Canadian Jobs Growth Slowed Markedly in January as the Unemployment Rate Fell Sharply to 6.5%

Today’s Canadian Labour Force Survey for January was weaker than expected. Employment declined by 24,800 (-0.1%), and the employment rate decreased 0.1 percentage points to 60.8%. This followed only a small gain in December and was the first decline in the employment rate since August 2025.

In January, a decrease in part-time employment (-70,000; -1.8%) was partly offset by a gain in full-time work (+45,000; +0.3%). Compared with 12 months earlier, overall employment was up by 134,000 (+0.6%), driven by gains in full-time work (+149,000; +0.9%).

The number of private sector employees fell by 52,000 (-0.4%) in January, partly offsetting a net increase of 128,000 (+0.9%) in the last three months of 2025. There was little change in the number of public sector employees (+13,000; +0.3%) and self-employed workers (+14,000; +0.5%) in January.

The jobless rate fell by 0,3 percentage points to 6.5% in January, driven by a decline in the number of people searching for work. The unemployment rate in January was the lowest since September 2024, down 0.6 percentage points from the recent high of 7.1% recorded in August and September 2025.

The labour force participation rate—the proportion of the population aged 15 and older who were employed or looking for work—decreased 0.4 percentage points to 65.0% in January, following an increase of 0.2 percentage points in December. The decline in January was concentrated in Ontario, the hub of the auto sector, manufacturing generally, and steel production. Recent data also show that the number of entry-level positions has fallen sharply, likely due to artificial intelligence replacing these positions.

The unemployment rate fell across most major demographic groups in January, largely reflecting declines in the number of job searchers.

Unemployment rate by age group, January 2026

Manufacturing jobs were hard hit by the tariffs and trade uncertainty. 

The number of people working in manufacturing fell by 28,000 (-1.5%) in January, bringing employment down to levels last observed in August 2025. The decline in January was concentrated in Ontario. On a year-over-year basis, overall employment in manufacturing was down 51,000 (-2.7%).

Employment change by industry, January 2026

There were also fewer workers in educational services (-24,000; -1.5%) and public administration (-10,000; -0.8%) in January. Employment in both industries was little changed year over year.

On the other hand, employment increased in information, culture and recreation (+17,000; +2.0%) in January, continuing an upward trend that began in September 2025. On a year-over-year basis, employment in this industry was up 30,000 (+3.6%) in January.

Employment also rose in business, building and other support services (+14,000; +2.1%) in January, the first increase since October 2024. Employment in this industry had previously followed a downward trend through most of 2025. Compared with 12 months earlier, employment in business, building and other support services was down 38,000 (-5.3%) in January.

Bottom Line

The Bank of Canada has reiterated that its primary mandate is price stability, effectively leaving the task of closing the output gap to fiscal authorities. Fiscal support delivered through large capital-spending projects will be implemented too slowly to materially offset near-term weakness in activity. If layoffs persist at their recent pace and the United States were to withdraw from the Canada‑US‑Mexico Agreement, the case for an additional round of monetary easing would strengthen markedly.

Absent that downside scenario, the more plausible path is a slow and limited normalization of policy. Market pricing currently anticipates that the next move by the Bank of Canada will be to raise the overnight policy rate, but this is unlikely until 2027. If labour force weakness and higher mortgage costs associated with this year’s huge volume of mortgage renewals, in combination with AI-induced job losses, weaken the economy, the Bank of Canada might be willing to cut the overnight policy rate later this year. Uncertainty has already markedly weakened the housing market, despite the reduction in home prices and mortgage rates over the past year.

Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres
drsherrycooper@dominionlending.ca

I just returned from a mortgage conference with some of the best in the industry, and while most people were talking about whether we’d see another rate reduction by the Bank of Canada or stay the course (including me), we had experts share a “thought experiment” that could change the game for an entire generation: The 50-year amortization.

I know what you’re thinking: “That’s way too much interest!” But let’s look at the reality of the Canadian market in 2026.

The Barrier to Entry is a Wall The average first-time homebuyer is now 40 years old. In our major cities, nearly 7 out of 10 buyers require a “gift” from their parents to even qualify—often to the tune of $100k to $300k. homeownership is becoming a “members only” club for those with generational wealth.

Rent is 100% Interest The biggest objection to a 50-year mortgage is the interest cost over time. But we rarely apply that same logic to the rental market. If you rent for 50 years, you have paid 100% interest and own 0% of the asset.

A 50-year mortgage isn’t a life sentence; it’s an on-ramp. It provides the lowest possible monthly payment during the years when life is most expensive—when you’re starting a career or raising a young family.

The Forced Savings Advantage We are living in a “K-shaped” economy. Homeowners are statistically 6 to 7 times wealthier than renters because a mortgage is a forced savings vehicle.

