The Bank of Canada is likely to continue its accommodative monetary policy.

The Canadian dollar has continued to weaken as the labor market shows slight signs of softening, despite employment increasing by over 91,000 jobs. Investors have raised their expectations that the Bank of Canada will further reduce interest rates this year. Meanwhile, the U.S. dollar has strengthened significantly, supported by the Federal Reserve potentially slowing its pace of rate cuts, with only two cuts forecasted for this year.

Canada's unemployment rate dropped to 6.7% in December from 6.8% in the previous month, aligning with the Bank of Canada's forecast of a slight decline as the labor market softens. However, despite the small decrease, the rate remains above the long-term average. The number of unemployed persons fell by 24,200 to 1,492,100, while employment rose by 91,000 to 20,738,000. Youth unemployment (ages 25 and under) saw an increase of 17,600 people. Employment growth was primarily driven by full-time jobs, particularly in education and finance.

Canada's Business Outlook Indicator, a long-term measure reflecting business performance expectations over the next 12 months, declined to 56.4 in December from 59.8 in November. This drop reflects a slowdown in small business confidence, as prolonged high interest rates increase costs for businesses, coupled with potential slowing domestic demand. However, the service and retail sectors experienced a less pronounced decline, remaining significantly below their long-term averages.

The manufacturing PMI rose to 52.2 in December from 52 in November, marking the fourth consecutive month of growth in manufacturing activity. This was driven by increases in output and new orders, resulting in continued employment growth. However, overall exports remained relatively unchanged, despite reports of a slight increase in demand from the U.S. in anticipation of tariffs on Canadian goods under President Trump in 2025. At the same time, input price inflation accelerated in December, reaching its highest level since 2023, pushing overall costs higher.

The services PMI fell to 48.2 in December from 51.2 in November, indicating the first contraction in service sector activity in two months. This decline was driven by a drop in new business and pressured by slowing domestic demand and economic uncertainty. Export business also contracted sharply, marking the steepest decline in four years. However, employment in the sector continued to rise despite increasing wage costs.

Canada recorded a trade deficit of 0.32 billion Canadian dollars in November, down from 0.54 billion Canadian dollars in the previous month. Although the deficit narrowed, it marked the ninth consecutive month of deficits. Imports rose by 1.8% to 66.4 billion Canadian dollars, led by construction materials and chemical products. Exports increased by 2.2% to 66.1 billion Canadian dollars, supported by shipments of metal ores and consumer goods. Exports to the U.S. rose by 6.8%, expanding the trade surplus with the U.S. from 6.6 billion Canadian dollars to 8.2 billion Canadian dollars, while exports to other countries declined by 10.3%.