Canada will escape a recession in 2025 by the skin of its teeth but its growth forecast and job market will be negatively impacted by the ongoing trade war with the United States, a new report predicts.
An economic survey from the Organization for Economic Co-operation and Development (OECD) is forecasting a growth rate of 1 percent for this year, with a decline in economic activity expected in the second quarter of 2025 followed by stagnant growth for the rest of the year.
“The economy is now facing significant headwinds from rising tariffs with the United States, given the strong interlinkages between the two economies, and the uncertain global economic context,” the report’s authors said in their executive summary. “Household consumption and business investment will be negatively affected by trade tensions and high uncertainty.”
While Canada is expected to avoid a recession—a period of marked decline in economic activity for two consecutive quarters—the country’s overall gross domestic product (GDP) is expected to take a hit this year due to sharply falling exports to the United States, driven by U.S. tariffs imposed on Canadian goods.
GDP is a financial metric that represents the total market value of all final goods and services generated within a nation’s borders during a fiscal or calendar year.
The report also predicts there will be a marked decline in Canada’s labour market within the next two years. The unemployment rate is forecasted to rise to 7.1 percent this year and increase to 7.3 percent in 2026.
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Canada’s unemployment rate reached 6.9 percent in April, marked by a decline in jobs within the manufacturing sector, according to a report released by Statistics Canada earlier this month. The number of people without employment rose by 39,000 in April, marking an increase of 189,000 compared to the same month last year.
Falling Behind
The report emphasized the importance of Canada boosting its productivity, which has fallen behind the OECD average.
“While Canada’s labour productivity level is only slightly below the OECD average, it is trailing behind several comparable high-income countries,” the authors said. “Specifically, Canada’s low labour productivity compared to the United States—despite strong economic ties and geographical proximity—has been a long-lasting concern.”
Canada’s workforce produced goods and services valued at US$74.7 per hour worked as of 2023, significantly lower than the US$97 generated in the United States and the US$89.3 produced in France.
Canada has lagged behind the OECD average and top-performing advanced economies like the United States for years, the authors said. Canada has experienced a decline in productivity growth since the turn of the century, averaging just 0.8 percent between 2000 and 2023 compared to the OECD average of roughly 1.6 percent.
The authors offered several suggestions to bolster productivity such as deeper adoption of digital technologies and automation of supply chains.
Ensuring good business conditions for small and medium-sized businesses, addressing regulatory obstacles such as internal trade, and ensuring access to low cost telecommunications were also on the productivity to-do list.
Implementing such changes domestically would not only improve productivity but would help to counterbalance some of the detrimental impacts of the ongoing trade dispute between Canada and the United States, the authors said.
Prime Minister Mark Carney’s recent mandate letter to his cabinet pledged to build “one Canadian economy” by expanding trade between the provinces so Canada would be less reliant on its southern neighbour. He has vowed to remove barriers that have impeded trade between the provinces by Canada Day.
“If these tariffs prompt addressing long-standing structural issues, such as strengthening internal markets in Canada, this could have lasting positive offsets,” the report noted.
The next report on Canada’s GDP is set for release on May 30, and will include data for the month of March, along with the overall figures for the first quarter.
