In a non-Trumpian world, things are looking up for the Canadian economy in 2025.
Growth is widely expected to increase over the parched level of the past year and, if the 91,000 jobs created last month were any indication, employment should improve as well. Also, inflation is under control and interest rates will drift lower.
In the real world, where Donald Trump was sworn in as U.S. President on Monday, there is a fog of uncertainty over the economy that threatens the good things listed above. Mr. Trump’s threats to slap tariffs on Canadian exports force us to confront the possibility of recession, job losses, firmer inflation, higher than otherwise borrowing costs and troubled investments.
Your 2025 personal finance priority from the vantage point of Mr. Trump’s inauguration day? Stability. Ask yourself, what can I do to prepare for shocks and manage stress? Having cash savings is a great start.
Short-term damage to the economy can be absorbed, like when labour disruptions or weather events put a dent in growth. Longer term, the Canadian Chamber of Commerce has estimated the GDP would shrink by 2.6 per cent and cost individuals in this country about $1,900 a year if Mr. Trump goes ahead with the 25-per-cent tariff. A recession could arrive at some point in the year, and Ontario Premier Doug Ford has said tariffs could cost the province up to 500,000 jobs.
The Trump effect on our finances has already been seen in the bond market, which can be thought of as a sensitive gauge indicating future economic prospects. Bond prices are lower than they were before the U.S. election last fall, which means bond yields are higher. Yes, bond prices and yields move in the opposite direction.
Bonds are telling us that financial markets fear that Trump’s economic plan will feed inflation. For the wave of households with mortgages that renew in 2025, this is discouraging news because the rate trend for fixed-rate mortgages is set in the bond market.
For now, we seem to be stuck in the low 4-per-cent range for three- and five-year fixed rate mortgages. To insure against the risk of higher rates, anyone thinking of buying a home or facing a renewal should lock in a rate immediately.
The Bank of Canada is expected to make at least a couple of additional interest rate cuts this year, which means lower rates for variable-rate mortgages, lines of credit and floating-rate loans. Variable-rate mortgages could work well for borrowers who want to squeeze their costs as much as possible. But if you want to de-stress your life, choosing a three- or five-year fixed rate is 100 per cent justifiable.
Rising interest rates in the bond market have also been an unwelcome development for investors with portfolios that have sensibly offset the risk of stock market declines with bonds. Rising bond yields hurt the price of bonds and bond funds, a lesson that investors painfully learned in 2021-22.
A thought for 2025: diversify your bonds with short-term guaranteed investment certificates or cash-type investments that hold savings accounts at big banks, government treasury bills or short-term borrowings from strong companies.
We don’t yet know how a Trump presidency will affect business conditions, so there’s no point in trying to outsmart the stock market. As ever, the stock market cares more about the outlook for corporate profits than who’s in the White House.
Long-term investors should stick with a properly diversified portfolio and maybe have some cash to deploy if stocks fall hard. “Short-term investor” is almost a contradiction in terms. If you need your money in less than five years, be a saver and forego stocks either completely or mostly. Now’s a good time to make any needed adjustments because stocks are still at elevated levels.
Finally, there’s your emergency fund. Having a few hundred dollars in a savings account is better than nothing, and a few thousand is better still. If your income or job status is affected, this money goes toward your mortgage, groceries and other essentials. Keep the money in a high-interest savings account – you should be able to find a rate of 1.75 to 3 per cent without too much trouble. Right now, PC Money is offering 4 per cent.
Again, a framing for all financial questions in 2025 is “stability first.” All decisions should be evaluated in terms of how they might work out if things go south.
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