Consumer spending is resilient, mitigating some of the labour market's soft spots

Consumers' spending - Q2-2025

At first glance, Canada’s economy seems caught in the crosshairs of a storm: a prolonged trade war with the United States, sweeping cuts to immigration, and a labour market slowly losing steam. But Canadian consumers aren’t flinching.

Despite a 1.1% decline in retail sales in May, and a 1.4% drop in volume, the bigger picture is surprisingly upbeat. Sales volumes remain up 3.7% year-over-year—and when you exclude gasoline stations, they’ve grown 5.2%, marking the fastest pace in three years. And June looks even brighter: preliminary estimates suggest a 1.6% rebound in sales.

The headline? Canadian households are showing remarkable staying power—shopping, spending, and largely brushing off economic headwinds. Beneath the surface, the country’s labour market and financial foundations help explain why.

A labour market with soft spot but… no cracks

The job market is certainly softer than it was in the post-pandemic boom. The unemployment rate has climbed about two percentage points from its 2022 lows. But crucially, this isn’t a story of mass layoffs. Instead, it’s one of population outpacing job creation.

Job growth has decelerated but is still positive—up 1.7% over the past year. Layoffs have been largely concentrated in three industries hardest hit by U.S. tariffs: autos, steel, and aluminum. Outside those sectors and their associated regions—think Windsor, Oshawa, Hamilton, and Sept-Îles—most workers remain employed and paycheques are still flowing.

This matters because household income has continued to climb, rising 6.6% year-over-year in the first quarter—about two percentage points faster than the long-term average. Those incomes, paired with a more favourable interest-rate environment, have helped stabilize consumer confidence and keep wallets open.

One might expect immigration cuts to dampen economic momentum. And indeed, Canada’s population growth slowed sharply—from an annualized 4.4% in late 2023 to just 0.2% in the second quarter of 2025. But the brunt of those cuts hit temporary residents—international students and some work permit holders—who tend to spend less than permanent residents.

In fact, per capita spending may have actually increased, as existing residents continue to shop while the denominator (population) shrinks slightly. This spending resilience is helping offset the drag from weaker business investment and softer export performance.

Household finances are stronger than expected

Canadians also appear to be in better financial shape than many expected just a year ago. Net financial assets rose 9% year-over-year in Q1, and BMO expects a near 20% jump in Q2, bolstered by record-setting gains on the Toronto Stock Exchange.

Meanwhile, the Bank of Canada’s earlier interest rate cuts are starting to pay dividends. With borrowing costs down roughly two percentage points from their 2023 peak, households are feeling less squeezed. Mortgage payments on renewing five-year loans are now expected to rise 15%–20%, down sharply from the 30%+ jumps many feared in 2023. That shift is softening the landing for thousands of mortgage holders.

Another quiet tailwind: Canadians are keeping more of their dollars at home. The number of residents traveling to the U.S. fell 34% in the first five months of 2025. In 2023, Canadians spent nearly $26 billion south of the border. A third of that redirected into domestic retail and services could inject an additional $9 billion into the economy this year.

That kind of shift isn’t just about patriotic consumption—it’s real stimulus. Combined with strong financial markets, rising incomes, and easing credit conditions, it’s helping offset weakness in exports and corporate investment.

What does mean for the labour market and the staffing industry?