Canadian economic growth is expected to pick up this year, as interest rate cuts gradually spur domestic demand and fiscal stimulus continues to drip out at the federal and provincial levels. BMO Economics is forecasting 1.9% real GDP growth in 2025, up from 1.3% in 2024. While risks on the trade front—namely threatened U.S. tariffs—are real and could seriously disrupt the economy, conditions on the ground heading into the new year are encouraging. Most provinces are expected to see growth improve in 2025, but a set of major macroeconomic factors could make for an interesting landscape. Lower interest rates should filter through and drive firmer growth, especially in areas that were struggling with tough housing and consumer spending backdrops. At the same time, an abrupt slowdown in population growth and the U.S. political backdrop will have varying degrees of impact across the country.

Ontario, Alberta and British Columbia are expected to lead the country with growth at or above 2% in 2025. While Alberta continues to churn out sturdy growth alongside stable oil prices, B.C. and Ontario figure to benefit most from lower interest rates. These provinces carry relatively high household leverage and saw some of the deeper housing market corrections, which now appear to be turning around.

Saskatchewan and Manitoba will likely stabilize around 1.6%. In Quebec, underperformance is expected to continue with 1.5% growth. While a weaker loonie and firm U.S. growth will benefit Central Canada disproportionately, we would judge Ontario and Quebec among those most at risk to any U.S. tariff action. Ultimately the provincial impact of any tariffs will come down to their size, duration and, most importantly, industry coverage—that is clearly the big risk in 2025.

Finally, Atlantic Canada looks to grow somewhat below the national average this year (in the 1.6%-to-2.0% range) as population growth slows significantly. B.C. and Ontario should technically see the biggest slowdown given their large share of temporary residents, but Atlantic Canada’s smaller economic base could notice the change more.

Steady on the Fiscal Front

Provincial governments have now published their FY23/24 finalized public accounts and have issued mid-year fiscal updates for FY24/25. To this point in the fiscal year, there has been very little change in the fundamental story underlying provincial finances.

The combined provincial budget deficit is on track to widen to $23.3 billion (0.8% of GDP) in FY24/25 from $9.0 billion in FY23/24, with pressure coming on multiple fronts. Revenue growth, which had been robust thanks to the post-pandemic recovery and high inflation, has cooled amid softer economic growth, although some provinces have seen in-year improvements versus their budget plans. Meantime, program spending growth remains firm, partly reflecting upward pressure on public sector wages, while interest costs are also on the rise. Torrid population growth has stressed infrastructure, necessitating large capital spending programs. Every province in Canada, with the exception of Alberta, is currently forecasting a deficit for FY24/25, so this is not a case where there are one or two outliers. To be fair, deficit sizes are not overly large, with perhaps the exception of B.C. (above 2% of GDP and already the recipient of negative credit-rating action). But, it’s indicative that the easy years for provincial finances are behind us.

Total borrowing requirements are currently pegged at a hefty $126 billion for FY24/25. But the provinces were active early (with some also pre-borrowing). To date, roughly 90% of the borrowing program has been completed.

Trade Risk at the Forefront

Threats by U.S. President Donald Trump to impose wide-ranging 25% tariffs on Canada pose the biggest risk to the Canadian and provincial economic outlook in 2025.

It is a worthwhile exercise to dig more deeply into how such tariffs could affect the Canadian economy, and what the market response may be. We recognize that there is a huge range of potential outcomes and questions: Are there any exemptions (e.g., energy, or auto parts)? Does it get scaled back (e.g., 10%), or even reversed at some point? Do Mexico and Canada retaliate, and to what extent? Do other economies get swept up, with possibly even harsher tariff rates? BMO Economics' recent analysis considers the economic impact under the full 25% tariff, with limited retaliation from Canada—for more, see the full report, 25% Tariffs: What If?

Direct exposure to U.S. trade varies across the country. B.C. carries a relatively low share of goods exports in its economy, and roughly half of those exports are destined for markets outside the U.S. That leaves U.S. exports to weigh in at just 7% of B.C. GDP, the lowest share in Canada. Alberta, Saskatchewan and New Brunswick, because of hefty energy exports, carry the largest shares at 25%-to-36%, so a lot hinges on whether tariffs would be all-encompassing, and who would swallow the cost (e.g., Midwest refiners with few immediate substitutes?). That said, talk of export taxes/restrictions as a Canadian retaliation measure is notable.

