Canada is now forecast to enter a deeper recession than previously expected, according to Oxford Economics, despite lower bilateral tariffs between Canada and the U.S.
In its April update, the research firm cut its Canadian GDP forecast by 0.4 percentage points to just 0.7% growth in 2025, followed by a 0.2% contraction in 2026.
While U.S. tariffs on Canadian goods have been scaled back—with most USMCA-compliant imports now exempt—steeper U.S. tariffs on the rest of the world are expected to weaken global demand, indirectly hitting Canadian exports and investment.
“Despite lower US-Canada tariffs, higher US tariffs on the rest of the world will significantly weaken U.S. and global demand and deepen the recession in Canada,” wrote Tony Stillo, Director of Canada Economics at Oxford.
Oxford expects exports and business investment to face the most immediate impact, while job losses, rising costs, and asset-price declines will “squeeze household disposable income and dent confidence, weighing on consumption and housing.”
The downturn is also expected to “aggravate existing economic imbalances, including highly indebted households, overvalued housing, and weak productivity,” Oxford says.
The forecast is further clouded by an expected slowdown in population growth, with recent federal immigration policy changes projected to cause a slight decline in population beginning in 2025. That will further constrain both labour supply and overall economic demand.
Unemployment to peak at 7.7%
Oxford forecasts the Canadian economy will shrink by 1.3% from peak to trough between Q2 2025 and Q1 2026—slightly worse than its previous projection.
That downturn is expected to eliminate 200,000 jobs, pushing the unemployment rate to 7.7% in the second half of 2025.
Consumer spending and housing will also take a hit, with Oxford projecting home prices to fall by 8%–10% by mid-2026. “Uncertainty about job security has already caused homebuyers to retreat, anxious sellers to boost listings, and home prices to decline,” Stillo noted.
At the same time, the removal of the federal carbon tax and lower global oil prices are expected to push inflation briefly down to 2% this spring. But Oxford says that will be short-lived.
As counter-tariffs and global supply chain disruptions mount, inflation is expected to re-accelerate to 3% year-over-year by the end of 2025 before easing again in 2026 as trade tensions begin to subside.
Bank of Canada likely to hold rates steady
Oxford Economics expects the Bank of Canada to keep its overnight rate at 2.75% for the foreseeable future as it balances weakening growth against persistent inflation pressures.
“We can’t rule out a couple more 25bp rate cuts, but we don’t believe the BoC will reduce rates below 2.25%—the low end of its neutral range—unless it’s convinced that inflation is controlled and additional stimulus is necessary,” the firm noted.
Oxford’s forecast shows the policy rate remaining steady at 2.75% through 2027, despite the economy falling into recession. That would mark a significant departure from previous cycles, where deeper rate cuts typically followed sharp downturns. But with inflation expected to rise again toward 3% by the end of 2025—driven by trade-related supply shocks and counter-tariffs—the Bank is likely to tread carefully.
The firm also expects 10-year government bond yields to rise gradually over the next few years, from current levels of around 3.2% to approximately 3.7% by 2029.
That upward pressure, combined with higher risk premiums and tighter global financial conditions, will keep 5-year fixed conventional mortgage rates elevated. Oxford projects those mortgage rates will stabilize just above 5% through the medium term—well above their pre-pandemic lows.
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Last modified: April 22, 2025