GDP forecast revised downward as confidence, employment, and home sales fall
Despite recent market optimism, Canada is on track to enter a recession, with job losses mounting and GDP expected to contract in the coming months, according to Beata Caranci, chief economist at Toronto-Dominion Bank.
Caranci warned that the country’s economy is under growing pressure from trade-related shocks, falling housing activity, and weakening private sector employment.
“We’re very worried that we’re going to be in a formal recession in the second and third quarters and that we can see perhaps another 100,000 jobs lost,” said Caranci in an interview with The Globe and Mail. “We’ve already had over 70,000 lost in the private sector in two months.”
Caranci estimates that current tariffs imposed on Canadian goods amount to an effective rate of 12%, largely due to steep levies on steel, aluminum, and non-USMCA-compliant products. That rate could drop to around 5% by year-end, and possibly to 2.5% by late 2026 if a new USMCA trade deal is reached.
However, near-term economic strain is evident. TD forecasts negative GDP growth in both Q2 and Q3 of 2025, with Caranci lowering her full-year GDP growth estimate to just 0.8%, down from the bank’s earlier forecast of 1.3%. For 2026, growth is expected to stay just above 1%.
“These are not great numbers,” Caranci said. “We think the middle of the year, the second and third quarters, are going to be deeper contractions than we initially anticipated.”
The housing market, traditionally Canada’s growth lever, is no longer responding to monetary stimulus. Even after 100 basis points in rate cuts by the Bank of Canada, Caranci notes that home sales have dropped 20% since November.
“We’re getting none of those drivers. Nothing’s coming through, even with 100 basis points of cuts,” she said.
Fed cuts possible if trade stabilizes
TD’s forecast includes just two more Bank of Canada rate cuts, bringing the policy rate to 2.25%. However, Caranci emphasized that the usual interest rate tools may not be effective in the current climate, where tariffs, essentially supply-side shocks, are limiting business and consumer confidence.
“This is a supply side shock. This is a confidence shock,” she said. “Interest rates in Canada are low relative to what you see in other countries… It’s not enough to stimulate demand because people are not comfortable to invest or purchase a house in this environment until they have clarity on their jobs.”
She pointed to uncertainty around trade deals as a major factor limiting investment and consumption. Without resolution by Q3, she warned, price pressures could intensify while growth stalls.
“If you don’t start to build out significant clarity and stabilization and tariffs, it’s a very difficult operating environment for businesses,” Caranci said.
Read next: Inflation data tempers expectations for June BoC rate cut
In the US, TD expects the Federal Reserve could make up to three rate cuts if key trade agreements are reached with major partners like China, the EU, Canada, and Mexico. Caranci said a clear tariff resolution would give the Fed confidence that any inflationary pressures are temporary, allowing room to support weakening economic conditions.
“You have to think of everything like a sequence of events,” Caranci explained. “The first sequence is that the tariff turmoil stops, that we get stability… Our base assumption is that this all happens around the third quarter.”
Recession or stagflation?
When asked whether stagflation, the combination of high inflation and stagnant growth, was a bigger concern than a recession, Caranci said the risks are about even. She stressed that outcomes largely depend on policy execution and international trade developments.
Canada’s unemployment rate rose to 6.9% in April, with Ontario’s reaching 7.8%. TD anticipates it could rise to around 7.2% to 7.3%, fueled by continued job losses.
“We still think that we could see about 100,000 jobs lost between now and the third quarter,” Caranci warned, although she acknowledged that labour force constraints from reduced immigration could moderate the headline unemployment rate.
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