The Business Data Lab Podcast EP 1
SUMMARY KEYWORDS
affordability challenges, labor disruptions, immigration slowdown, Trump tariffs, interest rates, weakening dollar, Canadian trade, housing prices, productivity improvement, AI adoption, supply chain diversification, labor concerns, economic growth, inflation impact, election year
SPEAKERS
Stephen Tapp, Patrick Gill, Marwa Abdou
Marwa Abdou 00:00
We've assembled some experts from the Business Data Lab, or BDL, to discuss eight predictions for the year ahead. Stephen Tapp is the chief economist at the Canadian Chamber of Commerce, and he leads the BDL. Patrick Gill is a senior director at the business data lab, and I am a senior research director at the chamber. Welcome Stephen and Patrick, thanks for having us on the show. Glad to be here. Let's dig into what's ahead for Canada in 2025 Steven, tell us about your prediction number one on affordability challenges.
Stephen Tapp 00:52
Sure. Mara, so I think one of the big stories in 2024 looking back, was the fact that inflation in Canada actually came down a lot faster than most economists were expecting. The inflation has been inside the Bank of Canada's target band for at least the last 10 months now, and we're back finally, to the 2% target that the bank is looking for for inflation. So I think we can characterize this as a bit of a soft ish landing, and it's, it's, uh, better than I think a lot of economists were expecting. If you go back a year from now, I think at the other side of things, though, this is not really a mission accomplished banner moment for the central bank. Folks around general a situation have not been feeling very good about the overall financial situation. We have really lived through a generational price increase and overshoot in the price level. So inflation reached over 8% back in 2022 so the cumulative level of prices is a lot higher than it would have been had the bank been able to keep inflation back to target, and particularly for some of those things that are essential for households, about groceries and what housing those were some of the areas where prices went up the most. What the central bank does, though, given the inflation target mandate, is they look ahead. They don't look back, so they're not trying to make up for the fact that the prices went up a lot, and so keeping inflation at 2% means we're going to be living with this overshoot in prices. And like I mentioned before, a lot of households are struggling. The first prediction, I think, is a relatively safe one, and that is that affordability is going to stay a key issue for households, but also for politicians. I think in this year, we have an election year coming up, and I think one of the key themes of the federal election will likely be affordability.
Marwa Abdou 02:22
Makes complete sense. Patrick, we're coming off of a year that's record year for work stoppages and labor strikes. I wanted to ask you a little bit about what we can expect for the year ahead and how that might impact Canada and Canadians.
Patrick Gill 02:36
Yeah. Can you believe that last year we lost the most number of days to work in 40 years due to labor disruptions. Think of strikes and lockouts. And two things really fueled those work stoppages last year and will continue to put pressure in 2025 and those two things are inflation and timing. You know, inflation has driven up the cost for ordinary workers, creating a lot of anxiety, putting a lot of pressure on collective bargaining. Inflation also pumped up wages for workers across the Canadian economy. And timing. You know, they say timing in life is everything very much here, because what just so happens to be taking place is that a number of collective bargaining agreements are starting to open up and fall during a period at the end of of these inflationary effects of higher wages and and higher costs, those collective agreements are creating a bit of a domino effect, where you get a sweeter collective agreement negotiated earlier in the year, and then that sort of cascades and affects all the collective bargaining agreements that happen afterwards. So this is still going to happen next year. This past year, we saw major strikes for our ports, our rails, our postal strikes. You have to remember that postal strike, you know, it's not fully settled well. It's delayed till middle 2025, so these have major implications on supply chains for businesses and not going away.
Marwa Abdou 04:00
Steven,obviously, we've coming off of a period where we've had the highest immigration rates in decades. And I wanted to hear a little bit more about the implications of slower immigration growth on the business, Canadian businesses and the economy, from you.