• Equity as a Safety Net: Homeowners can tap into equity to consolidate high-interest debt. Renters are stuck with high-cost credit cards and no leverage.
• Tax Efficiency: The principal residence exemption remains the best tax-free wealth builder in Canada.

A New Tool for a New Reality Back in the 80s, our parents dealt with 18% interest rates, but their homes cost 3x their annual salary. Today, homes are 10x our salary. The old rules don’t work for the new reality.

A 50-year amortization would allow young professionals to get into the market at 25 instead of 45. They could make lump-sum payments as their income grows, increase their frequency, or re-amortize at renewal.

The goal isn’t to stay in debt forever—it’s to get in the door. Because you can’t build a legacy on a rental receipt.

What’s your take? Is it time we stop letting “optics” get in the way of access? I’d love to hear your thoughts.

Bank of Canada Holds Policy Rate Steady

Today, the Bank of Canada once again held the policy rate steady at 2.25%. This is the bottom of the Bank’s estimate of the neutral overnight rate, where monetary policy is neither expansionary nor contractionary. With inflation hovering just above 2% and core inflation falling to 2.5%, the Governing Council sees the current overnight rate as appropriate, “conditional on the economy evolving broadly in line with the outlook published today. Inflation was 2.1% in 2025, and the Bank expects inflation to stay close to the 2% target over the projection period, with trade-related cost pressures offset by excess supply.”

According to the press release, “Economic growth is projected to be modest in the near term as population growth slows and Canada adjusts to US protectionism. In the projection, consumer spending holds up, and business investment gradually strengthens, with fiscal policy providing some support. The Bank projects growth of 1.1% in 2026 and 1.5% in 2027, broadly in line with the October projection. A key source of uncertainty is the upcoming review of the Canada-US-Mexico Agreement.”

In the United States, economic growth is supported by strong consumption and a surge in AI investment. The Fed stood pat today, but is expected to cut rates three times in the second half of this year. The US Federal Reserve is likely to cut its policy rate by 25 bps to 3.5%-3.75% as President Trump lobbies Chair Jay Powell for more dramatic rate cuts.

Data released yesterday showed that US consumer confidence plummeted in January to the lowest level in 12 years on more pessimistic views from Americans worried about the nation’s economy, inflation and a weakening labour market.

The Conference Board gauge decreased to 84.5 from an upwardly revised 94.2 last month, data released Tuesday showed. The figure was the lowest since May 2014 and fell short of all estimates in a Bloomberg survey of economists.

Bottom Line

The Bank of Canada has shown its willingness to bolster the Canadian economy amid unprecedented trade uncertainty. At the same time, Canada is working hard to establish alternative trade partners. Even the vast Chinese market cannot replace the US in terms of proximity and cost-effectiveness, given the high transport costs. China has stepped up its purchases of Canadian oil to record levels. There is no single market the size of the US market to replace exports of steel and aluminum.

“Employment weakened in the first half of 2025 as sectors hit hard by U.S. tariffs cut production and jobs,” Macklem said. “In recent months, overall employment has risen, led by hiring in services like health care, and slowing population growth is reducing the number of new entrants into the labour market.”

US tariffs have had a significant negative impact on Canadian exports. While the push for trade diversification is welcome, export growth is expected to be modest over the next two years.

“This restructuring, including more diversified trade and a more integrated internal market, will support some recovery in our productive capacity,” Macklem said. “But it will take some time.”

As outlined in its Monetary Policy Report (MPR), the top risk to the outlook is the CUSMA review. The bank highlights that Canada currently has an effective US tariff rate of 5.8%, thanks to the exemptions under the North American trade pact. It warned that an unfavourable outcome to negotiations could make Canadian exports less competitive.

“Faced with weaker demand, exporters would reduce production, investment and hiring,” the report said. “This would spill over into the broader economy, weighing on sectors such as services and putting Canadian GDP on a lower path.”

“Government spending on infrastructure is projected to rise, mainly reflecting commitments in provincial budgets,” the report said. “Additional federal capital transfers will also bolster infrastructure investment.”

In this environment, market-driven interest rates have risen. The 5-year bond yield is once again attempting to break through 3%. The 2-year bond at 2.67% is well above the overnight rate, and the Canadian dollar is rising. Lenders have recently increased fixed mortgage rates, which will be more popular if people generally expect rates to rise.

The key to the outlook is the continuation of CUSMA. We will likely suffer several more months of uncertainty before we know the fate of the trade agreement. In the meantime, PM Carney will continue to encourage trade deals in non-US countries

Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres
drsherrycooper@dominionlending.ca

CPI Inflation in Canada Rose to 2.4% in December

The Consumer Price Index (CPI) rose 2.4% on a year-over-year basis in December, following a 2.2% increase in the prior two months.

