Canada’s economy might narrowly steer clear of a technical recession this year, according to the latest report from the Organization for Economic Co-operation and Development (OECD). However, the outlook remains challenging, with the ongoing U.S. trade war expected to weigh on growth prospects and the job market.
Contents
Here are the key takeaways from the report:
- Canada’s economy is forecast for slow growth, likely avoiding a technical recession.
- The U.S. trade war is a significant headwind impacting GDP and jobs.
- Unemployment is expected to rise over the next couple of years.
- Canada lags behind peers in per capita GDP, partly due to productivity issues despite population growth.
- Removing interprovincial trade barriers could boost productivity and offset external pressures.
Canada’s Growth Forecast and Recession Watch
The OECD’s economic survey projects Canada will see economic growth of one per cent in 2025. However, this includes an expected contraction (negative growth) in the second quarter, followed by flat growth (zero per cent) in the third and fourth quarters.
This forecast is crucial because a technical recession is commonly defined as two consecutive quarters of economic contraction. The OECD’s prediction suggests Canada could avoid this definition by a slim margin. This compares with some other forecasts, like economists at TD Bank Group who have predicted negative growth in the second and third quarters, though they note the severity depends on future government action.
Impact of the Trade War on GDP and Jobs
A major factor identified by the OECD is the impact of the U.S. trade war and associated tariffs. The report states these external pressures are expected to drag down Canada’s overall Gross Domestic Product (GDP). GDP is a key measure representing the total value of goods and services produced in the country.
To counter these negative impacts, the OECD suggests boosting business development within Canada. This could help create domestic economic activity to offset some of the strain from international trade disputes.
The trade war’s effects are also felt in the labour market. The OECD forecasts that unemployment will rise to 7.1 per cent this year and further to 7.3 per cent in 2026, anticipating continued job losses linked to trade tensions and tariffs.
This aligns with recent data. The most recent report from Statistics Canada showed Canada’s unemployment rate increased to 6.9 per cent in April, up from 6.7 per cent in March. The OECD’s forecast indicates this trend may persist.
Challenges to Productivity and Per Capita GDP
The report highlights that Canada still lags behind its peers, particularly the United States, in per capita GDP. This metric divides the total economic output by the population, giving a sense of average economic prosperity. While Canada recovered well after the pandemic, the OECD notes it hasn’t kept pace.
One contributing factor cited is Canada’s recent high rate of population growth without a corresponding increase in productivity-enhancing investment. The report suggests that while a growing population boosts labour supply, a lack of matching investment means the overall output per person doesn’t rise significantly. It also notes that lower productivity among recent immigrants, particularly low-skilled non-permanent residents, can contribute to slower per capita GDP growth.
Policy Recommendations and Potential Solutions
The OECD recommends several ways Canada can increase productivity and strengthen its economy from within. A key suggestion is the removal of interprovincial trade barriers. The report argues that eliminating these internal obstacles would allow Canadian businesses to capitalize on larger domestic markets, reducing reliance on exports and potentially offsetting negative impacts from trade disputes with other countries.
Mark Carney meeting with US delegates in Ottawa regarding economic and trade matters
This aligns with policy goals discussed by the Canadian government. For example, Prime Minister Mark Carney addressed this during his campaign as part of the Liberals’ “One Canadian Economy” initiative, and Dominic LeBlanc was appointed to lead negotiations with the provinces on this issue.
The OECD report suggests that if trade pressures prompt Canada to address “long-standing structural issues, such as strengthening internal markets,” it “could have lasting positive offsets.”
What’s Next
While a recession may be avoided, the OECD report points to a period of slow growth and labour market challenges for Canada, influenced significantly by external trade factors. Boosting domestic productivity and removing internal trade barriers are highlighted as crucial steps to build economic resilience.
Investors and the public will get the next major update on the country’s economic health on May 30, when Statistics Canada releases the GDP data for March and the first quarter overall. This report will provide more insight into whether the economy experienced the contraction forecast by the OECD.
