If Canada is heading for a recession, how severe could it be?
That’s the question being debated by many economists and financial experts who warn that the main driving force is the trade war brought on by U.S. President Donald Trump’s tariff policies.
The labour market has already been shedding jobs as tariffs take hold and companies brace for higher costs, and at least one economist is forecasting the loss of thousands of jobs in the coming months.
In an interview with The Globe and Mail, TD Group’s chief economist and vice-president Beata Caranci said the bank is “worried” Canada will enter a recession, in addition to potential job losses heading towards the third quarter of the year.
“We can see perhaps another 100,000 jobs lost,” Caranci said in that interview. “We’ve already had over 70,000 lost in the private sector in two months.”
In a statement to Global News about that forecast, Caranci said much depends on how effective the federal government is at implementing promises to “stabilize jobs, particularly in manufacturing.”
“The 100,000 jobs looks like a big number but it amounts to 0.4% of the labour force,” Caranci said in an email to Global News.
“Past recessions have corresponded with job losses in a range of 1-5% of the labour force. This speaks to the belief that there will be a front-loaded adjustment to the tariff environment, but it’ll likely lack severity.”
She added: “But for now, there’s immediate transparency in jobs at risk of being lost, rather than what can be gained.”
How is a recession determined?
There are several ways to gauge a recession, and the formal definition by most economists and central bankers is when Gross Domestic Product (GDP) shows a decline for two consecutive quarters, or a six-month period.
This means that the total value of goods and services produced within Canada in that period would be less than the same period one year prior.
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Rising unemployment and inflation trends can also be used to determine a recession.
If Canadian businesses continue to pull back on producing goods and services due to the heightened cost of tariffs, that will be shown in economic data including GDP.
The trade war has also been impacting Canada’s labour market with unemployment rising as companies lay off workers, and that is reflected in monthly jobs reports from Statistics Canada.
Economic gauges like GDP and jobs reports come sometimes weeks or months after the start of a recession, which is only defined after the fact since it is based on data looking back at the previous two quarters of economic growth.
There are several anecdotal theories that have been proposed to try and gauge whether a recession is happening in real time, but for the most part are considered inaccurate or outdated compared to what economists use.
How severe might a recession be?
Any recession that could arrive imminently is not expected to be as severe as the economic impact of the COVID-19 pandemic in 2020 or the Great Recession from 2007-2009.
However, the severity of this recession may depend on how the federal government responds to Trump’s tariffs.
Caranci pointed to proposals such as the federal government’s plan to spend $2 billion on an “all in Canada” manufacturing network.
The next GDP report from Statistics Canada will be released on May 30, and represent economic growth by industry for the month of March.
This would also give the full GDP report for the first quarter, or three months of the year.
According to TD Economics, the first quarter of 2025 is forecast to show the economy grew by 1.8 per cent, while the second quarter is expected to show a decline of one per cent, and the third quarter will decline by 0.2 per cent. That projected third-quarter decline would meet the definition of a recession, but is projected to trend back up in the fourth quarter.
However, that all depends on the data — and that’s just not clear yet.
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