Canada is on the brink of a recession, warns Beata Caranci, Chief Economist at TD Bank Group, forecasting negative GDP growth for the second and third quarters of 2025. Despite recent gains in the S&P/TSX Composite Index, Caranci cautions that this market strength is unlikely to last as the impacts of global tariffs, weakening consumer sentiment, and a stagnant housing market begin to take hold.
According to TD’s latest outlook, Canada could lose an additional 100,000 jobs over the coming months, building on the 70,000 private-sector positions already lost in a short span. Caranci expects real GDP growth for the year to fall to 0.8 per cent, with only modest improvement to just over 1 per cent in 2026—well below earlier projections.
A major contributor to this economic downturn is the 12 per cent effective tariff rate on Canadian goods exported to the U.S., largely due to non-USMCA-compliant products and steep duties on steel and aluminum. While Caranci anticipates this rate could drop to 5 per cent by year-end and potentially 2.5 per cent in a new USMCA deal by late 2026, the immediate damage is already unfolding. She notes that despite a 100-basis-point rate cut by the Bank of Canada, the housing market remains unresponsive, with sales falling 20 per cent since November.
TD forecasts the Bank of Canada will deliver two more rate cuts this year, bringing the policy rate down to 2.25 per cent. However, Caranci warns that rate adjustments may have limited effect in the face of supply-side shocks caused by trade policy uncertainty, and more aggressive cuts could risk overheating the housing market if trade clarity emerges suddenly.
The economic uncertainty is also weighing heavily on the Canadian housing market, particularly in Ontario and British Columbia. TD projects home prices will fall 6 per cent in Ontario and 4 per cent in B.C. in 2025, with condo markets expected to drop 15 to 20 per cent from peak levels due to oversupply and weak demand.
While global markets remain hopeful for resolution on the tariff front, Caranci says time is running out. A significant trade breakthrough must be achieved by the third quarter to avoid a prolonged slump and inflationary pressure from supply constraints. If no progress is made, inflation could rise again, and any hopes of economic stabilization would be delayed.
For the U.S., TD is more optimistic, projecting 2 per cent growth in 2026 if trade deals are secured. Caranci highlights the U.S.’s ability to reverse escalation with China and other major partners as a positive sign. Should tariff stability materialize, it would give the Federal Reserve room for up to three rate cuts this year, helping to offset economic drag.
Domestically, Caranci warns Canada’s bigger long-term risk lies not only in failing to secure a tariff deal but also in poor execution of major policy initiatives. Projects like the East-West infrastructure corridor and ambitious housing plans require precision to avoid ballooning debt without meaningful economic return. A failure to execute could lead to rising debt-to-GDP ratios, weakening investor confidence, and eventually, higher taxes or interest rates.
TD expects Canada’s unemployment rate to rise to around 7.2–7.3 per cent in the near term, with Ontario already seeing above-average jobless figures. Though the Canadian dollar has remained relatively stable in the low 70s U.S. cents, this stability hinges on the hope that trade tensions ease.
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