have significantly worsened the economic outlook (Table 1). GDP is expected to decline from the second quarter of 2025 due to sharply falling exports to the United States, driven by higher tariffs. Household consumption and business investment will be negatively affected by trade tensions and high uncertainty. Labour market conditions will deteriorate in 2025. In 2026, GDP is projected to slowly recover as the economy adjusts to the new tariff environment. Lower interest rates will support business investment and household consumption as uncertainty declines. However, slower population growth will be less supportive of consumption growth. Headline inflation is expected to rise only slightly above the target rate, as the upward pressure from higher tariffs on consumer prices is partly offset by lower energy prices due to the removal of the fuel charge. Core inflation will be somewhat higher.

Uncertainties for the outlook are substantial, both regarding future tariff levels and their effects on the Canadian economy. Tariff levels could go lower or higher than where they stand currently. The significant magnitude of the tariff shock, the strong interlinkages of cross-border supply chains, and the uncertainty on the direction of future trade policies make their impact highly uncertain. However, on the positive side, if these tariffs prompt addressing long-standing structural issues, such as strengthening internal markets in Canada, this could have lasting positive offsets.

Public finances are robust, gross public debt is close to the OECD average and net debt and the primary deficit are low. They can absorb the deterioration of the fiscal deficit resulting from the tariff shock. In the medium term, fiscal policy must find the right balance between high spending pressures related to new social programmes, housing, and infrastructure, while also aiming to further reduce the debt-to-GDP ratio.

As inflation declined, the central bank lowered its policy rate from 5.0% to 2.75% by April 2025. Quantitative tightening has ended in March 2025 and the Bank of Canada returned to routine balance sheet management. Keeping a broadly neutral stance at the current juncture is appropriate. However, the central bank should remain vigilant in case negative risks to growth or prices materialise.

The banking sector appears well capitalised. However, risks, particularly those related to the domestic mortgage market, remain significant and warrant careful oversight and a pursuit of stringent prudential regulation.

Fiscal deficits have been reduced more rapidly than in other OECD countries after the pandemic-related surge and remain low in international comparison. The primary deficit of the general government stood at -0.3% of GDP in 2024. Gross debt was 107% of GDP and net debt 8% of GDP in 2024. The gross debt-to-GDP ratio is expected to broadly stabilise at current levels, slightly above 100% of GDP, without further fiscal action, provided that increases in age-related spending are offset. However, public spending pressures related to new social programmes, housing, defence, and infrastructure warrant effective spending control and the reduction of less priority spending through efficient spending reviews. After the impact of the recent trade shock on the fiscal balance has subsided, debt should be brought on a declining path in the medium-term.

The tax structure could be better aligned with growth- and environmental objectives. This strategy should include shifting a proportion of taxation from income to consumption taxes, by gradually phasing out zero-rate items. Canada has a well-designed and comprehensive carbon pricing system, which should be preserved. The recent removal of the fuel charge weakens the carbon price signal for consumers and slows down Canada’s carbon emission reduction strategy.

Tax advantages for SMEs should be reduced. Some government programmes favour investments made by smaller firms over larger ones. Preferential tax treatment for smaller firms could create distortions. The preferential corporate tax rate for SMEs should be discontinued and R&D incentives harmonised across small, medium-sized, and larger firms.

Significant increases in house prices and rents have deteriorated housing affordability. Various existing government programmes aim at improving the availability of housing. Still, more can be done to increase the supply of housing and expand social and affordable housing support.

House prices and rents have increased more strongly than in most other OECD countries (Figure 2). This is due to an insufficient supply of housing and a mismatch between available housing and demand, with a lack of rental and affordable housing. Recent strong immigration has amplified these housing challenges. Density restrictions have prevented more medium-density development in urban centres. Relatively long approval times and permitting issues have further weighed on housing construction. The social housing stock is small and relatively old, with demand far outstripping supply.

