By BDC
MONTREAL, Canada – Tariffs, immigration and interest rates will shape the business environment for the year. Learn what you can do about it.
Table of contents
- Lower inflation should give entrepreneurs some respite
- Tariff threats will create uncertainty for Canada-U.S. trade
- Lower population growth could make it harder to find employees
- A wind of cautious optimism for the venture capital ecosystem
Canadian entrepreneurs will be asked to navigate a landscape marked by both opportunities and challenges in 2025. While the economic outlook suggests higher growth than in 2024, the continued effect of inflation, the uncertainty of a changing administration in the US and a declining population will represent challenges for business owners.
Entrepreneurs will need to be agile and innovative to respond to these evolving dynamics. A focus on good cash flow management, efficiency, and a willingness to adapt to new trends will ensure that your business will not only survive but thrive in the coming year.
Read on to discover what you can expect for the coming year.
Lower inflation should give entrepreneurs some respite
The Canadian economy is expected to grow by around 1.5 percent for the year.
Rising costs and inflation have been the main challenges for entrepreneurs over the past two years and the situation should improve in 2025. Inflation is expected to stay within the Bank of Canada target range of about 2 percent . This should encourage the central bank to continue cutting its interest rate toward the neutral point of 2.75 percent by mid-2025.
Interest rates will be a deciding factor in the year ahead, and we expect them to bring momentum back to the economy. Growth will largely be driven by consumer spending and a rebound in residential investment. Essentially, we can expect a recovery in the spending categories most impacted by interest rate hikes that started in 2022.
However, the effects of inflation will continue to challenge Canadian entrepreneurs. Even as rates are lowered and inflation comes under control, a higher debt burden will continue to weigh down households. Meanwhile, the higher prices suppliers have been forced to charge because of rising inflation will not go down as inflation slows. Prices will just increase at a slower, more sustainable pace.
Overall, the economy will continue its safe landing following a peak in activity in 2022.
How to start 2025 on the right foot?
– Focus on cash flow management
Lower inflation doesn’t mean that costs will come down. This means cash flow and profitability will remain under pressure for a while. Diligent cash flow management and a focus on the core drivers of profitability will ensure your business can remain viable in 2025.
Find ways to boost your profits
The start of the year can be a good time to review your books and see where you are making or losing money. Do you need to raise your prices? Find new suppliers? Review production processes? Boosting profits will help you deal with uncertainty and allow you to reinvest in your business.
Stay on top of technology and other business trends
Remain aware of new trends impacting your business and act upon them. Last year saw the rise of artificial intelligence (AI) as a major force for change in business. AI and other technologies will continue to disrupt markets and industries. Use these as an opportunity to make your business more productive and to lower your costs.
Tariff threats will create uncertainty for Canada-US trade
President-elect Donald Trump has threatened to impose a 25 percent tariff on all products entering the United States from Canada and Mexico when he is inaugurated on January 20. Meanwhile, Canada is already examining possible retaliatory tariffs on certain US items should these threats materialize.
The potential tariffs could significantly impact several sectors, including automotive, construction and manufacturing, and they could lead to higher prices for American and Canadian consumers. Tariffs could also fuel inflation and disrupt the highly integrated supply chains that currently exist between the three countries.
It’s not just businesses that trade directly with the United States that could be impacted. Your business could be impacted if you sell to a company that exports to the United States, for example. Proposed tariffs could also impact the import of goods from China or Mexico transiting through the United States. High tariffs could even lead to a recession if Canada were to retaliate with the same intensity (25% tariffs). Such a situation would impact all types of companies, even those that have nothing to do with trade.
While it’s unclear whether these tariffs are meant to be enacted or simply a negotiation tactic, the responsible thing to do is to start planning for what they could mean for your business. This involves understanding their direct and indirect impacts on your operations and supply chain.
How to start 2025 on the right foot?
- Start calling clients and suppliers
Calling up clients to anticipate the effects these tariffs could have on their purchases from your business is a good place to start. You will also want to talk with your suppliers to understand how these tariffs will affect the price and availability of the goods you buy.
Build different scenarios
The next step is to build various scenarios, from a worst-case to a moderate and best-case. What would full 25% tariffs across the board mean for your business? What would happen with more targeted tariffs on specific industries? Will this new situation create opportunities for you? Answering these questions will help you plan what you need to do if any level of tariffs are ever enacted.
Try to improve your competitiveness
Focusing on operational efficiency or digital transformation can help reduce costs and improve your productivity. Regardless of what happens, these types of initiatives can help your business remain viable over the long term and in uncertain situations.
Get used to uncertainty
Our trade relationship with the United States will be more uncertain in 2025 than it has been in the past. Trying to work out how different scenarios could affect your business and how best to take advantage of them will help you reduce risk and forge a path forward.
