Canadian Economy Faces Recession Amid Global Trade Tensions

OTTAWA — A new report from the Crown corporation Export Development Canada (EDC) projects that the Canadian economy will officially enter a recession this year, primarily influenced by global trade tensions linked to U.S. President Donald Trump’s tariff policies. The EDC forecasts a modest economic growth of just 0.9 percent for 2025, with a slight increase to 1 percent in 2026. This growth rate falls below that of the United States, which is expected to achieve 1.7 percent, and the average for developed economies at 1.3 percent.

In contrast, the developing world is anticipated to exhibit stronger growth rates of 3.8 percent, contributing to an overall global growth rate of 2.7 percent.

Impact of Trade Tariffs

Stuart Bergman, chief economist at EDC, emphasized that ongoing trade tensions have destabilized the foundations of the global economy. Canada’s primary trade challenges arise from relations with both the United States and China. Under Trump’s administration, significant tariffs have been placed on a variety of Canadian exports, including steel, aluminum, copper products, motor vehicles, and lumber. Exports that do not comply with the Canada-U.S.-Mexico Agreement (CUSMA) face a steep 35 percent tariff.

Moreover, China has imposed tariffs on Canadian canola, pork, and seafood. The EDC report indicates that these trade tensions have led to rising unemployment and decreased business investment, particularly in machinery and equipment. Despite an earlier surge in exports as companies sought to stockpile supplies before tariffs took effect, the overall economic outlook remains bleak.

The downturn in the crude oil market has compounded these challenges, with prices experiencing a decline of approximately 15 percent over the past year. According to Statistics Canada, the national unemployment rate held steady at 7.1 percent in September 2023, following a 0.2 percentage point increase in August. This marks a 0.5 percentage point rise in the unemployment rate overall this year, reaching its highest level in over four years.

Future Economic Prospects

The EDC’s forecasts suggest that the economic difficulties are likely to persist in the medium term, driven by structural issues such as slowing population growth, low productivity due to limited investment, and high consumer debt levels. Benjamin Tal, deputy chief economist at CIBC World Markets, aligns with the EDC’s outlook, stating that the Canadian economy will be “very vulnerable” over the next three to six months. He predicts that the Bank of Canada will respond by reducing interest rates by 25 basis points later this month, with a similar decrease expected before the year’s end.

Tal notes that while the economy’s overall direction and core strength are more critical than whether it experiences a technical recession, significant improvements are not anticipated until the latter half of 2024. “The economy is not strong by any sense of the imagination,” he remarked.

The EDC’s grim forecast heightens pressure on Prime Minister Mark Carney‘s government to secure a trade agreement with the United States. Potential approaches include a comprehensive deal covering broad economic aspects or targeted sectoral agreements focused on steel, automobiles, aluminum, or softwood lumber. Additionally, there is a growing expectation for policies that stimulate short-term economic growth, which will be felt across provincial and territorial capitals.

Since taking office in April, Carney’s administration has concentrated on addressing long-standing structural issues within the Canadian economy. Initiatives to date have included significant investments in infrastructure, tax reductions, and a focus on enhancing defense capabilities while eliminating the consumer aspect of the carbon tax. Public opinion polls suggest that Canadians are increasingly supportive of Carney’s structural reforms, yet they are also eager for more immediate economic improvements.

As the federal government prepares for its budget announcement in early November, Tal warns that finding short-term measures to bolster the economy while supporting long-term growth will be challenging. The EDC’s forecast is part of a broader trend, with various institutions, including TD Economics, Deloitte Canada, and Capital Economics, also predicting an economic slowdown for Canada this year and next.

Recession is defined as two consecutive quarters of negative economic growth, and the situation in Canada reflects broader global uncertainties. The coming months will likely prove critical as policymakers navigate these turbulent economic waters.