“We expect economic momentum to extend through 2025, primarily because consumer fundamentals appear strong,” says Morningstar DBRS in its updated North America forecast.
“A healthy labor market next year should generate steady wage growth. “Household debt servicing costs remain near historic lows and easing monetary policy should support credit expansion,” the agency continued, adding that strong stock markets have also strengthened household balance sheets.
“The outlook for business investment is also positive, as companies will likely increase their capital spending following the explosion in manufacturing-related plant construction over the past three years,” notes Morningstar DBRS.
The agency notes that the IMF projects that Canada will record GDP growth of 1.3% this year, compared to 2.8% for the United States.
“However, Canadian growth should gradually accelerate next year,” says the rating agency, thanks to fiscal stimulus measures, such as tax breaks and government stimulus checks, as well as easing of monetary policy.
“Lower borrowing costs and relaxed mortgage rules could boost housing activity. In addition, Canadian consumers are in a strong position to spend, as the personal savings rate is high and household balance sheets are strong,” comments Morningstar DBRS.
The IMF forecasts growth of 2.4% for Canada in 2025, the agency continues, adding that it considers this forecast to be “slightly optimistic due to increasing uncertainty in global trade policy which could have a chilling effect on short-term investment.
Indeed, the prospect of higher tariffs is “the biggest risk to what is a generally positive growth outlook in 2025,” according to Morningstar DBRS.
The threat of a 25% tariff on all U.S. imports from Canada and Mexico “would constitute a significant negative shock to all three economies, damaging cross-border supply chains, raising prices for consumers and weakening profitability of companies,” according to the report. “The impact would be even greater if Canada and Mexico retaliated by imposing tariffs on U.S. exports. »
Given the very negative impact of such a measure, Morningstar DBRS believes that this is unlikely to occur.
“The threat can possibly be considered as a gesture of openness on the part of the future American administration in the context of the upcoming revision of the free trade agreement between the United States, Mexico and Canada, which is scheduled for 2026,” suggests the rating agency.
It therefore considers it more likely that the United States will increase customs duties on imports from China in 2025 and that it will carry out targeted increases in customs duties on imports from other important trading partners, including including Canada.
“The macroeconomic impact of such a scenario for the United States and Canada would likely be modest in 2025, characterized by slightly higher inflation and slightly weaker growth than otherwise. The impact could intensify in 2026 and 2027 if additional tariffs are implemented,” the agency says, while specifying that it has relatively low confidence in its expectations regarding trade policy. of the United States.
“Tax and immigration policy changes could end up being defining features of President-elect Donald Trump’s second term, but the economic impact of these policy changes is not expected to be felt until 2026,” the agency predicts. .
In this context, Morningstar DBRS expects the monetary policies of Canada and the United States to diverge further in 2025.
The Bank of Canada has already cut rates more sharply than the US Federal Reserve, and DBRS expects “the pace of easing by the two central banks will differ in 2025 due to different economic conditions in the two countries.” »
“In the United States, strong growth momentum and above-target inflation imply that there is no urgency to ease monetary policy. In contrast, Canada faces a negative output gap and benign inflation dynamics. »
Therefore, the rating agency expects the US Federal Reserve (Fed) to cut rates by only 75 to 100 basis points from the current range of 4.5% to 4.75%. here the end of 2025, leaving monetary policy in restrictive territory until 2026. The Bank of Canada is expected to move into neutral territory during the first half of 2025.