The year-over-year acceleration in the all-items CPI was driven by the temporary Goods and Services Tax (GST)/Harmonized Sales Tax (HST) break that began on December 14, 2024. This resulted in monthly declines for the exempt goods and services, which have now fallen out of the year-over-year movement, putting upward pressure on headline CPI growth.

The headline CPI accelerated, but the year-over-year decline in gasoline prices in December moderated it. Excluding gasoline, the CPI rose 3.0% in December, following a 2.6% increase in November.

The CPI fell 0.2% month over month in December. On a seasonally adjusted monthly basis, the CPI increased 0.3%.

Various indexes were affected by the GST/HST exemption in December 2024, including restaurant food, alcoholic beverages, toys, games and hobby supplies, children’s clothing and some grocery items, such as potato chips and confectionery.

Year over year, higher restaurant prices were the largest contributor to faster all-items CPI growth in December 2025. Prices for food purchased from restaurants rose 8.5% in December, up from 3.3% in November. Prices for alcoholic beverages served in licensed establishments (+6.5%) and purchased from stores (+5.6%) also rose faster in December.

Prices for toys, games (excluding video games) and hobby supplies rose 7.5% in December, after a 0.5% decline in November. Additionally, prices for children’s clothing accelerated in December (+4.8%) compared with November (+2.4%).

Year-over-year price growth also picked up for potato chips and other snack products (+7.9%) and confectionery (+14.2%).

Despite being unchanged month over month, prices for food purchased from stores rose 5.0% year over year in December. Coffee (+30.8%) and fresh or frozen beef (+16.8%) remained the largest contributors to the increase.

The main core inflation measures decelerated sharply in December, with the BoC’s two measures both easing to their lowest level in a year.

Bottom Line

This report confirms the Bank’s hold on the policy rate. Aside from food prices, inflation seems to be dissipating. The overall economy is in better-than-expected shape, as upward revisions to GDP since 2022 have been largely driven by stronger-than-expected productivity growth, a long-standing concern for the Canadian economy.

The backdrop of stronger growth and lower inflation will keep the Bank of Canada on hold for most of 2026, as the next rate move is likely to be a hike, but not until 2027 unless the US withdraws from CUSMA. In the meantime, the biggest loser in the past year has been the housing market.

The most recent Canadian Real Estate Association data suggests particularly weak activity in Ontario, the region hardest hit by the tariff uncertainty. A cautious Bank of Canada will monitor the effect of rapidly rising food prices on inflation expectations. With any luck at all, core inflation will continue to decelerate, keeping the Bank on the sidelines for much of this year.

Hopefully, greater clarity on the Canada-Mexico-US agreement will be forthcoming. Reduced uncertainty is the key ingredient required for a rebound in housing activity, particularly in the regions of Ontario and Quebec hardest hit by the tariffs.

Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres
drsherrycooper@dominionlending.ca

Housing Activity Fell in December, Rounding Out A Disappointing Year

Today’s release of December housing data by the Canadian Real Estate Association (CREA) showed the market ended 2025 with declining sales and prices due to ongoing economic uncertainty.

The number of home sales recorded over Canadian MLS® Systems declined 2.7% m/m in December. On an annual basis, transactions totalled 470,314 units last year, a 1.9% decrease from 2024, despite a series of Bank of Canada rate cuts.

“There doesn’t appear to have been much rhyme or reason to the month-over-month decline in home sales in December, which was simply the result of coincident but seemingly unrelated slowdowns in Vancouver, Calgary, Edmonton, and Montreal,” said Shaun Cathcart, CREA’s Senior Economist. “For that reason, it would be prudent for market observers to resist the temptation to trace a line from the end of 2025 into 2026. Rather, we continue to expect sales to move higher again as we get closer to the spring, rejoining the upward trend that was observed throughout the spring, summer, and early fall of 2025.”

New Listings

New supply declined by 2% on a month-over-month basis in December, marking a fourth straight monthly drop. Combined with a slightly larger decrease in sales activity in December, the sales-to-new-listings ratio eased to 52.3% from 52.7% in November. This remains close to the long-term average national sales-to-new listings ratio of 54.9%. Readings roughly between 45% and 65% are generally consistent with balanced housing market conditions.

There were 133,495 properties listed for sale on all Canadian MLS® Systems at the end of December 2025, up 7.4% from a year earlier but 9.9% below the long-term average for that time of year. Inventories have been falling since May 2025 owing to the mid-year rally in demand, meaning active listings could be back posting year-over-year declines around the time this year’s spring market gets going.

“While we remain in the quiet time of year for a little while longer, the spring market is now just around the corner, and it is expected to benefit from four years of pent-up demand, and interest rates that at this point are about as good as they are going to get,” said Valérie Paquin, CREA Chair. “Barring any further major uncertainty-causing events, that means we should see a more active market this year.”

There were 4.5 months of inventory on a national basis at the end of December 2025, up slightly from 4.4 months, which had been the measure since August. The long-term average for this measure of market balance is 5 months of inventory. Based on the measure of one standard deviation above and below that long -term average, a seller’s market would be below 3.6 months, and a buyer’s market would be above 6.4 months.