Drilling down further, non-energy U.S. export exposure is highest through Central Canada. In Ontario, for example, U.S. goods exports top 17% of GDP with a wide range of industries (e.g., autos, machinery, metals and consumer goods) carrying shares in excess of 1% of GDP. Uncertainty weighs here as well, particularly for autos, where the supply chain is deeply integrated across the border.

Ultimately, the regional impact of tariffs will depend on if there are any carve-outs but, setting energy aside for now, Central Canada and parts of Atlantic Canada look most exposed.

British Columbia

B.C. is expected to expand 2.0% this year, up from a 1.3% growth rate in 2024 and slightly above the national average. Real estate activity is stabilizing, while some major projects, such as LNG Canada and the TMX expansion, have passed peak construction.

Housing has stabilized as Vancouver sales volumes have picked up following a weak summer, while the benchmark price is hovering around 4% below peak levels. Province-wide construction activity remains firm with new starts expected at 43k this year.

The job market has loosened in recent months with employment growth roughly flat year-over-year and labour force growth also slowing.

That has kept the unemployment rate around 6%, or almost 1 ppt below the national average. Conditions are expected to remain generally stable through 2025 as an expected slowdown in population growth drives cooler labour force growth.

The Province of British Columbia is estimating a $9.4 billion deficit for FY24/25 (2.2% of GDP), in the first refresh of the books following the October election. That's running deeper than both the 2024 budget ($7.9 billion) and the Q1 update ($8.9 billion). Note that this fiscal update doesn't incorporate what turned into an election campaign full of promises, so we could see even more pressure on finances in the 2025 budget.

Alberta

The Alberta economy is expected to remain among the provincial leaders with 2.3% growth this year following a 1.7% pace in 2024. The province has arguably been best positioned to handle tough macroeconomic conditions—and it has—while firm oil prices and strong demographics support growth. Any U.S. tariffs on Canadian energy shipments could add downside risk to the outlook, although some of the impact could be absorbed by U.S. refiners and the currency.

Oil production continues to grow at a steady pace, as increases in oilsands output are set against stable conventional output. While capital spending remains less than half of its 2014 peak, maintenance spending and cash flow are ongoing. With additional TMX pipeline takeaway capacity now online, producers have benefited from a tighter spread relative to WTI, all at a time when the loonie is weak—a positive combination.

Housing is firm, although showing signs of levelling off. Calgary prices are still pushing record levels, but the extremely tight market balance has ebbed in recent months. Interprovincial migration flows are running at a record positive inflow, in addition to international immigration, leaving overall population growth above 4% y/y. The commercial real estate backdrop, however, remains tough with persistent high vacancy rates in the downtown office market.

Job growth is solid, but still can’t keep pace with the influx of labour. That has left the unemployment rate above 7% in Q4. Still, pockets of labour scarcity remain—for example, skilled trades amid robust residential construction demand.

The Province of Alberta is estimating a larger FY24/25 budget surplus, now pegged at $4.6 billion (1% of GDP) compared to $2.9 billion estimated in the Q1 update, and a small $355 million in the 2024 budget. That leaves this year's surplus tracking roughly in line with the $4.3 billion balance posted last fiscal year.

Saskatchewan

Saskatchewan's economy will likely grow 1.7% this year, and at a similar pace in 2026. A firming housing market, solid population growth and build-out of a major potash project are supporting employment and investment.

Agriculture output is a wildcard, but favourable conditions should help output this year, although trade uncertainty is a risk. Oil production is pushing higher, and incomes will be well supported by firm prices. Meantime, potash prices soared amid geopolitical turmoil, and BHP’s go-ahead of the massive Jansen project will lift activity in coming years until reaching production around 2026. Capital spending intentions in the province have been strong this year.

The unemployment rate has risen to near 6%, but remains among the lowest in Canada as the job market is tight. Unlike Alberta, the province continues to see net interprovincial outflows to stronger jurisdictions, but those flows are more than offset by international inflows.

