Canada’s economy grew faster than expected in early 2025. But dig past these positive headlines and just about everyone can see that cracks are forming. This is the situation the Bank of Canada economists are in as they make one of its toughest calls yet: lower rates or stay the course?
Split economy complicates the July 30 decision
Canada’s GDP surprised forecasters with a 2.2% annualized growth rate in Q1, fueled by strong exports and government spending. On paper, the economy looks healthy. But dig deeper, and the picture gets murkier. Households are stretched thin. Small businesses are pulling back. Delinquencies are up, hiring is down.
That leaves the Bank of Canada facing a classic policy dilemma: hold steady to keep inflation in check, or cut rates to cushion an economy showing signs of fatigue? As the July 30 decision approaches, the answer is anything but clear.
The growth story: Why Q1 GDP beat expectations
According to Statistics Canada, the 2.2% Q1 growth came from three primary sources: booming exports — especially oil, energy, and agricultural goods — alongside robust public sector spending and relatively stable business investment.
This momentum was unexpected. Analysts had forecast something closer to 1.4%, citing high interest rates and global uncertainty. But as BMO senior economist Sal Guatieri noted, the GDP data reflects “a surprising resilience, especially in trade-related sectors.”
It’s a headline the BoC can’t ignore. Economic strength, especially if sustained, could reaccelerate inflationary pressures the central bank has worked hard to suppress.
The softness beneath the surface
Yet for many Canadians, this "resilience" doesn’t feel real — and for good reason.
Households under pressure
Consumer spending growth has slowed to a crawl, a signal that households are feeling the pinch of higher borrowing costs. And with interest rates still elevated above the historical lows of 2020 and 2021, Canadians are using more of their income to service debt. This comes at a price. Rather than spending to fuel the economy, Canadians are paying what they owe.
Then there’s mortgage renewals; many mortgages were many locked in during the ultra-low-rate era of 2020/2021. Almost five years later, many are resetting at rates that are two to three times higher, leading to monthly payment shocks of hundreds — in some cases thousands — of dollars. Renters aren’t faring much better, with vacancy rates near record lows and rent inflation running hot in major urban centers.
All this financial stress is showing up in the data. Credit card balances have hit all-time highs, and delinquency rates are rising across most age groups — especially among millennials and Gen Z borrowers. Personal loan defaults are ticking up and insolvency filings have started to trend higher. For many households, the choice is increasingly between keeping up with debt or cutting back sharply on spending. That’s a dynamic with real macroeconomic consequences — and the Bank of Canada is watching it closely.
Business strain
At the same time, businesses across key sectors are pulling back, reacting to a weakening demand environment and the sustained pressure of high borrowing costs.
In retail, sluggish foot traffic and shrinking consumer budgets have led to layoffs and hiring freezes.
Construction — a sector highly sensitive to interest rates — is facing project delays, scaled-back developments, and job losses, particularly in residential housing. Commercial builders are also reassessing risk, especially as financing costs bite into margins and demand for new space softens.
Beyond labour, business sentiment is cooling. Capital investment plans are being shelved or deferred, with many firms choosing to preserve cash rather than expand. Small and medium-sized enterprises (SMEs), which make up the bulk of private-sector employment, are reporting tighter credit conditions and declining confidence in future sales. Even sectors that benefitted from post-pandemic momentum, like manufacturing and professional services, are beginning to show signs of fatigue.
The Bank of Canada’s June Monetary Policy Report didn’t mince words. It acknowledged “soft domestic demand” and a “cooling labour market” — in other words: polite central bank speak for growing economic strain. While inflation has come down, the economy is slowing in a way that’s becoming harder to dismiss as a mere post-pandemic normalization.
The disconnect between headline GDP and the day-to-day realities of business leaders and workers is stark. Economic output can look strong, even as the underlying foundations begin to crack. For the BoC, this complicates the path forward. Should it trust the backward-looking growth data — or place more weight on leading indicators that suggest fragility ahead?
BoC’s tightrope: One data set says ‘wait,’ the other says ‘cut’
So, what should Canada’s central bank do? The GDP numbers argue for caution. Strong output suggests the economy can handle higher rates. But the weakness in domestic consumption and business sentiment points toward fragility — and possibly recessionary risk.
Central bankers often view GDP as a lagging indicator. What looks strong today might reflect decisions and momentum from six months ago. The current softness in households and hiring may be the leading edge of a deeper downturn.
This wouldn’t be the first time the BoC has acted preemptively. In 2015, for instance, it cut rates in the face of falling oil prices despite steady GDP. In 2001, it eased policy quickly after signs of slowing, even as official output data still looked fine.
What to watch ahead of the July 30 overnight rate decision
Before the BoC meets, a few key data releases will help shape the final decision:
- June CPI (due July 16): A soft inflation print could tip the scales toward a cut.
- Labour Force Survey (early July): More evidence of job market weakness will raise alarms.
- Consumer and business sentiment: Confidence levels may foreshadow spending and investment shifts before they show up in hard data.
- Markets are split. Futures pricing shows about a 55% to 60% chance of a cut in July, with more traders betting on September. Bond yields have edged lower, and the Canadian dollar has softened — both signs that investors expect easier policy soon.
The case for patience — or pre-emptive action
The Bank of Canada is threading a narrow path. Cut too soon, and it risks letting inflation rebound. Wait too long, and it could worsen the pain already spreading through households and small businesses.
This decision may hinge less on GDP and more on whether signs of economic fragility grow too loud to ignore. As July 30 approaches, the question isn’t just what the economy has done — it’s what happens next. Will the Bank hold the line, or act now to get ahead of the slowdown? For most experts, there is an expectation that the Bank of Canada will maintain the current rate while signalling readiness to cut if Q2 data — on inflation, jobs, consumption, and business activity — continues to disappoint. At this point, a rate cut is now expected in September, assuming domestic fragility persists.
This article provides information only and should not be construed as advice. It is provided without warranty of any kind.