Home Prices

The National Composite MLS ® Home Price Index (HPI) fell by 0.3% between November and December 2025. It was similar to the dip recorded in November and could reflect some sellers making price concessions to sell properties before the end of the year. Most of the overall price softening in December came from markets in Ontario’s Greater Golden Horseshoe region, which was hit hard by US tariffs.

The non-seasonally adjusted National Composite MLS® HPI was down 4% from December 2024. Under the surface, year-over-year declines are larger for condo apartments and townhomes, and smaller for one- and two-storey detached homes.

Bottom Line

Today’s data end a year that saw house prices drift lower despite falling interest rates, as a simmering trade war with Canada’s largest trading partner caused higher unemployment and considerable job uncertainty. Though US tariffs apply to a limited volume of Canadian goods, and the economy didn’t tip into a recession, the unpredictability of President Donald Trump’s trade policy has stoked a sense of economic insecurity.

In some regions, the price decline has now wiped out a sizable proportion of the gains homeowners saw during the torrid Covid market from 2020 to 2022, when overnight interest rates were reduced to a record-low 25 basis points. Back then, ultralow interest rates caused home prices to surge, particularly in smaller cities to which remote workers fled to take advantage of a lower cost of living.

Vancouver and Toronto remain by far the most expensive large cities. The benchmark price in Greater Vancouver was C$1.14 million in December. In the Toronto region, it was C$962,300 – down about 6% from a year earlier.

With many regional markets soft, sellers are now pulling back. New listings dropped 2% in December from the previous month, the fourth straight monthly decline. But the total number of homes on the market last month was still 7.4% higher than the previous year. That’s the equivalent of about 4.5 months of inventory.

We concur with the view that there is considerable pent-up demand among potential first-time buyers who will likely dip their toe in the market once winter passes. This year, we also see a record volume of refinances and renewals, which will increase monthly mortgage payments and dampen household purchasing power.

Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres
drsherrycooper@dominionlending.ca

Strong Canadian Job Growth Drove the Unemployment Rate Down to 6.5%

Today’s Labour Force Survey for November blew past expectations for the third consecutive month.

The Canadian economy added 53,600 jobs in November, marking the third straight month of unexpectedly strong gains amid US tariffs that otherwise slowed activity.

Employment rose by an impressive 180,000 since September, marking the strongest three-month period for job gains since about a year ago. The employment increase has also more than reversed job losses over Canada’s summer months.

Where gains were most significant

Youth hiring led the latest gains, with employment growth heavily concentrated among those aged 15 to 24. That strength pulled the youth unemployment rate down to 12.8%, from a peak of 14.7% earlier this year, underscoring improved conditions for younger workers even as broader cyclical headwinds persist.

The employment increase last month was also driven by part-time work and the private sector. Health care and social assistance led the job gains, with employment rising by 46,000 in that sector.

Part-time positions rose by 63,000 (1.6%). Over the past three months, part-time employment has increased by 2.7% (103,000), outpacing the 0.5% (78,000) growth in full-time jobs over the same period.

Employment rate continues to trend up in November

Most part-time workers do so by choice—for example, to attend school or provide care to family members—but a meaningful minority are part-time involuntarily because of weak demand or an inability to secure full-time hours. In November, 17.9% of part-time workers were in this involuntary category, broadly unchanged from 17.6% a year earlier and slightly below the 2017–2019 average for the month (19.3%, not seasonally adjusted).

In October, 19.8% of unemployed individuals in September found jobs; this job finding rate is higher than a year ago (16.5%) but lower than 2017–2019 averages (24.6%). November’s employment growth was driven by part-time jobs (+63,000; +1.6%), which increased more rapidly over the past three months (+2.7%) compared to full-time positions (+0.5%).

What this means for the economy

Forecasters had expected a mild deterioration rather than a surge in hiring. Economists surveyed by Bloomberg were expecting a 2,500 decline in employment and an increase in the unemployment rate to 7%, making the actual print a substantial positive surprise relative to consensus.

This blockbuster report boosted the Canadian dollar and interest rates, reducing the likelihood of additional Bank of Canada easing. Traders in overnight swaps dropped bets on additional easing from the Bank of Canada. Instead, they’ve started to price interest rate hikes from the central bank over the next year, with a quarter percentage-point hike expected by December 2026.

Gross domestic product data last week also showed the economy grew much faster than economists had forecast, expanding at an annualized rate of 2.6% in the third quarter. However, the details beneath the headline growth figure reinforced the idea that the economy is showing signs of weakness as US tariffs destabilize strategic sectors — final domestic demand fell 0.1%, household consumption dropped 0.4% and business investment was flat. Those details reinforce the view that US tariffs are destabilizing key strategic sectors, even as headline growth remains positive.

