By BDC
MONTREAL, Canada – After two years of rising interest rates, the effects on Ontario’s economy were fully felt in 2024. High rates dragged down consumer spending, the housing market and business investment. The result was the most marked slowdown among the provinces last year. In 2025, we should see a slow rebound. Rate cuts will start working their way through the economy and growth will improve, especially in interest rate sensitive sectors. The residential housing market will be an important driver of growth and further support will come from major investments in the auto sector.
Higher mortgage payments will hurt, but overall household spending should increase
Since 2022, household spending in Ontario has been cautious in the face of higher debt payments. When the Bank of Canada began increasing rates in the first quarter of 2022, Ontarians turned to rebuilding their savings.
This year, homeowners renewing their mortgages will still have to do so at higher rates despite last year’s reductions. This will push them to save more and limit their spending. However, many households are either mortgage-free or are not facing a renewal this year.
Overall, higher disposable income per capita, lower rates and the Ontario’s government’s family rebate policy, coupled with some possible federal tax relief, should lead to stronger consumer spending this year and a return to the long-term growth trend in consumption
Housing market recovers
The skies are finally clearing for the housing sector in Ontario. Home sales began rising quickly after the Bank of Canada kicked off its rate-cutting cycle in June 2024. While we don’t expect a return to peak levels in the real estate market due to an expected population decline in the next two years, we still think the market will perform better in 2025. However, lower population growth will likely impact demand for rentals and dampen investor appetite keeping a lid on price increases.
On the residential investment side, the Bank of Canada will continue to lower rates this year and the government plan to build 1.5 million homes by 2031. These factors should stimulate residential construction this year and beyond. Longer term, residential development should be supported by a return to population growth once temporary measures on immigration are lifted.
A slow start to the year should give way to stronger growth
At the start of 2025, sectors that struggled in 2024 continue to deal with uncertainty generated by the threat of trade tarrifs. Last year, a weak housing market weighed on the construction sector and weaker demand for goods hurt the manufacturing sector. Manufacturing sales declined by 5.4 percent at year end, dragged down by a decline of 7.9 percent in durable goods sales and retooling of plants in the Ontario and the US.
However, consumers are expected to spend more on goods in 2025 which should help the manufacturing sector and overall growth. For exporters, US demand for Ontario’s goods should remain positive as long as tarrifs threats are not fully implemented. Despite headwinds, the outlook for the province is positive with major projects in the works. Honda announced a massive $15-billion investment in four new electric vehicle battery and assembly plants. Another $2 billion is being invested to refurbish a nuclear energy plant to meet growing clean energy demand. These projects in the non-residential sector are important for the province and will feed through the economy this year and following ones.
The impact on your business
- Lower interest rates will lighten consumer debt burdens, freeing up cash for spending. This could present opportunities for your business to improve sales by targeting specific markets.
- Credit conditions are easing for businesses and entrepreneurs will have access to financing at lower cost. A good way to start the new year is by planning your future investments with an eye to improving your company’s productivity.
- Major investments in certain sectors will have ripple effects through the economy. It’s a good time to assess how your business can take advantage of opportunities in your sector.
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