Oxford Economics expects Canada to remain on the edge of recession through 2026, warning that broad-based weakness across the economy shows little sign of easing.
The outlook was shared during the firm’s September Office Hours call, where economists pointed to persistent sluggishness across key sectors despite cooling inflation and recent rate cuts from the Bank of Canada.
Ongoing uncertainty around trade, a softening labour market and a housing market still searching for the bottom were flagged as key risks, with the path ahead also vulnerable to policy shocks such as the federal budget this fall.
Weak growth and a softening job market
Oxford Economics said the economy will “remain on the verge through the second half of 2025, teetering on recession,” with the Bank of Canada’s recent cut described as consistent with easing inflationary risks and faltering growth. Another reduction in October was noted as possible, though the outlook “is still subject to policy shocks,” including a fiscal boost anticipated in the federal budget this fall.
The firm now expects inflation to average 2.6% next year, down from earlier projections of 3%, while the labour market will continue to feel the strain. “We think there’s still a little bit of a hit coming to lift unemployment to 7.4%,” the call noted, though the rate should fall relatively quickly into 2026 as population growth slows.
The outlook pointed to a prolonged weak growth cycle. “Our outlook for the Canadian economy is not that optimistic — we expect to remain on the edge of recession into 2026, with overall growth close to zero,” Oxford said. Quarter-by-quarter gains are expected to come slowly, in the range of just one to three tenths of a percent.
Uncertainty over tariffs under USMCA was also cited as a risk. Until Canada secures a deal similar to those achieved by the UK or EU, the firm noted a cloud of uncertainty is expected to hang over tariff rates, dampening investment and related sectors.
Tentative housing rebound overshadowed by falling prices
Oxford Economics pointed to early signs of improvement in resale activity, noting “a pickup in sales and average prices in Toronto and Vancouver, and listings have also risen, so overall activity is starting to move a little bit.” However, benchmark prices — described as the stronger gauge — “have continued to drift lower.”
Further rate relief is expected to bring more buyers and sellers back into the market this fall, though the balance is likely to tilt toward a buyer’s market. “There will be a pickup in activity, but it will lead to prices drifting lower into 2026,” Oxford said.
Modest price growth could resume by 2027, but structural headwinds are expected to limit the upside. “Demographic shifts will limit overall housing demand, alongside ongoing affordability challenges, especially in the Greater Toronto and Greater Vancouver areas,” Oxford noted.
Over the longer term, home prices are expected to rise only slightly faster than inflation. “We anticipate a housing market rebalance in the late 2030s, but over the next five to 10 years house prices will be largely flat in real terms,” the firm said.
Government ambitions tempered by structural limits
On the construction side, Oxford Economics is projecting limited momentum in the near term. “The next couple of months and quarters are not looking particularly good,” the firm noted, with a relative uptick expected only by late 2026. Even then, the baseline is described as low, and any rebound would resemble a return to balance rather than a boom.
Government ambitions add another layer of complexity, with Ottawa’s recently announced Build Canada Homes program calling for a near doubling of housing output through modular and mass-timber construction. But Oxford warned such targets risk overshooting. “We think the government’s plan to double housing supply overdoes it. We see housing starts peaking near the 300,000-unit range in the latter half of the decade. With changing factors including aging boomers selling homes, for example, we could face an oversupply situation by the end of the decade if that government plan comes true.”
For now, the Canadian economy appears set to remain in a holding pattern — not fully in contraction, but still far from a clear path to recovery. With tariffs in flux, inflation expected to tick slightly higher in the long term, and housing still adjusting, the market is shaped more by uncertainty than conviction.
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Last modified: September 22, 2025