Other labour market indicators continue to point to steady, but not overheating, wage pressure. Average hourly wages rose 3.6% year‑over‑year in November (an increase of 1.27 dollars to 37.00 dollars), following 3.5% growth in October on a not‑seasonally‑adjusted basis.

Labour market flows also look firmer than a year ago, though still softer than in the late 2010s expansion.

Financial markets reacted quickly to the combination of strong jobs and firmer growth. The report lifted the Canadian dollar and pushed market rates higher, leading investors to further scale back expectations of additional easing from the Bank of Canada. Pricing in overnight swaps now leans toward a gradual tightening path instead, with markets embedding roughly a 25‑basis‑point hike by December 2026.

Regarding Unemployment

The unemployment rate dropped 0.2 percentage points to 6.9% in October, down from 7.1% in August and September—the highest since May 2016 (except for pandemic years). Furthermore, Statistics Canada’s labour force survey shows the unemployment rate fell to 6.5% last month, the lowest since July 2024 and down from 6.9% in October. It’s the most significant percentage-point change in the unemployment rate since 2022.

The drop in the unemployment rate was partly driven by Canada’s labour force shrinking by 25,700 on the month. That pushed the participation rate down to 65.1%. Prime Minister Mark Carney’s government has kept in place the post‑pandemic immigration curbs introduced by his predecessor, limiting population growth and thereby dampening labour supply.

Bottom Line

The Bank of Canada has reiterated that its primary mandate is price stability, effectively leaving the task of closing the output gap to fiscal authorities. By early next year, it will likely become evident that fiscal support delivered through large capital projects is rolling out too slowly to materially offset near-term weakness in activity. If layoffs persist at their recent pace and the United States were to withdraw from the Canada‑US‑Mexico Agreement, the case for an additional round of monetary easing would strengthen.

Absent that downside scenario, the more plausible path is a slow and limited normalization of policy. Market pricing currently anticipates a 25‑basis‑point increase in the overnight rate by the end of next year.

Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres
drsherrycooper@dominionlending.ca

November is Financial Literacy Month in Canada — and one of the most misunderstood areas I come across when working with clients is their credit score and how it directly impacts their mortgage options, interest rates, and long-term financial flexibility.

For many clients, the credit score isn’t just a number — it’s the foundation of their borrowing power. Yet, even financially responsible people often misunderstand how it’s calculated or what affects it.

Here are three of the biggest misconceptions I see:

1. “Checking my score will hurt it.”
   When a mortgage broker checks your credit, it’s considered a soft inquiry within a short timeframe and does not negatively impact your score. In fact, it’s better for one broker to review your file than to have multiple banks pull credit individually.
2. “If I make the minimum payment, my score is fine.”
   Minimum payments keep you in good standing, but high utilization (balances above 30% of your credit limit) can drag your score down — even if you never miss a payment.
3. “My income affects my credit score.”
   Your credit score measures how you manage debt — not how much you earn. However, lenders assess your income separately to evaluate your ability to take on new debt.

Here’s what actually builds a strong credit profile:

1. Consistent, on-time payments. Even a single missed payment can lower your score by 50–100 points.
2. Low credit utilization. Keeping balances below 30% of available limits shows financial discipline.
3. Credit diversity and history. A mix of credit types (credit card, line of credit, car loan) with a long track record of repayment builds credibility.
4. Avoiding unnecessary credit. Each new account shortens your average history and can trigger temporary dips in your score.

Why it matters for your clients:

• A higher score (typically above 680) opens doors to prime mortgage rates and more lender options.
• Weaker credit can limit borrowers to higher-rate or restricted products, which can cost thousands more over time.
• Improving credit by even 25–50 points before purchase or renewal can translate into real savings and negotiating power.

As professionals, one of the best gifts we can give our clients this Financial Literacy Month is education. Helping them understand their credit health before they make a purchase, refinance, or investment move allows us to build stronger, faster-closing files — and ultimately, happier clients.

Check out the below Credit Health Checklist

Federal Budget Revamp, FY 2025-2026

Today, Finance Minister François-Philippe Champagne presented his first budget. Mark Carney was elected Prime Minister with a mandate to transform Canada’s economy and reduce its dependence on trade with the United States. The Carney government’s inaugural budget emphasizes structural changes to strengthen the domestic economy and boost non-U.S. exports, and it will be funded by an increase in government debt.

Carney, a former central banker who took office in March, has committed to decreasing reliance on the U.S. by increasing military spending, accelerating infrastructure projects, speeding up housing construction, and enhancing business competitiveness. Given the current large deficits and a rising debt-to-GDP ratio, the government cannot afford higher long-term interest rates. Carney has promised to build a stronger Canada using domestic resources and labour, noting that only 40% of the steel used in Canada is produced domestically, and he intends to change that.