Stephen Tapp 04:14
Sure. Yeah. I mean, the third prediction is really about immigration slowing down, but a lot of trouble potentially for the government to hit the target in 2025 looking back before, as we were early in the pandemic in 2020 2021 there were sentiment restrictions on international borders and the movement of people. And so as we opened up the gates and started to increase the flows we did see over the past couple years, this has been the fastest population growth we had in Canada in the last 60 years, it is growing about three times faster than it normally would, if you go to a sort of a more general period of time, and in terms of the types of flows, in terms of immigration that we've had, it's largely coming from non permanent residents, which would be international students, and then on the other side, temporary foreign workers. So this came at a point in time where Canada has come. Out of the pandemic, but the absorptive capacity of Canada's economy, I think, was was relatively limited, and you saw a lot of pressures on housing markets. So rent prices went up, a lot difficulties accessing doctors and healthcare, challenges infrastructure, just in general, you know, being being an issue in some of Canada's major cities. And so this became a bigger issue for politics, and for politicians, we saw a pretty significant U turn in terms of federal government's policy towards the end of 2024 and so the targets now that have been set for 2025 are really represent a pretty significant slowdown in immigration flows. And if you take the government's targets kind of at their face, what they suggest is that we would go from growing at about over 3% a year in terms of total population growth to actually having negative population growth, a small kind of minus 0.2 but negative and actually for two years in a row. I mean, on the upside, as we had the inflows of immigration that helped the economy in terms of overall consumption and overall spending, as we slow things down, if we're actually dragging three percentage points off of headline growth just from the population side, that's going to be quite challenging. So I think the real sort of situation I'm seeing is that where the government has slammed the brakes on this hard and this fast, businesses are going to be felt, especially those that are relying on temporary foreign workers, some of the structural funding gaps we've had in post secondary education that have relied a lot of international students to fill those on revenue, those are going to be challenged. So my main prediction there on the immigration side is that we're definitely going to see immigration slow in 2025 but I think it's going to be quite a challenge, particularly in an election year, for the government to really hit those targets and to slam the brakes on that hard.
Marwa Abdou 06:29
Now I'm going to take us to another challenge that we've been kind of maybe expecting in a way. Obviously, at the time of this recording, Trump has not yet been sworn in, but we are already feeling the the impacts of his pending term. And I wanted to hear a little bit more about, you know, your fourth prediction regarding Trump's tariffs. He's been letting us know kind of what's coming down the pike and and, yeah, it's, it's definitely looking like it's going to have some major implications for us if he goes all the way through?
Stephen Tapp 07:03
Yeah, so I didn't want to bury prediction for kind of somewhere in the middle, but I think, you know, kind of sucking up all the oxygen in the room, really is the Trump tariff threats. So for all the uncertainty that's happening in Canada, we talked about immigration, we talked about affordability, really the most consequential thing is going to be whether Trump brings tariffs in. And we're likely to know at least the start of that very soon, with Inauguration Day coming, we did live through the first term. I was exported from Canada, and we we saw firsthand a lot of the back and forth, the negotiations, the bluster from Trump. He threatened to pull out of NAFTA. He renegotiated NAFTA. He had threats and on autos and a big trade war with China. So we've been through this before, but the second term could be different. Our base case at this point in time, in terms of predictions, I would be surprised if the tariff man doesn't bring in tariffs. You know, this is what he's been campaigning on. He's been talking about a lot. So we do expect that tariffs will come in, and could come in through emergency measures, through executive orders, relatively quickly. It is pretty unclear in terms of whether that's going to be a high level of tariff at 25% as you said, and cover all industries, whether there is potential for different exemptions for different sectors. We do see in the modeling that we've done. The business data lab with Trevor tomb, have done some modeling in terms of the impacts if you have a 25% tariff against all Canadian exports to the US, that, on its own, would be recessionary. And so, you know, there's certainly potential for some areas like energy, there's a lot of discussion with Premier Smith and Alberta and whether or not we would pull back on energy, but energy is going to be hit in a pretty significant way. The auto sector relies on trade across the border multiple times during production processes, and a lot of the southwestern Ontario companies that are working in manufacturing are similarly situated. So there's the tariff threat itself, which we can sort of we'll live through, and we'll see what the impact of that is. Even the the threat of the tariff that Trump has brought in is causing some concerns for businesses. And if you're thinking about making decisions now on multi million dollar decisions and and the business plan requires access to the US market, I think the most likely outcome is, what we actually saw in the first term, is a lot of Canadian businesses are just going to pause and think, okay, maybe I'm not going to do that investment, or maybe I can do that right now. And so I see a lot of weakness coming for for investment. The initial prediction, I think, is one that, you know, tariffs are probably one that Canada is going to have to deal with. But if you look longer term, if we imagine a period after Trump's second term being over, the ties that bind us together, the economic importance of this cross border relationships, I think that ultimately we will get to a point where we have a trilateral North American trade pact in some form similar to we've had under NAFTA for quite a while. And so I think there is some optimism longer term, but it's going to be a pretty bumpy ride as we get there.
