TD Economics’ latest Canadian Quarterly Economic Forecast largely comports with our assessment of an incoming Canadian recession. The wildcard is how much government support can soften the depth of the downturn and contain job losses. TD has a hopeful view. Here are the main takeaways:
Canada has borne the brunt of President Trump’s tariff action despite having one of the most equal trade relationships of any country (Chart 3 below). This leaves us skeptical that tariffs can be avoided no matter the negotiation tactic. A wave of “Buy Canada” national pride has been unleashed, but it won’t be sufficient to offset the direct negative impacts to the outlook. As outlined in the text box, our forecast assumes a high level of U.S. tariffs remain in place for six months, before being gradually reduced through negotiations.
However, even with this, we doubt Canada’s trade and tariff relationship will return to the pre-Trump state. We expect Canada’s economy to tip into a shallow recession this year, mitigated in part by government support. The Canadian government has been swift acting in announcing changes to the work-share program for impacted industries, in addition to broad financial programs operated by the EDC, BDC and Farm Credit Canada.
Tariff threats have sent a chill through Canada’s housing market, and downside pressure will build under the added weight of higher materials costs from a weaker Canadian dollar and retaliatory tariffs. We expect residential investment to contract through much of this year. That chill will also spread to broader business investment and consumer spending, with outlays forecast to decline through the spring and summer. However, the overall contraction in economic activity is less than seen in a typical Canadian recession.
Weaker demand is likely to tip Canada’s job market into net job losses in the third quarter. But the unemployment rate rises only marginally, as slower labour force growth creates a powerful counterforce. Under Canada’s recent immigration policy shifts (see report), the labour force grinds to a halt in the second half of 2025. The unemployment rate is forecast to rise to a peak of 7%.
Recessions are a regular resetting part of economic cycles measured as a multi-quarter decline in five key indicators: real gross domestic product (GDP), income, employment, manufacturing, and retail sales.
While recessions have always brought down commodity prices and inflation, they are dreaded because they also reduce revenues, profits, employment, asset prices, and the ability to service debt.
For three decades, the theory was that ultra-low interest rates helped borrowers save on interest costs. In fact, low rates enabled the masses to go deeper into debt. In 2021, Bank of Canada research acknowledged that low interest rates inflated home prices and attracted capital to counterproductive financial speculation.
While central banks (investment purveyors and politicians) infamously never see the “R” word coming, once financial conditions have been left too loose for too long, it is typical for tightening efforts to coincide with economic contraction. Downturns led by real estate (like now) have traditionally coincided with the deepest recessions and bear markets.
ChatGPT reminds us that the average price decline for large-cap stocks during recessions has been 30%, and when valuations start from extreme highs, as in 1929, 1973, 2001, 2007, 2020, and now, the peak-to-trough decline has been 34 to 86 percent (table below):
📉 Median Stock Market Decline During Recessions (Since 1900):
Median decline: ~24%
Average decline: ~30%
These figures represent peak-to-trough declines during or surrounding U.S. recessions.
📊 Context:
Recession Market Drop 1929–1933 (Great Depression) -86% 1973–75 (Oil crisis) -48% 2001 (Dot-com bust) -49% 2007–09 (Great Financial Crisis) -57% 2020 (COVID) -34% Some mild recessions (e.g., 1945, 1980) -10% to -20% These huge drops skew the average higher, but the median gives a more balanced view of what’s typical.
🧠 Key Insight:
Markets almost always decline in anticipation of a recession — but they also typically rebound before the recession officially ends.
The masses are cash-light and debt-heavy with the savings they do have loaded into highly leveraged, over-valued assets. If you are one of those, it’s not too late to take protective steps. We’ve certainly been forewarned.
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