The Canadian economy is doing better than expected, and things will slow but be fine. That’s the takeaway one gets reading the summary of the Bank of Canada’s (BoC) January Monetary Policy Report (MPR). However, a dive into the full 44-page report reveals that narrative is a statistical mirage, supported by contradictory data points the central bank acknowledges then ignores. The reality is the full document shows that Canadians are seeing their quality of life erode, and may already be living in a per-capita recession.
BoC Cuts Canadian GDP Growth Forecast—and Reality Is Even Worse
Canada’s economy is expected to continue growing, but not by much. Headline GDP is forecast to slow from 2.0% in 2024 to 1.7% in 2025, according to the BoC estimates ahead of finalized estimates later this year. That growth is expected to fall further, dropping to just 1.1% in 2026. They see a mild improvement to 1.5% in 2027, but the momentum is clearly fading.
Unfortunately, households aren’t expected to feel any of that “growth.” The central bank believes the 2025 gain was “essentially flat” on a per-capita basis. Worse, they warn that consumption per person is expected to slow as the temporary relief from rate cuts fades—signalling a stagnation in actual living standards despite the headline gains.
The central bank explicitly links moderating headline growth to the slowing population. That may be true, but it also effectively confirms that Canada’s previous growth relied heavily on adding more people rather than improving productivity or value.
Headline growth without per-capita growth isn’t great for anyone except national optics. It means the national economy is masking household stagnation by simply adding more households. Quality of life and living standards erode, but at least there are more human capital tax units to keep the headline number positive.
Canada’s economy is growing in aggregate, but for the average person, the recession is already here.
BoC Expects Inflation To Calm….By Building More Homes?
The central bank holds a contradictory position on housing: activity is technically “subdued,” yet costs are running hot. Shelter is the largest single component in the CPI basket (~27.1%), and remains the primary inflation engine. The BoC report cites that rents climbed 7.4% in 2025, while mortgage interest came in 5.8% higher. The BoC describes the market as “flat or declining” in some cities, while acknowledging that the cost of shelter continues to rise at a breakneck speed.
The BoC doesn’t see this as a problem though, as they expect a supply-side miracle. They forecast housing starts to remain “elevated,” arguing that this new supply—combined with slowing population growth—will eventually slow rent inflation. They’re pinning inflation control on the theory that increased construction will lower prices, conveniently ignoring that new supply often sets a higher price floor, not a lower one.
Demand doesn’t just apply to finished housing; it applies to the materials, labour, and land required to build them. Accelerating building places demand on those input costs, which then need to flow to end-users. Developers aren’t a charity, they aren’t going to build to lose money. The end of a housing boom often marks the end of the business cycle. It’s not the new supply that reduces prices, but the job losses and inability to pay rents that do.
The BoC understands this demand conundrum, but it’s not a convenient conversation. We’re now waiting for developers to build excess supply and lose money. Not just to fix housing affordability, but to tame inflation. In this dream, are the developers also unicorns that hand out free candy?
Magic Math: Canadian GDP Gets Upward Revision, BoC Changes Output Gap So It Doesn’t Matter
The BoC is demonstrating an odd disconnect between economic models and reality. Recent GDP revisions from Statistics Canada (StatCan) reveal the economy was significantly stronger than thought, driven by higher investment and consumption. The BoC acknowledges it’s risky to assume this activity is output related, and may simply be spending (demand). However, it chooses to ignore this risk in its forecast.
These GDP revisions weren’t matched with upward revisions to income. This implies the “new” funds were previously assumed to be savings, not additional funds from missed job growth. To avoid acknowledging the inflationary implications of this, the central bank assumes the economy miraculously became more productive overnight. They adjusted their “potential output” model by nearly the exact amount as GDP. This keeps the output gap—the difference between the economy’s output and potential— virtually unchanged. In plain English, the BoC insists the economy is bigger on paper, while simultaneously arguing it doesn’t actually matter.
While the Bank relies on revised history to balance its models, the forward-looking reality is hitting a wall. Exports are roughly 4% lower than they would be without US-imposed tariffs on imports. They cite businesses postponing investment and expansion plans, while also trying to diversify from US-based sourcing. Over the long run, diversifying will lower exposure to US-imposed trade hostility.
This decoupling won’t be free though, with the BoC admitting that sourcing from non-US markets is “likely more expensive.” This type of inflation isn’t due to the excess consumption of an economy firing on all cylinders, but simply higher sourcing costs. It contributes a new inflationary pressure just as the others had been easing.
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