What’s got economists talking recession

U.S. president Donald Trump targeted Canada for tariffs while still on the campaign trail. And the first hundred days of his administration saw executive orders authorizing tariffs primarily on Canadian autos, steel and aluminum but also impacting other sectors of our economy.

Some tariffs were temporarily walked back, but others remained, with predictable negative impacts on business investment and Canadian household spending. Recently, Statistics Canada reports February data show a 0.2% dip in the gross domestic product (GDP), which measures Canada’s total output of goods and services. Goods-producing economic sectors slipped 0.6%, with quarrying, oil and gas extraction, and mining falling 2.5%.

Earlier this year, Canada’s minerals sector was singled out in a report from Fitch Ratings, which predicted “significant economic and fiscal repercussions for Canadian provinces” from higher U.S. duties on Canadian exports.

“​The largest sector subject to duties is mineral products, including oil,” it said, and added western Canada “would likely be among the hardest hit, affecting non-renewable resource revenue in Alberta, Saskatchewan and British Columbia.” But Fitch also noted the dependence of Canadian crude oil on refineries in the midwestern U.S. could be a bargaining chip to mitigate tariffs.

Meanwhile, a Morningstar DBRS commentary found trade uncertainty will impact property and casualty insurers in North America more acutely than their U.K. and E.U. counterparts. “Canada, whose economy and supply chains are closely integrated with the U.S., will likely see an increase in inflation due to disruptions in cross-border supply chains and the imposition of retaliatory tariffs on certain imports from the U.S.,” the report said.

“As such, insurers in both markets will see their claims costs increase, in some cases materially, which could affect loss ratios and profitability if not mitigated. Other P&C subsectors such as travel, marine cargo, and surety could also see impacts because of reduced travel, slowing global trade (partially offset by higher values of imported goods), and weakening of credit quality that is likely to follow.”

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Handicapping recession fears

Right now, economists say early numbers for March suggest GDP will improve in that month and possibly for the first quarter of 2025 overall. But market watchers also point to soft home sales since late last year, growing layoffs at major employers, and slipping consumer sentiment as evidence a recession may be brewing.

While March’s Index of Consumer Confidence in Canada hit a historic low of 44.2 (on a scale where confidence in 2014 equals 100), April’s report showed some improvement, rising 4.2 points to 48.4. The latest report found consumers expressing cautious optimism for future economic conditions.

“The share anticipating fewer job opportunities six months from now fell 7.6 percentage points to 42.0%, following the historic high recorded in last month’s survey,” said commentary from the April report authors. “At the same time, the share expecting more job opportunities six months from now remained largely stable, edging up just 1.3 percentage points to 5.6%.”

Taken together, these factors suggest all eyes will be on the next two sets of quarterly Canada GDP numbers, since the technical definition of a recession is two negative quarters of GDP growth.

Indeed, a second Fitch Ratings report, issued this week, forecasts slow consumer spending throughout 2025 in response to a cooling labour market, continued trade tensions and a slowing Canadian population growth. That report doesn’t hesitate to use the ‘R word’ and calls for the unemployment rate to eventually top 8%.

“Due to the impact of U.S. tariffs, we forecast a recession, with Canadian GDP declining for three quarters from 2025, with annual average growth in 2025 of just 0.1%,” Fitch says.

“The boost to consumer spending growth from a surging population is set to fade through 2026 due to the impact of policy changes that restrict immigration. The rapidly changing tariff and trade landscape in the U.S. will both directly affect Canadian exports…This will have an adverse effect on the labour market.”

Home economics

Debt levels will also impact Canadians’ spending decisions, said Fitch, noting the country’s “household debt service burden” fell to 14.4% of disposable income in the final quarter of 2024. “But this reflected strong growth in incomes,” the ratings agency said, as opposed to a lighter household debt load.

“Weak consumer confidence is encouraging precautionary savings among households, something we see only gradually recovering after the trade dispute with the U.S. is resolved,” adds Cory Renner, associate director of economic forecasting at the Conference Board of Canada, “but businesses could remain cautious for a while.”

Overall, the Conference Board calls for Canada’s real GDP to grow 0.9 per cent throughout 2025.

Arrears in liabilities — a key indicator of household solvency — rose in the fourth quarter of 2024. Delinquencies on auto payments rose 67 basis points, and credit card delinquencies rose 102 basis points—the highest level in a decade.

Phil Porado

Phil, an award-winning journalist with over 30 years of experience in financial topics, has been managing editor of Canadian Underwriter for more than three years.