Champagne has cautioned that the public service will need to shrink as the government strives to balance the budget in the coming years. Carney also faces a political challenge in convincing some opposition members to support his budget or at least abstain from voting against it. His Liberal Party caucus is currently three seats short of a majority in the House of Commons, meaning it cannot pass the budget on its own.

Unemployment remains high, economic growth is weak, and exporters, along with business investment, are still struggling due to U.S. tariffs. Carney and Champagne must persuade citizens that jobs, real wages, and living standards will eventually improve if they can stimulate both domestic and foreign investment.

Last week, the Bank of Canada indicated that it is nearing the limit of monetary stimulus it can provide without triggering inflation. Governor Tiff Macklem has consistently stated that he sees fiscal policy as a more effective tool to counter the adverse effects of the trade war, which he perceives as a negative supply shock.

The chart above indicates that Canada not only had the lowest deficit-to-GDP ratio in the G-7 but also among all countries with a triple-A credit rating. However, the rate at which we are issuing net new debt is expected to accelerate over the next year or two. Canada needs to assure the bond market that we will maintain our triple-A credit rating to keep financing costs manageable.

Ottawa has divided the budget into two parts: the operating budget and the capital spending budget. The operating budget covers the costs of running the federal government, which includes salaries, wages, rent, and interest payments on the debt. Carney has urged government leaders to review their operating budgets and eliminate unnecessary costs, which include downsizing the federal workforce.

A similar approach is used in countries like the United Kingdom and New Zealand, as well as by some provinces here at home. In principle, this shift could enhance transparency by allowing a better understanding of how public funds are allocated between day‑to‑day program spending and long‑term investments intended to boost future growth.

The capital spending budget is more complex because it’s harder to determine which expenditures will enhance growth and productivity. For instance, while the government is increasing defence spending to meet our NATO obligations, not all of it will contribute to productivity growth.

Ottawa’s agenda highlights major infrastructure projects, defence initiatives, housing, significant undertakings like pipelines, enhanced ports, and the development of the Ring of Fire. Federal leadership believes there is a role for industrial policy, as well as measures aimed at broad deregulation and tax competitiveness.

This year’s federal budget projects a deficit of $78.3 billion—nearly double the Liberals’ projection a year ago—prioritizing capital project spending over services. The deficit is expected to decrease gradually to $56.6 billion by 2029-30. Only a year ago, the Liberals forecast a 2025 budget deficit of $42.2 billion, but that was before trade uncertainty and tariff inflation hit our shores with the inauguration of Donald Trump last January.

The budget presents both downside and upside scenarios. In the downside scenario, ongoing trade uncertainty could worsen the budgetary balance by $9.2 billion annually, while the upside scenario anticipates a $5 billion annual improvement contingent on easing trade uncertainties.

Finance Minister François-Philippe Champagne emphasized the need for “generational” investments, allocating $25 billion to housing, $30 billion to defence, and $115 billion to infrastructure over the next five years. He criticized proposals to cap the deficit at $42 billion, advocating instead for investments to drive future growth.

The 2025 budget introduces a new format that separates capital and operational spending, with capital investments accounting for 58% of this year’s combined deficit. This shift aims to catalyze $500 billion in private-sector investment. However, we should be skeptical that such animal spirits will materialize quickly, given the immense uncertainty about the future of the Canada-Mexico-US free trade agreement.

The budget pledges to balance operational spending in three years.

Ottawa has been running a “comprehensive expenditure review” to spend less on the day-to-day operations of the federal government. According to the budget, that plan will save $13 billion annually by 2028-29, for a total of $60 billion in savings and revenues over five years.

The budget promises more taxpayer dollars will go toward “nation-building infrastructure, clean energy, innovation, productivity and less on day-to-day operating spending.” This “new discipline” will help protect social benefits, the budget promises.

The public service will see a drop of about 40,000 positions over the coming years. The budget projects it will have 330,000 employees in 2028-29, down from the 368,000 counted last year.

To confront an anemic economic picture, the government says it’s “supercharging growth” and vows to “make Canada’s investment environment more competitive than the U.S.”

To that end, the budget introduces a “productivity super-deduction” tax measure that will allow companies to write off a larger share of capital investments more quickly.

There are also new measures specifically for writing off expenses for manufacturing or processing buildings, as well as a new capital cost allowance for liquefied natural gas (LNG) equipment and related buildings.

Build Baby Build
Fast-tracking nation-building projects: In close partnership with provinces, territories, Indigenous Peoples, and private investors, the government is streamlining regulatory approvals and helping to structure financing.

Additional Cuts to Immigration
Selling it as Ottawa “taking back control” over an immigration system that has put pressure on Canada’s housing supply and health-care system, budget 2025 promises to lower admission targets.

The new plan proposes to drastically reduce the target for new temporary resident admissions from 673,650 in 2025 to 385,000 in 2026.