The Province of Saskatchewan is projecting a $744 million deficit in FY24/25 (a moderate 0.7% of GDP), although that’s a deterioration from the $182 million surplus reported for FY23/24. The Saskatchewan Party earned another majority mandate on October 28, 2024.

Manitoba

The Manitoba economy is likely to expand 1.6% this year, stronger than the 1.0% pace in 2024 but still below the national average. Manitoba’s diverse and steady economic base has historically helped the province avoid major swings in growth, but deep U.S. ties in manufacturing leave the province exposed to tariffs.

Agriculture output should get a boost from favourable growing conditions, continuing the swings of recent years, although trade uncertainty around canola is a risk. The labour market has been steady, but is struggling to absorb the influx of supply. While job growth has held firm, the unemployment rate has risen to almost 6% alongside a surge in the labour force.

Housing activity has cooled alongside higher mortgage rates after a very strong run, with sales running roughly in line with pre-pandemic levels. Like the economy more broadly, the downturn was more moderate in Manitoba given less froth on the way up. For example, Winnipeg’s benchmark price growth peaked at 16% y/y, less than half of that in Toronto, and the correction since early 2022 has also been milder—prices are now moving higher again.

The Province of Manitoba is projecting a $1.3 billion summary budget deficit in FY24/25, improved from the hefty $2.0 billion shortfall reported for FY23/24. The improvement only comes after the FY23/24 deficit was revised sharply higher. The Province sees a return to balance, but not until FY27/28.

Ontario

Ontario’s economy is expected to grow 2.1% this year, well above the 1.4% pace in 2024. Momentum improved through 2024, but the province faces a mix of factors—still-elevated interest rates and a tough real estate market are weighing, while torrid population growth is supporting aggregate demand. These factors should all pivot through 2025, though tariff threats add meaningful downside risk over the medium term given deep integration with the U.S.

The province-wide housing market is roughly balanced with sales activity turning up from the subdued levels of recent years. That said, the market is especially fragmented with some regions, especially in Southern Ontario, remaining subdued. For 2025, we expect significant performance discrepancy within the major cities, especially in Toronto, depending on property type.

Single-detached housing remains scarcely supplied and well bid by young families; yet, the condo market is dealing with a flood of completions, much of which are investor-owned and will be flipped onto the resale market. Look for condo prices to struggle in 2025 even if the single-detached market firms.

Meantime, federal population caps are expected to have a disproportionate impact on Ontario given a high concentration of nonpermanent residents—the impact is already being seen in the rental market. The near-record number of apartment units under construction will be reaching completion at a time when rental demand is backing off. In the commercial real estate sector, GTA office vacancy rates remain elevated at above 19%, according to CBRE.

Employment slowed to end 2024, falling well short of population inflows. While job growth has ebbed to 2% y/y, labour force growth has accelerated to more than 3% y/y, pushing the unemployment rate up to 7.6%. Unemployment is particularly high among youth and lower-skilled workers. While recent investment in the auto sector is encouraging, the uncertainty of tariff threats could act as a headwind over the next few years.

The Province of Ontario is projecting a $6.6 billion deficit for FY24/25 (roughly 0.6% of GDP), notably smaller than the $9.8 billion shortfall estimated in the initial budget plan. Considering the mid-year update came with a strong dose of new spending (including cash handouts), it speaks to the large improvement in the underlying fiscal situation—on the back of higher revenues and lower interest costs.

Quebec

After expanding 1.2% in 2024, Quebec’s economic growth is expected to pick up to 1.5% this year. That is still the weakest growth rate in the country, but Quebec's slower rate of potential growth tends to limit the province. Recent underperformance reflects less fiscal stimulus, a smaller boost from population inflows relative to other provinces, and some labour market disruptions.

On the positive side, the economy has been helped by the prolonged weakness in the Canadian dollar, which has buoyed exports and the manufacturing sector. That said, Quebec is among the most exposed provinces to the threat of broad-based U.S. tariffs. Meantime, the labour market has loosened with the jobless rate up two percentage points from its November 2022 low. Still, at 5.7% in Q4, it remains well below the national average.

