North American outlook: Economic unpredictability in an uncertain trade landscape

The outlook across the continent is mixed: After enduring months of high inflation and heavy borrowing costs, North Americans are beginning to feel a sense of relief as inflation slows and central banks begin easing their policy rates. Despite declining interest rates, an immediate rush of consumption is unlikely. Businesses and consumers are still carrying heavy debt and will focus on normalizing their balance sheets and rebuilding their depleted savings before any major spending.

The descent from the height of the monetary policy cycle is fraught with a polarized political environment that could cause economies to stumble. President Donald Trump has started rolling out policies during his first days in office, including the announcement of potential 25% tariffs on Canadian and Mexican goods. This has raised concerns among exporters and Canadian companies about potential trade friction and economic instability. New  measures are likely to follow.

Mexico’s administration, which came to power in October 2024, has pushed through a slew of constitutional reforms that have unnerved the business community and its major trading partners. In Canada, 2025 is an election year, the outcome of which will undoubtedly result in policy changes as well.

The bottom line: Policy changes across the continent could result in an unstable environment for the North American economies.

Across the continent, housing prices have surged, while high interest rates and the elevated prices of building materials have suppressed new home construction. An uptick in immigration has also put upward pressure on housing and rental prices. Until the supply gap is plugged, housing will continue to eat into household budgets and limit discretionary spending.

While hiring has slowed, wage gains remain above inflation, helping consumers keep their heads above water. But there are signs of improvement: North American governments are focused on resolving the housing situation. Mexico’s president has promised to build one million homes, while President Trump has issued executive order to deliver emergency price relief through deregulation to boost housing supply. In Canada, where lack of affordable housing is more acute, the federal government has announced billions of dollars in funding to expand housing supply, and provincial governments have started to address regulatory restrictions.

Yet, some events outside North America are beyond our control. Wars in Ukraine and the Middle East, for example, are far away, but are impacting commodity prices. With the conflicts intensifying, inflation could worsen and hit real wages and the purchasing power of households on this continent. Additionally, China’s growth prospects could impact the commodity space. For a snapshot of the global economy, read our latest Global Economic Outlook.

When we look at North America’s three nations more closely, we can see differences, but overall, the likelihood of a recession is remote.

The U.S. economy has been incredibly resilient over the last two years amid high inflation and elevated interest rates. Real gross domestic product (GDP) expanded 2.9% in the first nine months of 2024, compared to the same period a year ago. It also surpassed the 10-year, pre-pandemic average economic performance of 2.4%, where interest rates and inflation were benign.

Rate cuts ease consumer strain

Inflation has slowed and is well-anchored in the Federal Reserve’s (Fed) target range. The easing of inflation has allowed the Fed to reduce its policy rate by 100 basis points since September. The downward rate adjustment has given households and businesses a breather in their interest carrying costs, and will gradually support their spending. We forecast that additional rate cuts will occur in the next 12 months, but the Fed is going to be measured in their policy decisions going forward.

Even though borrowing costs are easing, consumer spending over the forecast period is expected to fall from last year’s pace. Many households are likely to take advantage of the lower borrowing costs to repair their balance sheets, which have been depleted over the last few years. 
 

The labour market in the United States has showed signs of easing. Job gains averaged 207,000 a month in the first half of 2024, but this pace slowed to a monthly average of 148,000 over July-November. Employers are rationalizing their payroll to reflect their current labour needs. The softening labour market is evident in the jobless rate, which increased by 0.4 percentage points to 4.2% in November compared to January 2024. This has allowed wages to ease as well, with average hourly earnings dropping to 3.9% year-over-year in November, marking the first time annual wage gains have been below 4% since June 2021.

With inflation down to 2.7% year-over-year in November, workers are experiencing a positive real wage of more than 1%, helping households stabilize without stoking inflation.

U.S. housing supply won’t meet demand

In addition to debt load, housing remains another pain point for consumers. Although borrowing costs will continue to ease, mortgage rates are unlikely to return to the pre-pandemic sub-4% rates. Those who have locked in at pre-pandemic lower rates are unwilling to sell, limiting supply on the resale market and keeping prices high. Mortgage rates are expected to ease, but will likely remain above 6% this year. With home prices staying high, the supply will struggle to catch up with pent-up demand. Construction of new homes is projected to see only a modest gain of 6.8% to 1.44 million units in 2025, which won’t be enough to address the housing shortage in the United States.

Surveys indicate that financing conditions are generally positive for companies. Business spending is expected to remain steady, supported by incentive packages from recent legislation. These incentives help businesses renew aging capital assets and expand by building new plants. Check out our in-depth guide on opportunities infrastructure in the U.S.

