Canada Likely To Face Deep Recession Despite Lower Tariffs: Oxford Econ

Canada is facing much smaller tariffs than initially proposed, but unfortunately the problems are getting bigger. A new report from Oxford Economics sees the country plunging into a recession deeper than previously anticipated. Despite softening tariff threats, economic uncertainty will reduce consumption and investment, ultimately producing higher unemployment and even briefly producing disinflation. 

Canadian GDP Forecast Trimmed, Contraction Expected In 2026  

Oxford Economics is trimming its Canadian GDP forecast despite softening tariffs. The firm cut its GDP forecast by 0.4 points and expects 0.7% growth in 2025. Next year’s forecast also saw 0.1 points trimmed, with the firm now expecting a 0.2% contraction of GDP in 2026. That’s a big change from the recent population-driven booms seen over the past few years. 

At the center of the loss is reduced consumption related to rising unemployment. Their baseline forecast expects 200,000 jobs lost in the second half of 2025, with the unemployment rate peaking at 7.7% when it hits. This is expected to cause a significant drag on consumer spending, as well as already slow housing activity.  

“Despite lower US-Canada tariffs, we expect Canada’s recession will be deeper due to weaker global demand from higher US tariffs on the rest of the world,” explains Tony Stillo, director of Canadian economics at Oxford Economics.    

Canada Hit With Smaller Tariffs, But More Global Trade Uncertainty

Tariffs are a protectionist policy designed to raise the cost of imports. The idea is to incentivize local production, eventually producing more domestic industry. It’s highly debated if this works for all industries, especially considering production costs fall with economies of scale (the more produced, the lower the cost of production). 

What’s not debated is the short-term impact of tariffs, paid by consumers. The funds are diverted from disposable income, slowing consumption and investment. In the near-term, this will provide a negative shock, even with reduced tariffs. 

Canada is facing smaller tariffs but more risk as global trade uncertainty spreads. Stillo’s firm notes that tariffs have been smaller than initially assumed. Most USMCA (NAFTA 2.0) compliant goods remain tariff exempt, with steel, aluminum, and non-US contents of auto parts being notable exemptions. However, a broad 25% tariff remains on all other non-USMCA-compliant goods. 

Canada responded with counter tariffs that will also impact consumer prices. It hit US imports with a 25% counter-tariff, impacting roughly $95 billion in US imported goods. On the upside, it was less than the $155 billion hit previously anticipated. 

“Overall, this leaves bilateral US-Canada effective tariff rates about 4ppts lower than in our March forecast,” explains Stillo.  

Canada’s Economy Will Be Hit By Rising Global Trade Uncertainty

Canada’s economy won’t just suffer from tariffs, but the uncertainty of global trade will leave a mark. Global trade is currently being rewritten, and it’s not just an American-led issue. For example, Canada kicked off a trade war with China last year, slapping tariffs on key Chinese goods to preserve domestic prices. The counter tariff is expected to deliver a significant blow to the economies in Atlantic Canada and Prairie Provinces. 

These types of issues are cropping up around the world, as the benefits of globalism face more intense scrutiny. This has created significant uncertainty, and volatility is not great news for businesses and investment.  

Canada won’t be exempt from this global market uncertainty. “…the trade war and pervasive uncertainty will paralyze private investment. The global trade war will also have knock-on effects that broaden and deepen Canada’s recession,” warns Stillo.  

Even The Bank of Canada Is Rattled By Global Trade Uncertainty

Canadian monetary policy also has a rocky and uncertain road ahead, according to the firm. The end of the consumer carbon tax and lower oil prices are seen cutting CPI to 2% in April, right on the Bank of Canada (BoC) target. Since tariffs reduce demand and thus prices, the trade war will also reduce inflation over the medium-term. However, the initial implementation will lead to a higher price shock, pushing CPI higher. 

“… we expect Canada’s counter-tariffs and supply chain stress from the global trade war will push inflation back to 3% y/y by the end of 2025,” says Stillo.   

He believes this surge will be brief. Broad tariffs aren’t expected to persist for long, reducing the sharp inflationary pressures as suddenly as it arrived. Since this will occur after tariffs reduced demand, the firm sees a period of excess supply resulting in a brief period of disinflation by late 2026. Inflation will return to a stable target by 2027. 

“Uncertainty about tariffs and how they will impact the economy led the Bank of Canada to keep the policy rate at 2.75% in April. We think the BoC will continue to hold, but we can’t rule out a couple more 25 bp rate cuts. Still, we don’t believe the BoC will reduce rates into stimulative territory unless it’s convinced inflation is under control and additional stimulus is required,” warns the firm.