Quebec’s housing market has been more stable than markets in other large provinces during the rate-driven swings in recent years, and momentum is strong entering 2025. Relative affordability (compared to other big cities) seems to be drawing demand to Montreal, which has seen its housing market heat up in recent months.

The Province of Quebec is projecting an $8.8 billion deficit for FY24/25 (1.4% of GDP) on a public accounts basis, little changed from the 2024 budget estimate—and the deepest deficit since the mid-1990s as a share of GDP. Note that in the spring, Quebec had removed its forecast to return to surplus in the medium term, and it now expects the deficit to shrink to $0.6 billion by FY28/29. While the Province does have a $750 million risk provision this year (pegged at $1.5 billion in FY25/26 and thereafter), it will also need to find over $2 billion in savings by the end of the forecast horizon.

New Brunswick

New Brunswick’s economy looks to expand 1.6% in 2025 before slowing to 1.2% next year. While the population story mirrors trends in other Atlantic provinces, it’s notable that year-over-year growth in New Brunswick has been slower to step down from all-time highs.

The labour market has been supported by a relatively stable participation rate, ending a multi-decade downward trend. Even so, the rise in the unemployment rate has been more muted compared to other provinces; at 7.2% in Q4, it remains below pre-pandemic norms.

The Province of New Brunswick is projecting a $92 million deficit for FY24/25, flipping from a small surplus in its pre-election update. The Liberal Party earned a majority mandate on October 21, 2024.

Nova Scotia

The Nova Scotia economy is expected to grow 1.7% in 2025 versus 1.3% last year. While improving, growth is expected to lag the national average as population caps weigh harder.

The major driver of activity seems to have peaked with population gains down from all-time highs in recent quarters, though still historically strong. Reduced inflows in 2025 will have an impact on near-term consumer spending and housing demand. While the population surge has led to a looser labour market, the jobless rate has held steady in recent quarters, finishing at 6.2% in Q4. That's expected to edge up to 6.5% this year, still below the national rate.

The combination of relative affordability and a surging population kept resale housing activity stable despite still-challenging interest rates. As a result, the price correction was limited in Halifax and the rest of the Atlantic region. Further Bank of Canada easing should support activity in 2025.

The Province of Nova Scotia is projecting a $654 million deficit in FY24/25 (1.1% of GDP), a notable turn after three years in the black. Nova Scotia has seen strong revenue upside but has also ramped up spending in a number of priority areas.

Prince Edward Island

The PEI economy looks to expand 1.8% this year, matching the 2024 rate, before slowing to a 1.4% pace next year. In previous years, growth was boosted by record-high population inflows and a post-pandemic rebound in tourism. Now, while population growth has stepped down from its all-time high in recent quarters, it remains historically elevated.

The province’s relatively low cost-of-living has helped it attract more interprovincial and international migrants in recent years. That’s pushed growth in the adult population up to a record pace, keeping housing demand sturdy. In turn, an expanding labour force has driven the unemployment rate to nearly 9%, higher than pre-pandemic levels albeit in line with historical norms.

The Province’s latest budget calls for a $85 million deficit (0.8% of GDP) this year, versus a $15 million shortfall in the prior fiscal year. The twin deficits are the first following a run of five surpluses over the preceding six years.

Newfoundland & Labrador

Newfoundland & Labrador’s economy is expected to grow 2.0% this year, after leading the country with a 2.3% expansion in 2024. That followed two years of contraction, with the recovery driven by elevated oil prices and a pickup in production. Those supports are expected to cool through this year and into 2026, with growth pegged at just 0.9% next year.

The unemployment rate, above 10%, is expected to remain the highest in Canada. The province’s long-term outlook is tied to energy prices, along with reserve levels and maintenance of production capacity. This leaves broad economic activity, and the labour market, susceptible to large year-over-year swings.

The Province of Newfoundland & Labrador is forecasting a mild $218 million deficit in FY24/25 (0.5% of GDP), better than the $459 million shortfall reported for FY23/24. The Province looks to borrow $2.8 billion this fiscal year, including $1.2 billion in maturities. A restructured Churchill Falls hydro deal with Quebec will also inject significant revenues into the province.