Is Canada Facing a Recession?

With the unemployment rate rising and the Bank of Canada scrambling to unwind high interest rates, one question is growing in importance: Will the Canadian economy avoid a recession?

Some analysts argue that strong population growth and a targeted monetary policy will help avert a recession. Others argue the country is already in a stealth recession, edging toward a technical recession in the coming months. Others point to population decline, trade tensions with the United States, and increasing unemployment headwinds as warning signals.

Is Canada Already in a Recession?

Most economists define a recession as two consecutive quarters of decline in a country’s real GDP. Going by another measure, one economist says Canada is already in a recession. “Canada is in a per-capita recession, and has been for some time, [since] real GDP per capita has contracted for six consecutive quarters,” explains David Doyle, head of economics at Macquarie Group.

Ashish Dewan, senior investment strategist at Vanguard Canada, attributes the trend to Canada’s population growth: “Accounting for Canada’s rising population, its real GDP per capita has been deteriorating for many years, negatively impacted by low productivity, particularly in R&D, and interprovincial trade barriers.”

However, looking at the overall GDP data, Dewan thinks the country might have avoided recession so far. Notably, Canada’s economic growth eased to a 1% annualized rate in the third quarter, down from 2.2% in the second. “We do not believe Canada is technically in a recession,” he says, noting that the Bank of Canada’s monetary easing cycle suggests a brighter outlook for consumers and households. The central bank has implemented five interest rate cuts this year, including two back-to-back half-point reductions, lowering the overnight policy rate from 5.00% in June to its current 3.25%.

Can the Bank of Canada’s Rate Cuts Help Avoid a Recession?

Desjardins macro strategist Tiago Figueiredo says Canada isn’t at the cusp of a recession, and that with the right amount of monetary stimulus from the central bank, the country can avoid one altogether. Still, he concedes that “there’s no doubt the Canadian economy is in a vulnerable position.”

Michael Davenport of Oxford Economics thinks the opposing forces of stronger demand generated by lower interest rates and persistent slack in the economy (which will limit upward price pressures) will keep conditions just shy of tipping into recession. He says monetary policy directly affects Canadian CPI inflation through mortgage interest costs, and thus, “lower interest rates will support stronger [housing] demand and lower the risk of recession.” However, persistent near-term slack in the economy will limit upward price pressures.

The recent 50 basis-point rate cut could help counter the recessionary forces, according to Tom Nakamura, currency strategist and co-head of fixed income at AGF Investments. He calls that cut “a signal that monetary policy restrictiveness is being removed quickly to prevent conditions that may lead to a recession.”

The Complications of a Weaker Canadian Dollar

RBC chief economist Eric Lascelles says stronger economic demand (stimulated by lower interest rates making borrowing cheaper) and a weaker loonie (making imports more expensive) tend to fuel inflation. Nevertheless, these factors will not fully overcome existing economic weakness. In the coming months, he says, “these forces should become stronger, but not necessarily enough to offset the loss of economic growth from declining immigration.”

IG Wealth chief investment strategist Philip Petursson believes the Bank of Canada’s main worry isn’t inflation, but sluggish economic growth. That growth, however, will come at the cost of the Canadian dollar’s strength relative to the US dollar. “Even though domestic inflation is less of a concern at the moment, the Bank of Canada can’t completely ignore currency considerations,” he says. “It is fair to say that the Canadian economy is walking a thin line between recession and expansion.”

Citi economist Veronica Clark expressed similar views. She says more rapid cuts should spur demand, “which helps guard against too-low inflation outcomes,” but she adds that “demand has also been weakening, which has increased downside risks to inflation.”

Tariffs and the Risk of Recession

One of the biggest dangers for the inflation outlook is US President-elect Donald Trump’s threat to impose 25% across-the-board tariffs on Canadian goods. These are “significant downside risks, suggesting to us that recession in 2025 is a very real possibility,” warns Nick Rees, senior market analyst at Monex Canada. “If Trump delivers a 25% day-one levy on all Canadian exports as promised, this will tip the Canadian economy into a deep recession, warranting aggressive policy easing.”

Rees continues: “A weaker loonie would help offset the impact of any tariffs, even as it makes Canadian imports more expensive. As such, while this scenario would likely be associated with a domestic recession, any downturn would be much worse if the loonie failed to depreciate.”

Notably, Davenport cautions that any retaliatory tariffs imposed on US goods would result in a sharp contraction in business and economic activity and plunge Canada into a recession in 2025. And bilateral trade tariffs raising the cost of goods and services could “cause a sharp spike in inflation,” he adds. The resultant downturn could be particularly severe if it triggers significant layoffs, further squeezing household finances. According to one estimate, as many as 1.2 million Canadian jobs would be directly affected by US tariffs.

“Job losses and the associated drop in income could cause important negative spillovers to the economy, especially due to its heavy strain on household finances,” says Charles St-Arnaud, chief economist at Alberta Central.

The Canadian government’s decision to restrict immigration is another major risk. “The sharp increase in population in recent years can be fully credited for helping the Canadian economy avoid a recession, despite interest rates being well into restrictive territory,” explains St-Arnaud.

However, Ottawa’s immigration clampdown could exacerbate a broader economic slowdown, increasing the risk of a recession in 2025. “The expected sharp deceleration in population growth in coming years will broadly impact the Canadian economy, including restraining aggregate consumer spending and weaknesses in some areas of the housing market,” St-Arnaud cautions.

Such a scenario could stall the rate of economic growth—likely below 1%, according to St-Arnaud’s forecast. “Consequently, as there will be very little room to maneuver between economic expansion and contraction, the likelihood of a recession is higher,” he says.

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.

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