The 2026-28 immigration levels plan would keep permanent resident admission targets at 380,000 per year, down from 395,000 in 2025.

Ending Some High-End Taxes
The government is also proposing to undertake a one-time measure to accelerate the transition of up to 33,000 work permit holders to permanent residency in 2026 and 2027.

“These workers have established strong roots in their communities, are paying taxes and are helping to build the strong economy Canada needs,” the budget notes.

To fill labour gaps, the Liberals’ plan includes a foreign credential recognition action fund to work with the provinces and territories to improve transparency, timeliness and consistency of foreign credential recognition.

It would also launch a strategy to attract international talent, including a one-time initiative to recruit over 1,000 highly qualified international researchers to Canada.

In addition, there were billions of dollars in increased defence spending, the details of which are still sketchy.

Bottom Line

Nothing in this budget is surprising, as most of it has been telegraphed in recent weeks. The budget asserts that “the global trade landscape is changing rapidly, as the United States reshapes its economic relationships and supply chains around the world. The impact is profound—hurting Canadian companies, displacing workers, disrupting supply chains, and creating uncertainty that holds back investment. This level of uncertainty is greater than what we have seen in recent crises. Budget 2025 makes generational investments while maintaining Canada’s strong fiscal advantage—a foundation that allows us to invest ambitiously and responsibly, and build Canada’s economy to be the strongest in the G-7.”

Canada has the lowest net debt-to-GDP ratio among the G-7 and one of the smallest deficit-to-GDP ratios. Canada and Germany are the only two G-7 economies rated triple-A, a marker of strong investor confidence which helps keep our borrowing costs as low as possible. This is a time for bold actions to bolster Canada’s competitiveness. We have products the world needs. Hopefully, we can salvage a significant part of the trade agreement with the US, but the odds suggest we build the infrastructure necessary to trade our products worldwide.

Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres
drsherrycooper@dominionlending.ca

Bank of Canada Lowers Policy Rate to 2.25%

Today, the Bank of Canada lowered the overnight policy rate by 25 bps to 2.25% as was widely expected. This is the bottom of the Bank’s estimate of the neutral overnight rate, where monetary policy is neither expansionary nor contractionary. The economy will grow at about a 0.5% pace in Q3, causing the Bank to cut rates again at the final meeting this year on December 10. The easing will then end, but rates will remain relatively subdued until more trade uncertainty is alleviated.

The Fed is widely expected to cut rates by 25 bps this afternoon as well.

Today’s Monetary Policy Report suggests that the significant decline in export growth will persist for some time. Layoffs in trade-dependent sectors have already slowed considerably, especially in Ontario, Quebec, and some softwood lumber businesses in several provinces. The central bank acknowledged that “because US trade policy remains unpredictable and uncertainty is still higher than usual, this projection is subject to a wider-than-normal range of risks.”

“In the United States, economic activity has been strong, supported by the boom in AI investment. At the same time, employment growth has slowed and tariffs have started to push up consumer prices. Growth in the euro area is decelerating due to weaker exports and slowing domestic demand. In China, lower exports to the United States have been offset by higher exports to other countries, but business investment has weakened.  Global financial conditions have eased further since July and oil prices have been fairly stable. The Canadian dollar has depreciated slightly against the US dollar.”

“Canada’s economy contracted by 1.6% in the second quarter, reflecting a drop in exports and weak business investment amid heightened uncertainty. Meanwhile, household spending grew at a healthy pace. US trade actions and related uncertainty are having severe effects on targeted sectors, including autos, steel, aluminum, and lumber. As a result, GDP growth is expected to be weak in the second half of the year. Growth will get some support from rising consumer and government spending and residential investment, and then pick up gradually as exports and business investment begin to recover.”

Canada’s labour market remains soft, and job vacancies have declined sharply despite the September improvement in job growth. Job losses continue to mount in trade-impacted sectors, and hiring has been weak across the economy. The unemployment rate remained at 7.1%, well above the US rate of 4.3%. Slower population growth translates into fewer new jobs and less inflation pressure. On a per capita basis, the economy is already in a recession.

The Bank projects GDP will grow by 1.2% in 2025, 1.1% in 2026 and 1.6% in 2027. Quarterly, growth strengthens in 2026 after a weak second half of this year. Excess capacity in the economy is expected to persist and be gradually absorbed.

“CPI inflation was 2.4% in September, slightly higher than the Bank had anticipated. Inflation excluding taxes was 2.9%. The Bank’s preferred measures of core inflation have been sticky around 3%. Expanding the range of indicators to include alternative measures of core inflation and the distribution of price changes among CPI components suggests underlying inflation remains around 2.5%. The Bank expects inflationary pressures to ease in the months ahead and CPI inflation to remain near 2% over the projection horizon”.

