Recession, or Not Recession? Is That the Right Question?

At Desjardins Economic Studies, our members and clients often ask: Will the chaos of President Trump’s on-again, off-again tariff threats push Canada’s economy into a recession? It’s a reasonable question, but we’re not sure it’s the right one.

First, recessions are binary outcomes. An economic downturn either is or is not a recession. To be considered a recession, real GDP needs to contract for at least two consecutive quarters. But the economic weakness also needs to be felt broadly throughout the economy. That’s why, for instance, the CD Howe Institute’s Business Cycle Council didn’t label the negative real GDP growth prints at the beginning of 2015 as a recession. They argued that the economic shock from a sharp drop in oil prices was concentrated in too small a number of industries to be a recession, as important as those industries are to the Canadian economy. The same is true of the three consecutive quarterly declines in Quebec’s real GDP in late 2023, when a series of one-off shocks combined with strikes to briefly pull economic activity lower.

Second, the reasons for the economic downturn are likely to be the same, regardless of whether or not the Canadian economy experiences an official recession in 2025. The real question is one of magnitude. Tariffs are being increasingly applied to US imports from Canada, albeit through a haphazard and unpredictable process. This constant uncertainty has raised significant concerns among US companies and will likely persuade them to increasingly seek out domestic suppliers to meet their needs. That will weigh on Canadian exports. To avoid whatever tariffs may ultimately come to pass, some businesses operating in both countries may also shift some of their planned Canadian capital expenditures to the US, exacerbating the drag on business investment resulting from reduced external demand. With exports and business investment likely to be on a lower growth track going forward, hiring can also be expected to slow, weighing on Canadian consumers. Retaliatory tariffs will then make these circumstances even more difficult by increasing the price of goods imported from the US and pushing up inflation. And that’s on top of the preexisting domestic headwinds to consumption growth coming from slower population gains and an uptick in mortgage renewals at higher interest rates. Taken together, Canada is likely to experience broad-based economic malaise for the foreseeable future, whether or not the Canadian economy gets officially labelled as having a recession.

Could Canada experience two consecutive quarters of negative real GDP growth in 2025? Quite easily. Will that qualify as a recession? Quite possibly. But regardless, Canada’s economy is likely to enter a period of protracted economic weakness as US economic policy holds back trade, investment, job creation and growth here at home.

So, what can be done to offset this drag originating from south of the border? Canadian policymakers need to have a relentless focus on reducing the barriers to Canada’s economic success. Cutting the cost of private investment and streamlining regulations would be a good start, as would leveraging Canada’s comparative advantages as a resource-rich Western democracy. It also means bringing down internal trade barriers. We’ve seen a lot of talk about this so far but not much action, save for some joint press releases. That needs to change. Companies are going to need to look further afield to new markets for their products as well. But that’s easier said than done, and companies can’t be expected to turn to new customers and suppliers on a dime. Government support will need to be made available to bridge that gap. This includes through increased lending by Crown corporations like the Export Development Canada and the Business Development Bank of Canada. Recently announced federal measures, such as the $5B Trade Impact Program, are a step in the right direction. Ramping up public infrastructure investment will also be paramount to facilitating resurgent domestic and international trade. However, it would be a mistake to think the impending economic malaise is going to require the same support that was rolled out during the pandemic. That economic downturn was sharp and short. This one is likely to be shallow but sustained, causing a structural dent in economic activity. The policy response should fit the nature of the shock.