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Despite headwinds such as elevated interest rates and rising unemployment, consumer spending in Canada held up last year. As demographic headwinds intensify, the Bank of Canada holds the key to maintaining spending’s momentum in 2025, says Desjardins Group.

In a new report, economists at Desjardins said that while households faced financial challenges in 2024 — from renewing mortgages at higher rates to growing unemployment — consumer spending didn’t suffer as much as feared.

“Typically, an elevated national unemployment rate portends slower spending growth and a rise in mortgage arrears. Not so last year,” the report said.

Spending held up largely because the rise in unemployment came among immigrants and recent graduates, who don’t typically account for a large share of household spending — while layoffs for more-established workers remained low, it noted.

“Importantly, that meant that households that were approved for and had taken on a lot of debt maintained stable incomes,” it said — and rising wages boosted spending power among employed workers, particularly lower-paid workers.

“Given that those employees tend to recycle income gains back into spending relatively quickly, such wage growth likely contributed to the resiliency of spending in 2024,” it said.

Looking ahead, household spending faces a growing challenge from the federal government’s efforts to slow the recent rapid population growth.

The report noted that, so far, this has largely meant a sharp drop in international students, who aren’t large contributors to household consumption.

“As a result, we’re cautiously optimistic that household spending growth cools off only slightly in 2025,” it said. “However, much depends on Canadians spending more per capita.”

On that front, a positive sign is the fact that inflation has eased, and incomes are growing faster than consumer prices, which is, “a necessary ingredient for an acceleration in per person spending growth.”

But lower interest rates will also be needed in the year ahead, it said.

“With so many mortgages facing the prospect of material payment shocks when they come up for renewal this year, the Bank of Canada will need to keep cutting rates to keep a lid on arrears,” it said.

Indeed, the report said that the central bank, “holds the key to avoiding a major slowdown in the economy. Cutting rates isn’t a silver bullet, but it’s probably the best hope for the economy this year.”