“If inflation and economic activity evolve broadly in line with the October projection, the Governing Council sees the current policy rate at about the right level to keep inflation close to 2% while helping the economy through this period of structural adjustment. If the outlook changes, we are prepared to respond. Governing Council will be assessing incoming data carefully relative to the Bank’s forecast.”

Bottom Line

The Bank of Canada has shown its willingness to bolster the Canadian economy amid unprecedented trade uncertainty. While Canada is working hard to establish alternate trade partners, even China cannot replace the US in terms of proximity and cost-effectiveness, given the huge transport costs. China has stepped up its oil purchases to record levels, but larger oil flows east will require additional pipelines to BC. There is no market the size of the US market to replace exports of steel and aluminum. The US will also suffer from the economic impact of stepping away from the Canada-US-Mexico free trade deal. A renegotiation of the contract is likely to come before the end of next year. As of now, the US is signalling their desire to exit the agreement. We can only hope that cooler heads will prevail.

The auto industry is a case in point. Onshoring non-US auto production would require a 75% increase in US production and the construction of $50 billion in new factories. This would take years and significantly reduce the profitability of US auto companies.

Canada is the US’s number one supplier of steel and aluminum, with its competitively low hydroelectric costs. It will take time for the US to create the capacity to replace aluminum imports from Quebec.

Canada is the number one trading partner for 32 American states, many of which are lobbying Washington to end this CUSMA bashing.

It will take time for Canada to adjust to this new reality, which leads us to conclude that another cut in overnight rates is probable at the next decision date on December 10.

Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres
drsherrycooper@dominionlending.ca

Canadian Home Sales Post Best September In Four Years

Today’s release of the September housing data by the Canadian Real Estate Association (CREA) showed a pullback on the housing front. The number of home sales recorded through Canadian MLS® Systems declined by 1.7% on a month-over-month basis in September 2025. Nevertheless, it was the best month of September for sales since 2021.

The slight monthly decline was the result of lower sales activity in Greater Vancouver, Calgary, Edmonton, Ottawa, and Montreal, which more than offset gains in the Greater Toronto Area and Winnipeg.

“While the trend of rising sales that began earlier this year took a breather in September, activity was still running at the highest level for that month since 2021, and that was true in July and August as well, said Shaun Cathcart, CREA’s Senior Economist. “With three years of pent-up demand still out there and more normal interest rates finally here, the forecast continues to be for further upward momentum in home sales over the final quarter of the year and into 2026.”

New Listings

New supply dropped 0.8% month-over-month in September. Combined with a slightly larger decline in sales activity, the sales-to-new listings ratio eased slightly to 50.7% compared to 51.2% in August. The long-term average for the national sales-to-new listings ratio is 54.9%, with readings roughly between 45% and 65% generally consistent with balanced housing market conditions.

There were 199,772 properties listed for sale on all Canadian MLS® Systems at the end of September 2025, up 7.5% from a year earlier but very close to the long-term average for that time of the year.

“While there are more buyers in the market now than at almost any other point in the last four years, sales activity is still below average and well below where the long-term trend suggests it should be,” said Valérie Paquin, CREA Chair. “As such, we expect things to continue to pick up steadily in the future.

There were 4.4 months of inventory on a national basis at the end of September 2025, unchanged from July and August and the lowest level since January. The long-term average for this measure of market balance is five months of inventory. Based on one standard deviation above and below that long-term average, a seller’s market would be below 3.6 months, and a buyer’s market would be above 6.4 months.

Home Prices

The National Composite MLS® Home Price Index (HPI) was again almost unchanged (-0.1%) between August and September 2025. Following declines in the first quarter of the year, the national benchmark price has remained mostly stable since April.

The non-seasonally adjusted National Composite MLS® HPI was down 3.4% compared to September 2024. Based on the extent to which prices fell off beginning in the fall of 2024, look for year-over-year declines to shrink in the fourth quarter of the year.

Bottom Line

Homebuyers are responding to improving fundamentals in the Canadian housing market. Supply has risen as new listings surged until May of this year. Additionally, the national benchmark average price is 3.5% lower than it was a year earlier. That decrease was smaller than in August.

The view is nearly unanimous that the Federal Reserve will cut the overnight policy rate again by 25 basis points when it meets again on October 29.

The jury is out on the Bank of Canada’s next move. Their decision date is also October 29. While the stronger-than-expected labour market report might have dissuaded the Bank from easing, all eyes will be on the next CPI report on October 21.

With the Bank of Canada cutting the policy rate halfway through September and another 25-basis-point reduction expected by January, if not sooner, the CREA forecasts sales to rise by 7.7% in 2026.

“Interest rates were always going to be the thing that brought this thing back to life,” Cathcart said in an interview. “While that long-anticipated recovery has been delayed and dampened by trade uncertainty, the Bank of Canada is getting close to dipping out of the neutral range and into stimulative territory.

Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres
drsherrycooper@dominionlending.ca