According to the White House, former president Joe Biden’s legislative incentives attracted $1 trillion in private investments, as multinationals moved production back to the U.S. to take advantage of these benefits. Private investment in the chips and cleantech manufacturing sectors has skyrocketed. With investment and consumption supporting economic activities, real GDP is expected to grow by an average of 2.1% over 2025-2026, following an expected 2.8% growth in 2024.

While the overall outlook is positive for the U.S. economy, the transition to the new administration and its impact on policy changes remain uncertain. The Trade Policy Uncertainty Index has risen to the highest level ever, as trade policy became a major campaign issue during last year’s election, underscoring the unease among business leaders. This uncertainty could have significant ramifications on business decisions. 

The Bank of Canada has so far managed a soft landing of the Canadian economy—easing inflation and interest rates without tipping it into recession. The bank’s measured policy adjustments helped bring inflation down without causing mass unemployment, but that has come at the cost of modest growth.

The Canadian economy has struggled to gain traction since 2023. Real GDP slowed to 1.5% in 2023 and underwhelmed in the first nine months of 2024, expanding by a paltry 1.1%. 

Canadians have been exceptionally fretful about the bottom dropping out of the economy. High interest rates haven’t helped. Since the Bank of Canada started raising its key policy interest rates in spring 2022, households have devoted a significant portion of their disposable income towards debt interest cost.

As of the third quarter of 2024, households spent 9.3% of their take-home pay on interest costs, up from 5.9% in the first quarter of 2022. High interest rates have also caused a slump in home purchases, causing rental prices to skyrocket. Households have less room for discretionary spending and big-ticket items, leading to a sharply weakened domestic demand for goods and services.

Lower rates will gradually induce spending

The good news is that inflation has eased back to where the Bank of Canada needs it to be, so it has started reducing interest rates to induce more spending and keep the labour market humming along. With the labour market showing signs of distress, the bank is likely to continue reducing its key interest rates, which will influence commercial lending rates. Although borrowing costs are easing and consumer spending should increase this year, the full impact of rate reductions on consumer spending won’t be felt immediately, as some households shift their attention to repairing their balance sheet.

While the top income bracket continues to build their saving buffers, the bottom 60% of the income ladder have no savings at all. Credit card balances are elevated, pushing borrowers to file for credit proposals, which could limit future credit facilities. Aggravating this uneasy situation is the cooling labour market. Unemployment rates soared to 6.8% in November as the labour pool swelled beyond what the economy could absorb.

Close to three million people—almost equally split between permanent and non-permanent residents—have been added to the Canadian population since 2021. With the economy not growing fast enough to create jobs to absorb the rising labour force, the unemployment rate is likely to rise further. The federal government has significantly reduced the number of immigrants and non-permanent residents that will be eligible to arrive in Canada in the coming years as it seeks to rebalance the pace of population growth and infrastructure development

On the business side, the outlook for 2025 is expected to be better than 2024. With interest rates easing and credit conditions improving, business sentiments are on the mend. Another positive for business is that cost pressures are moderating, particularly on the labour front, as wage gains ameliorate. EDC’s Trade Confidence Index (TCI) in June 2024 showed that exporters are seeing global economic conditions and business opportunities improving. This will eventually lead to an increase in business investment this year. There are couple of large projects covering transportation, electric vehicles (EVs) and other sectors, like manufacturing and industrial, that will help lift spending in 2025 from its current doldrums. 
 

Export recovery in 2025

Canadian exports struggled in 2024 as some automotive companies began adjusting plants to produce EVs, while forest fires disrupted mining operations across the country and impacted export volumes. The effects of these disruptions have faded and should allow exports to recover in 2025. With last year’s good harvest, agri-food should sustain Canadian exports into the first half of 2025. Strong demand in the United States, along with a weaker loonie, should support Canadian exports. The Canadian dollar is expected to average US$0.70 this year, continuing its weakening trend against the U.S dollar over the last three years.

Government spending, which has been a key support for the economy since the pandemic, has wound down as all levels of government focus on returning to a balanced budget. This will remove some growth momentum from the economy, but strength in the domestic economy, along with exports, should help lift the Canadian economy from a mediocre 1.3% growth in 2024 to a descent 1.8% this year.

Mexico’s economy has underperformed since the presidency of Andrés Manuel López Obrador (2018-2024), as policy missteps hamstrung private investment—the growth engine of a free market economy. The level of real gross domestic product (GDP) today is 5.5% below where it should be, had the economy kept the same pace of the 2012-2018 growth period, which coincided with former president Pena Nieto’s liberalizing era. 

The economy struggled to gain traction in 2024 post-pandemic, and prospects aren’t any better for 2025 as the new president doubles down on the same policy missteps that prevented the potential growth of the economy. A landslide victory for the country’s first female president, Claudia Sheinbaum, last June, and her coalition’s majority in Congress, have allowed them to pass a controversial constitutional reform that gutted checks and balances on executive powers. This has the potential to lead to the degradation of governance and rule of law, which are key ingredients to attracting business investments.

