OECD Economic Surveys: Canada 2025

Executive Summary

Key messages

Canada’s economy has been resilient, with growth picking up over 2024. However, its per capita GDP performance has lagged behind other OECD countries in recent years. The economy is now facing significant headwinds from rising tariffs with the United States, given the strong interlinkages between the two economies, and the uncertain global economic context. Furthermore, Canada faces several structural economic challenges, including weak productivity, high household debt coupled with low housing affordability, and strong exposure to physical climate risks. Canada's population has grown strongly in recent years, leading the government to adjust and recalibrate immigration targets in response. While high population growth has bolstered labour input growth, it has also further strained an already subdued labour productivity performance.

In this context, this survey contains these four main messages:

• Canada’s policy framework for macroeconomic stability remains strong, with robust public finances and a well-capitalised banking sector. However, there is room to improve the efficiency of the tax system and to further reduce risks from the mortgage market. In response to the trade shock, monetary and fiscal policies should remain flexible and be prepared to act if negative risks materialise.

• Rapid population growth has exacerbated previous housing affordability challenges. To rebuild housing affordability, the government has rightly focused on measures to incentivise housing supply and provide support for vulnerable populations. Zoning laws should be further reformed, the permitting process expediated, and social and affordable housing availability further strengthened.

• Climate change requires a substantial acceleration of adaptation efforts. Policies should aim to improve risk disclosure, prevent land development in risk-prone areas, enhance infrastructure resilience and strengthen insurance coverage.

• Strengthening Canada’s productivity performance requires a combination of policies, including rebalancing R&D support, reducing regulatory barriers in internal markets, enhancing competition and the digitalisation of the economy, and fully utilising women’s skills and talents in the workforce.

Canada’s economy has been resilient, but per capita GDP growth has been weak

A challenging economic environment in recent years has intensified Canada’s structural challenges, especially its low productivity growth. Per capita growth has been weak due to sluggish productivity gains. This underscores the critical need for reforms to bolster potential output and enhance competitiveness.

Canada experienced a strong recovery from the pandemic, but its GDP per capita growth has lagged in recent years, particularly compared to its close neighbour, the United States. High population growth after the pandemic has boosted labour supply but was not met with similar productivity-enhancing investment. Lower per capita GDP growth also reflects lower productivity of recent immigrants, comprising many low-skilled non-permanent residents. Past interest rate hikes have weighed on consumer spending, given high household debt and comparatively short mortgage terms. Housing affordability has suffered. While exports of commodities perform strongly, the competitiveness of other exports and a high export market concentration remain important challenges.

Strong labour productivity growth is crucial to sustain economic growth in high-income countries. Canada's productivity performance has lagged its peers. Limited investment in key innovative assets, such as intellectual property and digital technologies, has held back productivity growth. This is compounded by weak business dynamics and limited competitive pressures. Long-standing interprovincial barriers to trade and labour mobility further prevent Canada from capitalising on larger markets.

Canada aims to achieve net-zero emissions by 2050, a goal that demands substantial policy action. As a major producer of crude oil and natural gas, Canada's economy is both carbon- and energy-intensive. Carbon pricing rightly has held a central place in the national emissions reduction strategy, even though the recent removal of the federal fuel charge has eliminated the direct price signal for consumers. Other important new policies, such as the cap-and-trade system for the oil and gas sector, are on the way. In addition to emission reduction efforts, and with the physical impacts of climate change expected to intensify, even greater efforts in climate adaptation will be necessary.

The growth outlook is weakening and fraught with uncertainties

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.

Figure 1. GDP per capita growth has fallen behind other OECD countries

Real GDP per capita

Note: OECD euro area 17 covers OECD Member countries also Member of the Euro area. 2024 data are compiled using population projections.

Source: OECD Economic Outlook database.

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Table 1. Tariffs are reducing growth prospects

Annual growth rates, unless specified

	2023	2024	2025	2026
Gross domestic product	1.5	1.5	1.0	1.1
Private consumption	1.9	2.4	1.9	0.9
Government consumption	2.2	3.2	2.3	1.9
Fixed capital formation	-1.6	0.1	1.6	1.3
Exports	5.0	0.6	-0.3	-0.2
Imports	0.3	0.6	0.4	0.3
Unemployment rate, %	5.4	6.4	7.1	7.3
Consumer price index	3.9	2.4	2.1	2.1
Fiscal balance, % GDP	0.1	-2.1	-1.9	-1.7
Current account balance, % GDP	-0.6	-0.5	-0.8	-1.0
Policy rate (period average)	4.8	4.3	2.4	2.3

Source: OECD Economic Outlook database.

Balancing short-term macro-economic support to mitigate the impact of tariffs with medium-term debt reduction

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.

Improving housing affordability

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.

Figure 2. House prices have increased strongly

Real house prices

Source: OECD Economic Outlook database

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Adapting to climate change

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.

