Canada will avoid a 2025 recession despite economic storm clouds, says report

But employment losses and housing debt strain are likely to continue

Canada will avoid a 2025 recession despite economic storm clouds, says report

Canada is expected to narrowly avoid a recession in 2025, but economic growth will remain stagnant, according to a new forecast from the Organisation for Economic Co-operation and Development (OECD).

The international body released its latest Canada Economic Survey on Monday, projecting just 1% GDP growth for 2025, with economic contraction anticipated in Q2 and flat performance for the rest of the year.

“We’re not talking about rates of growth that are very strong, but Canada will avoid in this case a recession,” said OECD chief economist Álvaro Pereira during a presentation in Ottawa.

The OECD’s forecast contrasts with predictions from some economists who expect two consecutive quarters of negative growth next year, which would constitute a technical recession. However, the OECD does not see Canada falling into that definition, instead characterizing the outlook as one of stagnation rather than decline.

Despite avoiding outright recession, the report signals a weakening labour market. The unemployment rate is expected to rise to 7.1% in 2025 and 7.3% in 2026, following an April reading of 6.9%. Notably, the manufacturing sector has already begun shedding jobs.

“Certainly, the labour market is deteriorating,” said Pereira. “It’s partly a reflection of what we see in terms of policy uncertainty, there is less investment, there is less consumption, and this is reflected in the labour market.”

The deteriorating employment situation is likely to exert pressure on fiscal policy. While Canada is well-positioned to absorb short-term trade shocks from US tariffs, Pereira emphasized the importance of debt control in the medium term.

“We do think it’s important to maintain the fiscal anchors that have been allowing good performance in Canada,” he said. “We also think that once trade tensions subside, we think (debt) should be brought down on a declining path.”

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Pereira cautioned that debt-related challenges will persist, as governments continue to prioritize spending on defence, healthcare, and social programs.

The report also showed that Canadian households, particularly low-income ones, are allocating a large portion of their income to housing costs.

“The last thing Canadians stop paying is their mortgages, so we know traditionally this is not a problem,” Pereira said. “Having said that, when we start with fairly high mortgage debt and fairly high household debt, of course if there are significant shocks in the economy like we’re going through now, this might put some families at risk in terms of the next few years.”

Canada continues to rank among the OECD’s highest in household debt-to-income ratios, increasing the financial vulnerability of mortgage holders should economic conditions worsen further.

The OECD also highlights Canada’s lagging productivity, which trails the OECD average. Pereira called for reforms in key areas to boost output and housing affordability. These include addressing regulatory inefficiencies, internal trade barriers, and increasing incentives for business innovation.

“(Canada’s) business R&D represents 1.8% of GDP,” Pereira noted. “The OECD average is close to three per cent, so Canada is significantly lower than the OECD average.”

The need for stronger climate-related investment and the importance of maintaining a consistent carbon pricing strategy were also emphasized in the report. The OECD criticized the federal government’s recent decision to zero out the consumer carbon tax, warning that the move weakens the country’s climate policy framework.

“The recent removal of the fuel charge weakens the carbon price signal for consumers and slows down Canada’s carbon emission reduction strategy,” the report stated.

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