Marwa Abdou 09:34
Now I wanted to take this opportunity to also plug in our new interactive Canada US Trade Tracker. You can find it on our website at the business data lab.ca, and it really allows you to explore in meaningful ways our economic integration and to have a good sense of what are the risks of imposing some of these tariffs. So I welcome all our listeners to head on our website and check that out now. Patrick, I wanted to ask you about what businesses should know about the declining interest rates, and you know how weakening dollar will be impacting the outlook ahead.
Patrick Gill 10:10
The Bank of Canada has cut rates five times and more. Reductions are expected. Rates have lowered from 5% to 3.2% as of January this year, and while the market thinks rates will come down perhaps to 2.6% this year, we see a scenario where rates will go down even further to support, be supportive, against some very real and tangible economic shocks from the pending us tariffs to also population decline. Now, when it comes to the dollar as a Canadian consumer, what can I say now is not the time to go to Disney World, but from a business perspective, a weaker Canadian dollar is a double edged sword for businesses. It benefits exporters such as those within the energy sector, manufacturing and also agriculture, as they export their goods to other markets, but certainly does hurt importers such as retailers.
Marwa Abdou 11:01
Thanks, Patrick. Stephen, I want to go back to this topic of trade. Some of our listeners who may not have a background in trade, maybe you can explain this to us now. Your sixth prediction is that Canadian trade will outperform early in the year. Can you explain that to us, especially as we were just talking about what to expect from from the Trump presidency and how, if tariffs are imposed, how that might impact Canadian trades? Talk us through that.
Stephen Tapp 11:24
I think there's a bit of a precision there, and I don't think that Canadian trade will outperform if you if you think from 2025, as a whole, but the precision there is outperforming early, early in the year, and so as we're in right now, in January. So what I often do is look back at the experiences that we've had in the first term under Trump, and try to extrapolate and think through what we learned we lived through the renegotiation of NAFTA the first time around, and at that point in time, Trump put tariffs in place, but they were relatively narrow, focused on steel, aluminum, and so we can look back at that experience and see what happened. It was a pretty difficult for exporters at that point in time, but there was a period prior to the tariffs coming in place, where Trump was using a certain section of trade law that he was bringing this in, so there was assessments done to see the impact on the US economy and competitiveness issues and other things. So in the intervening period where folks were concerned about the tariffs coming in place, we saw this sort of push and big increase in trade before that. And so we're at a point now as well as I'm talking to chambers around the country, we're doing events in Mississauga and some other places where there's a lot of exporters, and they're telling you right now that's exactly what's happening. So businesses on the the American side are trying to stockpile from Canada, from Mexico, from China as well, to try to get ahead of the tariffs, because people don't really know exactly when tariffs will come in place. And so I do think that we will likely see some strengths. We don't have data yet for December. We will get data in January. So I think in the early periods of time, depending upon when these tariffs come in, there will actually be some support for Canadian exports to the US and additional, additionally, because of the threat of the tariffs themselves, Patrick talked before about the currency. We've seen the Canadian dollar depreciate by over 6% already. And so that's something which cushions a little bit the blow to Canadian exporters. And so I don't think the trade will be as bad as people think in 2025 given the tariffs, but that's only because we'll have a relatively good start if the tariffs do come in, and if they're very broadly applied, you should expect the same as we saw with the aluminum. You should expect a pretty significant reduction in Canada's exports to the US, because a 25% tariff is extremely significant and almost sort of an existential threat to some of these production systems that have been built up over decades.
