Economists have reported that the measures taken by the Canadian federal government, including the temporary reduction of the sales tax and the issuance of relief checks to Canadians, will significantly contribute to enhancing economic growth expectations for the year 2025.

Furthermore, the Canadian federal government has implemented a series of economic measures that are expected to have a significant impact on the economy and growth in the upcoming period.

These steps include temporarily suspending the federal goods and services tax (GST) on a number of essential goods and sending $250 checks to eligible Canadians, which will directly affect consumer spending and growth.

Main Details

1. Support Checks:

About 18.7 million Canadians who worked in 2023 and earned up to $150,000 will receive $250 checks next spring.

2. Suspension of Sales Tax:

The suspension of the goods and services tax (GST) will begin on December 14 and end on February 15, covering items such as toys, diapers, snacks, restaurant meals, and beer and wine.

Expected Effects:

1. Increased Income and Spending:

The suspension of the goods and services tax (GST) on a wide range of essential goods, along with the $250 checks that will be awarded to about 18.7 million Canadians, will increase the disposable income of consumers, boosting spending at the beginning of the new year.

2. Improved Growth Expectations:

Economists at the Bank of Montreal (BMO) have raised their growth forecast for the first quarter of 2025 from 1.7% to 2.5%, anticipating a direct positive effect on GDP from these policies.

3. Impact on Inflation:

• The suspension of taxes will mechanically reduce inflation during the suspension period.

• However, the increase in consumer spending resulting from the relief checks may add inflationary pressures in the short term after the measures end.

4. Economic Impact:

• Doug Porter, Chief Economist at the Bank of Montreal (BMO), stated that these measures could significantly increase income and consumer spending at the beginning of 2025.

• The Bank of Montreal raised its growth forecast for the first quarter of 2025 to 2.5% from 1.7%.

• Although the suspension of the sales tax may lead to a mechanical reduction in inflation, the support checks will increase core price pressures and lead to volatile inflation readings.

4. Impact on Monetary Policy:

• The Bank of Canada is expected to cut interest rates by 25 basis points in December, adopting a more cautious approach to future cuts.

• Royce Mendes, Head of Macro Strategy at Desjardins, confirmed that the effects of government spending on growth and price pressures will be a focus for central bank governors.

Economic Analysis:

Doug Porter, Chief Economist at the Bank of Montreal, stated that the current measures are moving in a direction that enhances economic growth rather than focusing on reducing inflation, indicating that they align with the shifts initiated by the Bank of Canada. He added that the effect will be temporary but clear on inflation and growth figures during the first half of the year.

Growth Forecast:

While these measures are expected to boost growth in the first half of 2025, their impact will be short-term, with a likelihood of this effect diminishing by the second half of the year. However, there remain concerns that the consumer spending resulting from these steps may lead to additional inflation after the suspension ends.