By BDC
MONTREAL, Canada – Canadian entrepreneurs have their eye on several economic indicators that are flashing yellow about the potential for a recession this year. A slowdown in economic growth, rising unemployment and a number of ailing sectors are all worrisome signs. However, we still expect Canada to avoid a recession in 2025.
Canada is not currently in a recession and our forecast calls for modest growth of 0.8 percent for the year. But the risk of one or two-quarters of declining GDP remains.
Growth surprises to the upside in Q1
Although many consumers and businesses might have the impression the economy is already in recession, recent data has shown unexpectedly strong growth.
Canadian real GDP grew at a rate of 2.2 percent in the first quarter. It would be surprising, however, to see this strength continue in the balance of the year as trade conflict takes an ever greater toll on the economy.
Consumption and business investment, key pillars of economic growth, were positive in the first quarter, contributing 0.7 and 0.3 percentage points to GDP, respectively. But this was a subpar performance as uncertainty prompted many businesses and consumers to remain cautious.
Non-residential investment had regained some momentum at the end of 2024, thanks to interest rate cuts, but is once again suffering in the current economic climate.
Rising inventories and exports: Ominous signals
The uncertainty surrounding US trade actions led to higher inventories, imports and exports as businesses and consumers rushed to get ahead of the imposition of tariffs on both sides of the border. It’s unlikely the economy will benefit from a similar boost in the coming months.
In fact, Canadian exports to the US have already slowed significantly—falling by over 15 percent in April. By contrast, exports to the rest of the world rose by 2.9 percent, but this wasn’t enough to maintain overall trade growth.
The increase in business inventories is likely to come up against slower demand and this could be another drag on the economy this year.
Bank of Canada maintains key interest rate
The Bank of Canada maintained its key rate at 2.75 percent in its June 4 announcement. Headline inflation, as measured by the annual change in the consumer price index, slowed to 1.7 percent in April. But core inflation measures, which the Bank of Canada favours, picked up again, all exceeding 3 percent.
At this stage, the key interest rate is within the so-called “neutral” range. A rate between 2.25 and 3.25 percent corresponds to a monetary policy that allows the economy to run smoothly—neither too fast, nor too slow.
However, the economic slowdown that is underway could prompt the bank to cut its rate further, especially if it judges that inflation resulting from tariffs will be temporary.
Unemployment rate rises
The country’s unemployment rate increased again in May. Despite positive job gains during the month, the labour force—the number of people available and ready to work—grew by a much larger margin. (+35,300 available workers versus 9,000 jobs created.)
In a positive sign for the economy, private sector employment rose for the first time since January, jumping by almost 61,000 positions. Layoffs were stable compared with the same period last year.
There were job losses in sectors that are more vulnerable to tariffs, such as manufacturing (-12,200), construction (-7,400) and transport and warehousing (-15,500).
The impact on your business
- Trade negotiations with Washington are continuing and the situation is evolving by the day. Until an agreement is reached, consumers will remain cautious and companies will continue to want to reduce the inventories accumulated in Q1.
- In the face of trade uncertainty, the Bank of Canada is being patient in making further rate cuts, despite a slower economy. It’s still a good time to review your investment projects and develop your growth plans.
- The economic slowdown is concentrated in certain sectors, particularly those affected by US tariffs and Canadian retaliatory levies. If your company operates in these sectors, or if your supply chains are impacted, BDC can help you stay on track.
- Even if you’re not directly affected by trade turbulence, it’s worth assessing how your company needs to adapt to a wider slowdown in the economy. While we expect slower growth ahead, we’re not forecasting a recession at this stage.
Related: Ontario’s economy bears the brunt of trade tension
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