High underemployment continues

Momentum heading into 2025 is weak as inflation has become stuck in the 4% to 5% range, so the Central Bank of Mexico (Banxico) has been slow to reduce its policy rate, which is hurting domestic demand. Banxico has eased its policy rate 100 basis points to bring it to 10.25%, which is still historically high. The combination of high inflation and high interest rates has weakened the domestic economy.

The volume of retail sales was down 0.6% in the first nine months of 2024, while the pace of monthly job gains is half of what it was in 2023. Even though the official unemployment rate continues to decline, reaching 2.5% in October, Mexico’s highly informal sector (part of any economy that’s neither taxed nor monitored by government) is indicative of its rising level of underemployment. Excluding the pandemic period, underemployment in October was the highest it’s been since summer 2012. As a result, Mexicans rely on remittances from their diasporan families to support their day-to-day expenses. Inflation-adjusted remittances were down 2.4% year-to-date in October, meaning that what Mexicans are receiving from their families abroad isn’t enough to cover their spending and expenses.

With remittances not stretching far enough and the economy not generating enough work to absorb the large number of underemployed Mexicans due to investment hesitation by multinationals, the economy will continue to underperform. Investors are now on a wait-and-see mode to assess policy implementation from the new administration.

Foreign direct investment (FDI) in new projects was down 42% in the first nine months of last year compared to the same period in 2023, as some major projects by multinationals have been cancelled, or put on hold.

According to the Mining Chamber of Mexico (CAMIMEX), US$4.5 billion worth of investments is held back by legislative restrictions on the mining industry. Tesla’s July announcement that it’s halting its proposed US$5-billion factory at Santa Catarina in Nuevo León underscores the ramification of the constitutional reform on the country’s economic potential.

The weakening peso

With the domestic economy flagging, Mexico can count on solid U.S. demand to sustain its economy. Mexico has overtaken China as the leading exporter of merchandise to the United States, as geopolitical tensions between the two largest economies reorient U.S. buyers to de-risk their supply chains from China and look to their southern neighbour to fill their orders. In addition to strong U.S. demand, the peso will provide additional incentives for Mexican exports. A weaker peso makes Mexican exports cheaper for U.S buyers.

The peso lost 13% of its value against the U.S dollar from June to November, compared to January to May last year and it’s unlikely to recover this year. Pessimistic investor sentiments following the constitutional reform in September are holding off investment.

Investors are being cautious on the Mexican economy until President Sheinbaum’s administration demonstrates a pro-business direction. Another benefit of a weaker peso is its tourist-pull. Tourism in Mexico was up 15% year-to-date in October, while spending by international travellers in Mexico was up 7% year-to-date in October.

Fiscal constraints limit growth

With domestic private demand faltering, the government’s ability to use fiscal policy to stimulate the economy is critical. The new government is in a fiscal bind. Unlike her predecessor, Sheinbaum took office last October with a huge fiscal hole—a 5.9% deficit to GDP. Her administration has proposed bringing the deficit down to 3.9% by undertaking massive reductions to some government operations. Her desire to build one million homes for low-income Mexicans, along with transportation and utility-related infrastructure, would be fiscally challenged by her unwillingness to increase tax.

That means the government’s contribution to economic growth will be limited over the forecast period. With exports being the only promising prospect for the economy, real GDP is forecast to advance by a modest 1.4% this year, following a 1.5% increase in 2024. Under the current policy environment, Mexico’s economy is facing decades of deadweight loss and may not catch up to where it should be had it kept the same average pace as the 2012-2018 era.

Mexico will have to expand by an average annual pace of 4% between 2026-2029 to get back to where the economy would have been by following the same trajectory of the 2012-2018 era. This rate of economic growth will require massive private sector investment to lift Mexico back to its potential. Read our in-depth guide to find out more about doing business in Mexico.

How EDC can help

Export Development Canada (EDC) offers several solutions, including market intelligence and business connections, to support Canadian companies in their global expansion. Our sector-focused teams have a range of knowledge and expertise.

“We have local knowledge of how to do business in different markets, but we also have the right people who have the connections, and we can leverage that benefit to Canadian exporters,” says Jorge Rave, EDC’s regional vice-president for Latin America and the Caribbean.

“We have a significant and strong Team Canada, including the Trade Commissioner Service, as well as our guides on local culture and doing business as a Canadian exporter.”

• To learn more, check out our U.S. market intelligence page for insights on how to navigate that country.
• EDC’s Export Help Hub covers the globe and can connect you with EDC trade advisors who can answer your questions, help you understand your challenges and help you find solutions for them. They specialize in markets and strategies and customs and regulation requirements.
• EDC offers the Business Connections program, which promotes Canadian export capabilities to international buyers.

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