Figure 3. Insurance costs from natural disasters have rapidly increased

Annual amount of catastrophic losses in Canada

Note: The chart shows the share of economic losses insured based on the midpoint of two estimates: the share of total losses that were insured, and the average of the share of insured losses across each individual event. Presenting the midpoint of the two estimates mitigates bias in the data from events with large total losses and low reported insured losses.

Source: Insurance Bureau of Canada calculations based on estimates from Catastrophe Indices and Quantification Inc. (CatIQ), as of August 2024.

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Raising business sector productivity

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.

Figure 4. Productivity growth has been lagging other OECD countries

GDP per hour worked, average annual growth over 2000-23

Note: OECD is an unweighted average.

Source: OECD Productivity Statistics database

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MAIN FINDINGS	KEY RECOMMENDATIONS
Promoting economic growth and safeguarding against macroeconomic risks
Headline inflation has reached the 2% target. Tariffs exert two opposing influences on inflation, they increase import prices while simultaneously reducing demand, and hence prices.	Pursue a broadly neutral monetary stance in response to the anticipated trade shock. Be prepared to act in case negative risks to growth or prices materialise.
Household debt levels are high. The riskiness of mortgage lending and debt servicing costs continue to increase.	Continue to closely monitor housing market developments and mortgage market risks.
Fiscal deficits have been declining faster than in other countries after the pandemic-related increase, but the economic slowdown is expected to weigh on the fiscal outlook. Past significant new spending measures have increased long-term spending needs.	Allow the spontaneous deterioration of the fiscal deficit (“automatic stabilisers”) in response to the trade shock. In the medium-term, bring debt on a declining trend in line with fiscal anchors, and ensure efficient expenditure control.
The federal government is conducting a new round of spending review for the federal budget. The spending review focuses mainly on operational expenses and ad-hoc savings.	Conduct more systematic and period spending reviews and broaden the scope of the current review.
The share of revenues from indirect taxes (GST/HST) is comparatively low, while the share of revenues from incomes and profits is high.	Gradually increase GST/HST tax rates and move away from zero-rates for items such as basic groceries, agricultural products, and prescription drugs to fund a decrease in personal income taxes.
Taxation on energy and transportation is low in OECD comparison.	Preserve the existing, comprehensive carbon pricing system, including the fuel charge for consumers.
Improving housing affordability
Residential zoning was until recently tilted towards single-detached housing, even in metropolitan areas.	Ensure that municipalities continue to reform zoning laws, eliminating single-unit zoning and enable medium-density housing in urban areas.
Approval times for new housing projects can be long and the permitting process cumbersome in some municipalities.	Expedite the permitting process by developing electronic and one-stop systems and improving the tracking of approvals.
The non-market and affordable housing stock is relatively old and decreasing.	Preserve and protect affordable rental housing, by putting in place acquisition strategies and dedicated acquisition funds, such as the announced Canada Rental Protection Fund.
The construction sector faces significant labour shortages.	Expand the construction sector workforce through higher intakes in dedicated training programmes and apprenticeships.
Recent high immigration, especially of non-permanent residents, put a strain on the housing market.	Align policy support for housing with immigration targets.
Adapting to climate change challenges
A lack of sufficient climate-related risk awareness prevents individuals and businesses from adapting more effectively. Most people in high flood risks areas are unaware of the risks they face.	Step up efforts to enhance flood maps and ensure public availability. Mandate disclosure of climate-related risks in the sale of residential and commercial properties.
Land-use planning currently does not sufficiently account for climate-related risks.	Create independent bodies to advise on flood risk management, suggest urban development limits, and require authorities to ‘comply or explain’.
A large share of high-risk properties is uninsured due to lack of affordable insurance option.	Improve the availability and the risk-sharing of flood insurance through an increase in the overall coverage and a more effective re-insurance programme between private and public actors.
Public and private investment in adaptation can significantly reduce climate-hazard risks and dimmish costs.	Step up support for investment in climate resilient infrastructure through existing federal programmes and by ensuring sufficient funding at municipal and provincial levels.
Raising business sector productivity
Despite generous SR&ED tax credit breaks, Canada’s R&D investment intensity is weak. The larger credit for small firms leads to distortions and favours Canadian controlled businesses.	Harmonise the SR&ED tax credit for R&D activities across small and larger firms, and consider reinstating capital costs in the credit base.
The focus on tax-based support for R&D means there is too much weight on general subsidy for research.	Make more use of direct grants to support R&D, including to support digital technologies such as artificial intelligence.
Access to affordable financing for Canada’s small and medium-sized enterprises (SMEs) still needs improvement.	Target SME financing programmes at young and innovative firms lacking financial track records or tangible assets.
Internal barriers to trade have large economic costs and limit the efficiency and scope of labour markets.	Accelerate reduction in internal barriers to trade, including by widening the scope and powers of the Canadian Free Trade Agreement.
High rates of overqualification among immigrant employees point to underutilisation of skills.	Better harmonise the recognition of foreign immigrant skills across provinces.
The gender gap on participation rates and wages remains significant. Women are also underrepresented in leadership positions.	Continue to implement the roll-out of access to affordable childcare as planned. Increase the representation of women in leadership positions by strengthening awareness raising programmes.