Marwa Abdou 13:30
Thanks, Steve. In terms of the seventh prediction, I think none of us are surprised that looking to the year ahead, housing will be one of the top and consistent challenges that we continue to face in all over Canada. And this is not something nascent or new. Housing prices have been at the top of, you know, all of Canadians minds, particularly when we talk about immigration. So we're are expecting that there's going to be another rise in in housing prices in 2025 obviously we have, you were expecting that lower interest rates means lowering borrowing costs and extended mortgage amortizations will continue to push housing prices above 700,000 there's obviously supply shortages that will continue to put pressure on the market and on affordability, and particularly for first time buyers. So yeah, housing remains a huge challenge for economic and social stability, and there's no doubt that something that a lot of Canadians will be looking for the next government to really tackle this head on. I want to move to the eighth prediction on productivity. Patrick, what can businesses do to improve productivity in the coming year? And bearing in mind that productivity has been something that we've been talking about for decades. I know here at the business data lab, we've published on productivity. We've talked about the role of AI in enhancing productivity, and we have a paper on that. Can you talk us through some of the key points that we can look to in the year ahead?
Patrick Gill 14:54
Productivity is a critical factor for long term economic growth and community and Standard. Of living, and it's something that Canadian businesses must get serious about. Here's what's happening and what businesses can do. So right now, Canadians are working harder, but not necessarily smarter. Labor productivity in Canada has been weak, with declines in 15 of last 17 quarters. Our own central bankers, who are not known to be alarmists, have called it an emergency. Why? Because, if you can believe the average American worker is producing roughly 40% more than the average Canadian worker per hour, every hour, this is a concerning trend, because it limits our ability to compete globally, and hampers our economic progress. So with interest rates coming down, borrowing is becoming more affordable, creating an opportunity for businesses to invest in productivity, enhancing tools and strategies, whether it's upgrading equipment, investing in employee training or exploring new technologies. Now is the time to really make those moves, and one key area for improvement is the adoption of technologies like generative artificial intelligence, the Chamber has been very actively encouraging businesses to explore how AI can streamline operations, enhance decision making and reduce costs. For instance, AI can automate repetitive tasks, analyze data more efficiently and improve customer service, freeing up people resources for higher value work productivity isn't just about tools, it's it's also about people. And businesses need to invest in upskilling their workforce to ensure their employees are equipped to work more effectively alongside these technologies. Actually, upskilling is probably the most important thing that we could do as a nation, building productivity enhancing exercise so productivity gains won't happen overnight. There is some optimism for next year, but with intentional investments in technology, committing to upskilling our workforce and focusing on working smarter, Canadian businesses can make some strides in 2025.
Marwa Abdou 16:52
Thanks, Patrick, thank you, Steven. Thanks for sharing your expertise and insights. I've definitely learned a lot from both of you, and you know, I think we're doing a lot of great work here at the business data lab without any bias. So I just want to recap some of the the key points from our predictions. So the four actionable steps that I would say businesses can take from from our chat today is that we need to really prepare for affordability pressures by managing costs and pricing strategically. The second one is we need to invest in technology such as AI to boost productivity, and picking up from Patrick's last point on upskilling, that needs to be center of mind, diversifying supply chains to new markets and really thinking strategically about how we can expand and look to other markets to manage trade uncertainties. And this is not something that's going to apply over the next four years, but even beyond that, something that Steve you touched on, we also need to address labor concerns by improving retention and offering competitive compensation for our workers, especially in this economic climate and what we are anticipating for the year ahead, that's all the time that we have for today. I want to encourage all our listeners to please visit business datalab.ca for tools and reports to support your planning this year, I want to encourage you all to follow the BDL and our team on social media and the Canadian Chamber of Commerce for insights and updates and welcome to the BDL podcast, and we're really looking forward to helping you make sense of some of these numbers and turning data into action. Thank you so much for listening and tuning in today to Canada's Economy Explained, The Business Data Lab Podcast.