As we reported last month, Oxford recently cut its 2025 GDP growth estimate to just 0.7%, to be followed by a 0.2% contraction in 2026.
“The economy is being buffeted by unusually large shocks,” said Tony Stillo, Director of Canada Economics at Oxford Economics. “We’re not seeing the kind of organic shifts that typically result from economic policy—things are changing much more significantly.”
While reduced tariffs between Canada and the U.S. offer some relief, steeper U.S. tariffs on other countries are expected to weigh on global demand, indirectly hurting Canadian exports and investment.
“The reduction in U.S./China tariffs are not a significant mover for Canada,” noted Stillo. ”It reduces the risk of recession in the U.S., but for Canada, even 30% tariffs are still bad news, and these reductions are not a game-changer at all.”
Canadian recession locked in
While Canada’s retaliatory tariffs on select U.S. goods have been paused, the broader economic fallout from global trade rifts remains front and centre. Oxford’s base-case scenario continues to anticipate a Canadian recession, despite the removal of retaliatory tariffs.
“We estimate that U.S. tariffs on Canadian auto parts alone reduced production by about 30%,” said Stillo. “Canada’s retaliatory tariffs doubled that impact. So, while the pause lessens the squeeze on households, the foreign shock remains, and that’s why we still have a recession in our forecast.”
Oxford’s outlook also points to a decline in business investment as a result of high policy uncertainty. “The first place these shocks hit is CAPEX [capital expenditures],” Stillo added, “and we’re already seeing that in the data.”
Complicating the picture is the large share of Canadian goods that still don’t qualify under USMCA trade rules.
According to 2024 U.S. census data, only 38% of Canadian exports fully meet USMCA rules of origin. If that number improves, the effective tariff rate could drop from 12.6% to closer to 3–4%, reducing a lot of the strain.
“This will be a significant factor moving forward that could reduce the impact of U.S. tariffs for Canada,” notes Stillo.
Immigration slowdown could weigh on long-term growth
Demographic trends are also now playing a larger role in Oxford’s latest forecasts. Immigration, which has been a major factor in economic and housing demand over the past decade, is slowing sharply.
According to Michael Davenport, Senior Economist at Oxford, the federal government’s medium-term plan reflects a sustained pullback.
“What we think will be a slowdown in population could be a significant headwind for the Canadian economy,” said Davenport.
Labour supply growth has already begun to slow, limiting the rise in unemployment despite broader economic weakness. Oxford currently forecasts the unemployment rate to peak at 7.4% in 2025, up from 6.9% today.
“We think the long-term immigration trend will stabilize at just under 1% of the population annually,” Davenport added. “That’s a notable shift from the Trudeau era and more aligned with what the economy can absorb, particularly in terms of housing supply.”
Falling sentiment and rising bond yields add to economic strain
For borrowers and mortgage holders, the most immediate challenge may not come from tariffs or immigration, but from weakening consumer sentiment and changing bond market dynamics.
Oxford Economics notes that business sentiment and consumer confidence have already seen significant drops, with several soft models showing sharp declines due to current trade tensions. “Significant turning points in these data trends tend to indicate weaker consumer spending on the horizon, and that’s what we’ve seen so far,” noted Davenport.
The Bloomberg Nanos Canadian Confidence Index (BNCCI), a monthly measure of consumer financial health tracked by Nanos, has improved modestly since the election of Mark Carney, moving from 45.9 to 48.6 over the past two months. But despite the post-election bump, overall consumer spending remains negative.
Bond markets are also reacting to ongoing uncertainty, with investors demanding a higher risk premium—driving up long-term yields even as the Bank of Canada held its policy rate steady at 4.75% last month.
“Even though policy rates will remain steady, we do think that risk premium is rising given the significant uncertainty, as well as the fact that the inflation outlook has risen, so markets are starting to price in higher inflation on both sides,” noted Davenport.
Even potential positives, like Prime Minister Carney’s aim to remove inter-provincial trade barriers by July 1, are unlikely to offset the near-term damage from tariffs and overall uncertainty, Oxford noted.
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Last modified: May 16, 2025