Will Canada enter a recession?

Will Canada enter a recession?
Will Canada enter a recession?

As unemployment rates rise and the Bank of Canada works to reduce high interest rates, one question becomes increasingly important: will the Canadian economy avoid a recession?

Some analysts believe that strong population growth and targeted monetary policy will help avoid a recession. Others believe that the country is already in a stealth recession and is headed for a technical recession in the coming months. Still others see population decline, trade tensions with the United States and rising unemployment as warning signs.

Is Canada already in recession?

Most economists define a recession as two consecutive quarters of decline in a country’s real GDP. According to another criterion, an economist says that Canada is already in recession. “Canada is in a per capita recession and has been for some time, with real GDP per capita contracting for six consecutive quarters,” says David Doyle, head of economics at Macquarie Group.

Ashish Dewan, senior investment strategist at Vanguard Canada, attributes this trend to Canada’s population growth: “When population growth is taken into account, Canada’s real GDP per capita has been deteriorating for many years, due to low productivity, particularly in research and development, and interprovincial trade barriers.

However, looking at the overall GDP data, Mr Dewan believes the country may have avoided recession so far. Notably, Canada’s economic growth slowed to an annualized rate of 1% in the third quarter, compared to 2.2% in the second. “We don’t think Canada is technically in recession,” he says, noting that the Bank of Canada’s monetary easing cycle points to better prospects for consumers and households. The central bank has made five interest rate cuts this year, including two consecutive half-point reductions, lowering the key overnight lending rate from 5.00% in June to its current level of 3.00% in June. 25%.

Can the Bank of Canada’s rate cut help avoid a recession?

Tiago Figueiredo, macroeconomic strategist at Desjardins, says Canada is not on the verge of recession and that with adequate monetary stimulation from the central bank, the country can entirely avoid a recession. He concedes, however, that “there is no doubt that 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 continued headroom in the economy (which will limit upward pressure on prices) will prevent the situation from tipping into recession. According to him, monetary policy directly affects Canadian CPI inflation through mortgage rates and, therefore, “lower interest rates will support demand [de logement] stronger and will reduce the risk of recession”. However, the persistence of short-term room for maneuver in the economy will limit upward pressure on prices.

The recent 50 basis point rate cut could help counter recessionary forces, according to Tom Nakamura, VP and portfolio manager, Currency Strategy, co-head of the fixed income team at AGF Investments Inc. He calls this decline “signals that restrictive monetary policy is being quickly removed in order to prevent conditions that could lead to a recession.”

Complications linked to the weakening of the Canadian dollar

Eric Lascelles, chief economist at RBC, explains that stronger economic demand (spurred by lower interest rates which make borrowing cheaper) and a weaker loonie (which makes imports more expensive) tend to fuel inflation. However, these factors will not be enough to compensate for the current weakness of the economy. Over the coming months, these forces are expected to strengthen, but not necessarily enough to offset the loss of economic growth from falling immigration.

Philip Petursson, chief strategist at IG Wealth Management, believes the Bank of Canada’s main concern is not inflation, but weak economic growth. However, this growth will come at the cost of the strength of the Canadian dollar compared to the US dollar. “Even though domestic inflation is less of a concern at the moment, the Bank of Canada cannot completely ignore currency considerations,” he explains. “It’s fair to say that the Canadian economy is walking a tightrope between recession and expansion.

Veronica Clark, an economist at Citi, expressed a similar view. She said faster cuts should boost demand, “which helps guard against inflation being too low,” but added that “demand has also weakened, increasing the risks of a decline in inflation.” inflation”.

Customs tariffs and risk of recession

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

Mr. Rees continues: “A weaker loonie would help offset the impact of tariffs, even if it makes Canadian imports more expensive. So while this scenario would likely be associated with a national recession, any downturn would be much worse if the loonie did not depreciate.”

In particular, Mr. Davenport warns that any retaliatory tariffs imposed on U.S. products would cause a sharp contraction in trade and economic activity and push Canada into a recession in 2025. Additionally, bilateral tariffs increase the cost goods and services could “cause a sharp rise in inflation”, he adds. The resulting slowdown could be particularly severe if it leads to significant layoffs, further straining household finances. According to one estimate, up to 1.2 million Canadian jobs would be directly affected by U.S. tariffs.

“Job losses and the resulting drop in income could have significant negative repercussions on the economy, in particular because of the strong pressure they exert on household finances,” says Charles St-Arnaud, chief economist of Alberta Central.

The Canadian government’s decision to restrict immigration constitutes another major risk. “The sharp increase in population over the past few years can be fully credited with helping the Canadian economy avoid a recession, despite interest rates largely in restrictive territory,” says St-Arnaud.

However, Ottawa’s immigration policy could exacerbate a broader economic downturn, increasing the risk of a recession in 2025. “The expected sharp deceleration in population growth in the coming years will have broad implications for “Canadian economy, including a reduction in overall consumer spending and weaknesses in certain sectors of the housing market,” warns Mr. St-Arnaud.

Such a scenario could block the rate of economic growth – probably below 1%, according to Mr. St-Arnaud’s forecasts. “Therefore, as there will be very little headroom between the expansion and contraction of the economy, the likelihood of a recession is higher,” he says.

The author(s) have no ownership interest in any securities mentioned in this article. Learn more about Morningstar’s editorial policies.

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