Several government programmes are designed to increase housing supply and to support vulnerable populations. These initiatives are welcome and should be continued. Municipalities should continue and be further incentivised to enable medium-density housing in urban areas. Additionally, greater efforts could be made to expedite the permitting process. Additional public funding is needed to boost social and affordable housing, either by incentivising housing developers or through a stronger direct federal and provincial involvement in the social and cooperative sectors.

It is also vital to expand the workforce in the construction sector to address labour shortages, provide sufficient funds for infrastructure to support housing development, and improve energy performance standards for buildings to promote energy-efficiency in the residential sector, which is currently very low.

Climate-related risks from rising temperatures and extreme weather events are increasingly impacting the economy and communities. To address these challenges, a shift is needed from disaster recovery to proactive risk mitigation and investment in climate-resilient infrastructure.

Canada is vulnerable to rising temperatures and natural disasters from river and coastal flooding and wildfires. The frequency and severity of natural disasters have increased and will continue to do so (Figure 3), requiring a policy shift from emergency response to disaster prevention. Canada launched its first National Adaptation Strategy in 2023. Achieving its targets requires a substantial acceleration of adaptation efforts.

Public policy plays a crucial role in steering climate change adaptation, providing information, setting efficient regulations, and directly intervening in cases of significant financial costs and externalities. For example, improved mapping and increased public awareness of flood risks are crucial to mitigate exposure to floods. Land development in high-risk flood and fire zones should be restricted. Independent advisory bodies should be established to advise on flood risk management. Additionally, upgrading stormwater infrastructure and enhancing coastal flood defences require public sector involvement. There is scope to enhance the use of fire-resistant landscaping and firebreaks around critical infrastructure to limit wildfire damages.

Insurance coverage is underdeveloped, leaving many households in high-risk areas uninsured. Consequently, disasters often result in high out-of-pocket payments or public payouts. Broader flood insurance coverage is necessary, based on effective risk-sharing. This should be paired with strong incentives for risk reduction, such as linking premium discounts to adaptation initiatives. Providing targeted support to individuals and businesses for adaptation investments could complement these policies.

Canada’s productivity growth has been lagging best performing OECD countries for many years. Factors such as low investment activity and low business R&D spending contribute to this productivity gap. Addressing these weaknesses will be crucial to benefiting from ongoing transformations in new technologies, notably the green transition and Artificial Intelligence (AI).

Most of the low productivity growth can be attributed to a low productivity performance within sectors. Canada’s industry composition plays only a minor role. However, the relatively important resource sector (oil production, notably) periodically accounts for substantial swings in productivity growth. Challenges for growth and productivity come from weak business and firm growth dynamics, along with low investment in assets that are key for innovation.

Business R&D, a key driver of productivity growth, is low, representing only 1% of GDP compared to the OECD average of 2%. Existing R&D tax incentives should be streamlined for both smaller and larger companies and include more direct support. The preferential small business tax rate should be repealed to avoid potentially limiting firm growth. There is also room to improve access to finance, particularly for young firms without tangible assets, which could facilitate their growth.

The regulatory environment poses a burden on productivity growth. Internal trade barriers remain significant and should be reduced more quickly. Barriers on foreign investment should be revisited. Additionally, improving mutual recognition, including on foreign credentials, of qualifications across provinces would lower internal barriers to labour market mobility.

There is room to further harness the benefits of digital technologies. The digital intensity of the economy could be increased and the competitive environment for digital firms strengthened. There is also room to improve access to digital and telecommunication services and lower their costs by boosting competition in this sector.

There is potential for a better utilisation of labour resources. Overqualification rates are elevated, particularly among immigrants. Women remain under-represented in some key STEM fields and in leadership positions. The gender gaps in working hours and wages remain significant. To fully realise the potential of women in the labour force, the government should continue expanding the availability of affordable childcare and strengthening policies for parental leave, equal pay, anti-discrimination, and flexible work.