The Real Stories Behind the 2025 Headline Growth Forecasts

Steady growth for the U.S.; slightly weaker growth for Canada. That’s what the 2025 forecasts say – but underneath those fairly unremarkable figures lie some extraordinary trends and potential turbulence. RBC Capital Markets' chief economist and strategists uncover the hidden forces shaping both economies in the year ahead.

By Frances Donald, Helima Croft & Jason Daw
Published January 22, 2025 | 4 min read

Key Points

As we turn the page to 2025, RBC Capital Markets' strategy and economic specialists gathered to unpack the compelling stories shaping this year’s forecast, in a discussion led by Derek Neldner, CEO and Group Head.

  • Behind strong U.S. growth forecasts lie an unequal recovery, record government spending levels, and a static labor market.
  • Canada faces historically low growth potential amid poor productivity and a reversal of immigration policy.
  • Canada-US monetary policy and bond yield divergence should remain a theme in 2025.
  • The new U.S. administration’s sanction policies could conflict with its goal of reducing oil prices.

The bold numbers in the U.S. and Canadian economic forecasts may seem unremarkable – but they fail to capture the potential impact of the wide range of events 2025 could bring.

“We enter the new year at a point of significant global change,” Neldner noted. “There are a lot of factors to drive a high level of optimism in 2025, but equally, a number of very significant uncertainties.”

“We enter the new year at a point of significant global change.”

Derek Neldner, CEO and Group Head, RBC Capital Markets

From shifting global markets to policy-driven economic challenges, Helima Croft, Head of Global Commodity Strategy and MENA Research, Jason Daw, Head of North America Rates Strategy, and RBC’s Chief Economist Frances Donald share their insights on the forces shaping this year’s North American outlook.

U.S. recovery hides a divided picture

While U.S. growth of approximately 2% is in the cards for 2025, it will not be an even recovery. In 2024, the term "k-shaped economy" was often used to highlight the growing divide in American wealth. Donald predicts that in 2025, “the lowercase k will become an uppercase K.”

The unevenness extends from consumers to sectors. While U.S. services accelerate, manufacturing is shrinking. “We have never in modern American history seen a U.S. manufacturing sector that has been contracting for such an extended period,” Donald points out.

Another historic anomaly is hiding behind the figures on U.S. growth outperformance. Higher productivity and an AI-related tech boom are part of the story, but the real driver is the “extraordinary” level of government spending, says Donald.

“We have never seen this amount of government spending outside of a recession,” she says, pointing to high defense outlay, social security payments as well as £3bn in daily interest rate payments. Most forecasts see this continuing despite the change of administration.

Unemployment is low at 4.2%, but this hides a lack of churn and hiring activity in the U.S. labor market. With record numbers reaching retirement in 2025, there will be too few workers available to create a lack of jobs and push up the unemployment rate.

“It will stay low, but what you won’t see in a forecast table is that the health and dynamics of that employment market are changing very significantly – and how we think about the labor market has to change as well,” Donald says.

“The health and dynamics of the employment market are changing very significantly – and how we think about the labor market has to change as well.”

Frances Donald, RBC Chief Economist

Canada sinks to lowest-ever growth potential

Canada is also poised to reach record levels, albeit in less favorable ways. While the 2025 forecasts suggest growth of around 1.2%, and inflation dipping below 2%, “the top-line numbers are telling us things that are very different than the underlying stories,” says Donald.

She points to Canada’s growth potential, which is set to drop to 0.9% over the next two years: “This is the lowest potential to grow in Canada’s entire history.”

Low productivity is a major factor, but so too is a decline in population growth which has bolstered topline activity (even as it produced sizeable pressure on housing and other socio-economic elements). “Based on our calculations, that effectively reduces a huge segment of growth for the next three years,” Donald says.

“The top line numbers are telling us things that are very different than the underlying stories.”

Frances Donald, RBC Chief Economist

Divergence on rate cuts and bond yields

RBC takes a contrarian yet optimistic stance, maintaining a more positive outlook on the U.S. economy and a less bearish view on monetary policy—predictions that were borne out in 2024.

According to Daw, the U.S. and Canada are set to continue their divergent paths on interest rates.

He expects the Bank of Canada to cut rates to 2%. The terminal U.S. rate is harder to predict, given divided opinion within the Federal Reserve itself, but Daw believes the Fed is essentially finished cutting rates this year with the onus on the data to weaken to justify a lower terminal rate. That would leave a large gap between the two countries.

These forecasts would lead to similar divergence in bold yields. “If you think the Fed has basically finished cutting interest rates, then we’re probably around where we should be right now as far as the bond market’s concerned, and yields are not going to fall significantly,” he remarks.

“It’s a very, very different situation in Canada. We see bond yields continuing to go down and the yield curve being a little steeper going forward.”

“If you think the Fed has basically finished cutting interest rates, bond yields are not going to fall significantly.”

Jason Daw, Head of North American Rates Strategy, RBC Capital Markets

Sanctions policy could trigger oil price dilemma

The global energy sector is also expected to encounter greater turbulence than the headline figures may imply. Croft foresees a big impact on the sector from the incoming Trump administration.

She expects a reversal of policy on sanctions against Iran, with the aim of reducing Iranian oil exports by 750,000 to 1 million barrels per day. Sanctions on Venezuelan energy are also likely. “The real question is, how do you reconcile that with the Trump administration’s stated goal of energy prices around $50?”

According to Croft, U.S. energy companies will be unwilling to fill the gap because their shareholders are demanding capital discipline. That would leave the U.S. seeking additional production elsewhere: “I don’t think OPEC is going to immediately rush in with additional barrels.”

Trade tariffs threatened by the Trump administration against China and other nations are the biggest headwind for oil, Croft says, but their extent remains uncertain.

She points to the internal Republican row over immigration based on tech visas, which saw Trump side with the tech community. “I tend to believe at this stage that when it comes to tariffs, he might lean in more to his business community followers,” she says.

“How do you reconcile Iranian oil sanctions with the Trump administration’s stated goal of energy prices around $50?”

Helima Croft, Head of Global Commodity Strategy and MENA Research, RBC Capital Markets

Our Experts

Frances Donald
Frances Donald
Chief Economist, RBC
Helima Croft
Helima Croft
Head of Global Commodity Strategy and MENA Research, RBC Capital Markets
Jason Daw
Jason Daw
Head of North American Rates Strategy, RBC Capital Markets

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