Is Canada Heading Toward a Recession?

As Canada grapples with rising unemployment rates and a tightening monetary policy, the question of whether the country can avoid a recession has become increasingly important. Analysts are divided, with some believing that strong population growth and targeted monetary policy will stave off an economic downturn, while others warn that Canada is already in a stealth recession or on the brink of a technical recession. In this article, we explore the current state of Canada’s economy, the role of interest rate cuts, and the potential risks ahead.

Is Canada Already in a Recession?

A recession is traditionally defined as two consecutive quarters of declining real GDP. However, some experts argue that Canada is already experiencing a recession on a per-capita basis. David Doyle, head of economics at Macquarie Group, points out that real GDP per capita has contracted for six consecutive quarters, suggesting the country is already in a per-capita recession.

Ashish Dewan, senior investment strategist at Vanguard Canada, attributes this trend to low productivity, particularly in research and development, and challenges such as interprovincial trade barriers. Despite this, Dewan believes that the overall GDP data suggests Canada may have avoided a recession for now, thanks to a relatively strong economic growth rate in the second quarter and easing monetary conditions.

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

The Bank of Canada’s recent interest rate cuts have been a key tool in attempting to avoid a recession. In 2024, the central bank implemented five rate cuts, including two back-to-back reductions, lowering the overnight policy rate from 5.00% to 3.25%. This move is intended to support consumer spending and help stimulate the economy.

Tiago Figueiredo, a macro strategist at Desjardins, believes that with the right amount of monetary stimulus, Canada can avoid a recession. However, he acknowledges that the country’s economy remains in a vulnerable position, with risks of a downturn still present.

Michael Davenport from Oxford Economics suggests that lower interest rates will help stimulate housing demand and keep inflation in check, potentially preventing a recession. However, he also highlights that persistent economic slack could limit the upward pressure on prices, keeping inflation under control without fully reviving economic growth.

The Complications of a Weaker Canadian Dollar

The Bank of Canada’s rate cuts are not without complications. While lower interest rates make borrowing cheaper, they also tend to weaken the Canadian dollar, making imports more expensive. RBC’s chief economist, Eric Lascelles, warns that a weaker loonie could fuel inflation, even as the economy struggles with weak growth.

Philip Petursson, chief investment strategist at IG Wealth, believes that the Bank of Canada’s primary concern is sluggish economic growth, not inflation. However, the strength of the Canadian dollar relative to the US dollar will play a key role in shaping the economy’s future. A further depreciation of the loonie could exacerbate the challenges facing Canada’s economy, pushing it closer to the edge of a recession.

Tariffs and the Risk of a Recession

US President-elect Donald Trump’s potential tariffs on Canadian goods represent another significant risk to the Canadian economy. If implemented, a 25% across-the-board tariff on Canadian exports could plunge the country into a deep recession, warns Nick Rees, senior market analyst at Monex Canada. Such tariffs would likely disrupt trade relations and damage Canada’s economic stability.

While a weaker Canadian dollar could help offset the impact of these tariffs, it could also drive up the cost of imports, worsening inflation and pushing Canada closer to a recession. According to Davenport, retaliatory tariffs on US goods could further contract business activity and push Canada into a severe economic downturn by 2025.

Immigration Restrictions: A Potential Economic Slowdown

Another risk to Canada’s economic outlook is the government’s decision to restrict immigration. The sharp increase in population growth in recent years has been credited with helping Canada avoid a recession despite high interest rates. However, if population growth slows as expected in the coming years, the economy could face significant challenges.

Charles St-Arnaud, chief economist at Alberta Central, warns that a deceleration in population growth could result in weaker consumer spending and a slowdown in some areas of the housing market. With economic growth potentially dipping below 1%, Canada could face a precarious situation where the economy teeters between expansion and contraction, raising the likelihood of a recession in 2025.

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Conclusion: Is a Canadian Recession Inevitable?

While there are several factors working in Canada’s favor, including population growth and monetary policy adjustments, the risks of a recession remain high. The Bank of Canada’s rate cuts and efforts to stimulate the economy may provide temporary relief, but the country faces significant challenges ahead. Tariffs, a weakening Canadian dollar, and slowing population growth all pose potential risks that could tip the economy into a recession in the near future. As we move into 2025, Canada’s economic outlook remains uncertain, and the likelihood of a recession will depend on how these factors evolve in the coming months.