As Canada prepares for a potential trade war with its southern neighbour over the threat of sweeping tariffs by U.S. President Donald Trump, an economist with RBC says Canada’s domestic economic backdrop is improving.
Claire Fan told BNN Bloomberg in a Thursday interview that as of the fourth quarter of last year, Canadian businesses have been feeling a sense of “cautious optimism” due in large part to recent interest rate cuts.
“Rate cuts from the Bank of Canada, larger ones towards the end of last year, continue to trickle through to support economic activity, making it easier for Canadian households to pay their mortgages… (and) for Canadian businesses to borrow and to invest,” she said.
“That easing on monetary policy is going to continue – and that’s what we’re expecting the Bank of Canada to do next week as well: to continue to cut rates to support the economy. So, as that starts to happen a bit more in 2025, the domestic backdrop is really improving.”
Fan’s comments came after Statistics Canada released retail sales data from the fourth quarter of 2024 on Thursday.
The agency said Canadians spent about the same at stores in November as they did in October, but a flash estimate of December retail sales suggests a significant rebound during that month.
Fan said that while the flat reading in November may look underwhelming at first glance, it’s likely that many Canadians opted to push back their holiday spending until after the federal GST holiday came into effect in December.
“There was some amount of nudging holiday shopping towards later in December because of (the GST holiday) announced on Nov. 21, and that was kind of the day that we actually did see, very interestingly, spending starting to tail off a little bit more,” she said.
“But then the bounce-back was pretty substantial actually in December… so it kind of just tells us consumers were just waiting for the tax holiday as opposed to just softening spending trends that are persisting.”
StatCan said retail sales totalled $67.6 billion in November, and its preliminary estimate suggests spending grew by 1.6 per cent in December, which would be the largest monthly gain in two years.
Fan said that while these numbers support the view that the economic outlook for Canada looks “brighter” in 2025, it’s being offset somewhat by Trump’s threat to place 25 per cent across-the-board tariffs on Canadian goods entering the U.S. as soon as next week.
“The top concern these days remains the tariff uncertainties. It did seem like we got a very brief reprieve on the day of Trump’s inauguration but there’s obviously more threats that are floating around,” she said.
“There’s a huge amount of uncertainty as to what shape or form these tariffs can really take on, but it’s probably already to a certain degree dampening business investment decisions just because of, again, the uncertainties.”
With that uncertainty in mind, Fan said her team at RBC has a “plain and simple” forecast for the Bank of Canada ahead of its next scheduled interest rate decision on Wednesday.
“We expect the Bank of Canada will keep supporting the economy essentially by cutting interest rates very steadily at a 25-basis-point per rate cut, per meeting pace for the first five meetings of this year,” she said.
Fan explained that if that forecast proves accurate, the central bank’s overnight rate would reach two per cent by the end of July, just below the bank’s neutral range of 2.25 per cent to 3.25 per cent.
“So, it would be technically in the stimulative territory,” she said, “meaning that at that level, interest rates are supposed to be stimulating economic activities, and that’s just what we think the current backdrop is needing.”
With files from The Canadian Press