As we enter the new year, economic conditions are shifting, and it’s crucial to stay informed and adjust your financial strategies accordingly.
With recent interest rate reductions—three since summer, including a significant 0.5% reduction this past October—the economic forecast shows continued cuts. These rate reductions are a response to the current sluggish economy, with inflation gradually diminishing.
While challenges are on the horizon, including rising borrowing costs and inflation, there’s also reason to be optimistic about recovery in 2025.
Here’s a breakdown or a look into the financial crystal ball if you will of what some experts say you can expect economically and how to prepare your finances for the year ahead.
Economic Forecast for 2025
Deloitte Canada’s 2025 economic outlook is cautiously optimistic, forecasting recovery after a challenging 2024. While Canada faces slower growth and a softening labour market, easing inflation and a gradual decrease in borrowing costs are expected to boost consumer confidence and support economic expansion in 2025.
- 2024 Economic Challenges:
- Slowing growth.
- Softening labour market with higher unemployment.
- Inflation is expected to diminish further.
- Interest Rate Outlook:
- Bank of Canada expected to continue lowering interest rates.
- Key rate projected to fall to 2.25%-3.25%.
- Impact on Households:
- Easing of interest rates should reduce the debt burden for Canadian households.
- Expected boost in consumer confidence as borrowing costs decrease.
- Economic Expansion:
- Despite slower growth, the economy is still expanding.
- Deloitte’s Chief Economist Dawn Desjardins notes: “The economy is expanding, even if at a slower pace.”
- Outlook for 2025:
- Economic stabilization is anticipated as inflation and interest rates ease.
Managing Finances with Changing Interest Rates
For many Canadians, the impact of rising borrowing costs has been at the forefront of their minds in recent years. Mortgage payments, credit card debt, and loans tied to variable rates have made managing household finances more challenging. However, relief is on the way with anticipated rate cuts on the horizon.
As rates continue to fall, consider refinancing your mortgage or loans, which could lower monthly payments. If you’re planning a large purchase, like buying a home, waiting for rate cuts could make this investment more affordable.
However, if you’re looking to invest, higher interest rates will provide better returns on savings and fixed-income investments, so it may be best to take advantage while you can.
Adjusting Your Budget and Long-Term Goals
Lower interest rates in 2025 may present opportunities to reduce your debt cost or save more with less financial strain.
Here are a few options:
- Reassess Your Budget:
- With interest rates expected to continue dropping, it’s time to review your budget.
- Focus on essential spending and cut back on discretionary expenses if needed.
- Zero-Based Budgeting:
- Consider using a zero-based budget, where every dollar is allocated to a specific purpose, including savings.
- This approach helps you stay disciplined and ensures efficient spending and savings.
- Long-Term Planning:
- While addressing short-term financial challenges, don’t lose sight of long-term goals like retirement, homeownership, or investing.
- Opportunities in 2025:
- Lower interest rates may offer opportunities to invest or increase savings without as much financial strain.
- Take advantage of potential market conditions to strengthen your financial future.
Housing Market and Affordability
One of Canada’s biggest concerns has been housing affordability. Shelter costs remain high, particularly for renters, but there’s hope on the horizon. Deloitte predicts that lower interest rates will rejuvenate housing construction, which may help address the ongoing supply deficit.
However, affordability will remain an issue, and while a modest recovery is expected, significant drops in home prices are unlikely in the short term.
We Can Help
The road ahead may present challenges, but 2025 is expected to bring greater financial stability. You can make the most of the recovery by staying informed, adjusting your budget, and keeping long-term goals in sight.
Contact our team at Faber today for a financial consultation. Together, we can build a strong foundation for your financial well-being and unlock your path to a brighter future. Let’s simplify your journey to financial freedom.
Information Source: MoneySense (2024). Deloitte Canada predicts more economic growth, benchmark rate below 3% in 2025. https://www.moneysense.ca/news/2025-canada-economy-predictions/