Lower population growth could make it harder to find employees
Canada’s 2025-2027 Immigration Levels Plan projects a 0.2 percent population decline in 2025 and 2026 before returning to 0.8 percent growth in 2027. Meanwhile, the population aged 65 and over will grow by almost 3 percent per year.
The working-age population, aged 15-64, could fall by more than 450,000 between the end of 2024 and the end of 2026. By comparison, international immigration and net non-permanent residents from this age group grew by over 1 million in 2024 (that’s roughly the entire population of Nova Scotia).
Canada’s population growth reached 3.1 percent in 2023 and has been one of the main drivers of GDP growth for the past few years. A declining population will keep a lid on growth, especially given the Canadian population’s age composition. An ageing population will also lead to changing consumption patterns.
However, the biggest impact for entrepreneurs will likely be a reduced pool of potential workers. A decline in the working-age population could lead to labour shortages that are likely to hit certain regions or sectors harder than others.
How to start 2025 on the right foot?
– Improve efficiency with technology and automation
Investing in labour-saving technologies is the most effective tool against a labour shortage, according to BDC research.
The right technology streamlines processes, minimizes errors, and frees up staff to focus on more meaningful work. It also supports employees in their jobs, making your workplace more pleasant and your workers happy and productive. Most of all, it doesn’t have to be complicated. More and more software solutions are affordable, easy to use and sometimes free to try.
Develop a people strategy to attract and retain top talent
When new recruits are hard to find, a total rewards strategy can help set your business apart. It starts with competitive, equitable salaries and flexible benefits. These attract talent.
Growth opportunities like training and advancement can further help retain employees. A positive company culture is another effective way to position yourself as a desirable employer and reduce turnover.
There are unique pros to working for a start-up or a smaller company. The culture is often more laid back and you can often provide direct benefits to your local community. Be clear about these benefits in your job posting to showcase advantages beyond salary and benefits.
Expand your talent pool
With fewer candidates on the market, hire for attitude and train for skills.
Practically speaking, this means expanding your search to include candidates who are from another industry, those with less experience or people looking to re-enter the workforce after a prolonged absence. This is also an effective way to build an engaged and loyal workforce.
Consider providing training to existing staff. Contact local schools and universities to develop a talent pool of recent graduates.
You can also think about expanding your search to include remote workers or freelancers. This is especially useful if key roles are hard to fill locally. Remote workers can also reduce overhead costs by decreasing the need for more workspace.
A wind of cautious optimism for the venture capital ecosystem
The Canadian venture capital (VC) ecosystem witnessed cautious optimism in 2024 as investors tried to navigate a mixed macroeconomic environment. Although the number of transactions was lower than in 2023, transaction sizes were larger, leading to higher average deal sizes.
Investor’s cautious investment approach led to slower-than-expected capital deployment. This has left them with enough capital to invest in high-potential start-ups and emerging opportunities despite slower fundraising since 2022.
There is worry in the industry that a lower internal rate of return could prompt institutional investors to readjust their portfolio away from VC. However, declining interest rates could help allay these fears and potentially could provide a momentum for VC fundraising in 2025. Additionally, the full operationalization of the renewed Venture Capital Catalyst Initiative is likely to inject additional capital and provide momentum to the Canadian ecosystem.
Exit activity has been hurt by a drought of initial public offerings (IPOs). There has only been one VC-back IPO since 2022. Meanwhile, mergers and acquisitions (M&A) have been driven by big-ticket deals. 2025 might see an uptick in exit activity as limited partners pressure fund managers to increase distributions and companies return to a scale-up mentality.
Despite these challenges, sectors such as enterprise technology and clean tech continue to attract substantial investment. Meanwhile, the integration of environmental, social and governance (ESG) factors is becoming increasingly important in investment decisions.
Economic uncertainty, inflation, and geopolitical risks remain significant concerns for entrepreneurs and investors in the Canadian VC ecosystem.
The election a new administration in the US is likely to lead to a reduction in US corporate taxes, which could make the US more appealing to Canadian entrepreneurs and investors. The threat of tariffs on imports to the U.S. will also increase uncertainty and hurt Canada’s attractiveness.
One major point of uncertainty for the clean tech sector, in particular, is the future of the US’s Inflation Reduction Act. The Act includes major tax incentives to spur investment in clean energy projects and reduce greenhouse gas emissions. It has been criticized by the incoming President while on the campaign trail, creating speculation it could be repealed. However, many projects are already underway and cancelling them now would be politically difficult. While the law will likely be stripped down, climate tech companies will likely continue to benefit from ongoing projects.
How to start 2025 on the right foot?
- Talk to clients and suppliers and start building different scenarios to help manage the uncertainty created by the Trump tariff threats.
- Take advantage of lower borrowing costs to invest in innovation, technology and productivity to navigate complexities in 2025 and beyond.
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