Toronto, ON – A grim economic outlook for Canada has been delivered by Beata Caranci, Chief Economist at TD Bank Group, who warns the country is sliding into a recession expected to take hold in the second and third quarters of 2025. This downturn is projected to result in the loss of an additional 100,000 jobs, deepening concerns for Canadian households and businesses.
The comprehensive assessment was made during an in-depth Q&A session on May 15, where Caranci indicated that TD Bank is poised to slash its GDP growth forecasts for Canada. The interview, conducted by Jennifer Dowty, began with an observation of apparent market strength, as Dowty noted that, in her view, the S&P/TSX Composite Index had recently surpassed the 26,000 mark for the first time. However, Caranci’s subsequent analysis painted a starkly contrasting picture.
Recession Call and Looming Job Losses
“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,” Caranci stated unequivocally. This alarming figure builds upon already significant losses, as she added, “We’ve already had over 70,000 lost in the private sector in two months.” This sustained job loss contributes to a climate of consumer caution, which Caranci identified as a key factor behind the anticipated deeper economic contractions.
Caranci highlighted a particularly concerning divergence between Canadian and U.S. economic responses. “The concern for Canada is that negative sentiment has directly correlated to the hard data, so sentiment is manifesting quickly in the outcomes,” she explained. “In the U.S., you see very negative sentiment, but the economy is holding up quite reasonably, and in Canada, that’s not the case.”
Housing Market Falters, GDP Forecasts Downgraded
The traditionally robust Canadian housing market is notably failing to provide its usual economic stimulus. “The housing market has always been Canada’s go-to when you want to stoke growth. You would not just get the sales bump but that would lead to purchases of household furnishings… and it would lead to renovation activity… that 1,2,3 economic push,” Caranci elaborated. “We’re getting none of those drivers… sales are going in reverse… down 20 per cent since November, even though the Bank of Canada has cut interest rates by 100 basis points.”
Reflecting these troubling indicators, TD is revising its earlier GDP projections downwards. The bank’s March forecasts, pegging Canada’s real GDP growth at 1.3 per cent for 2025 and 1.1 per cent for 2026, are set to be reduced. “That was our March forecast, and I would say given our preliminary look at all the data, those numbers are coming down,” Caranci revealed. “I would say for Canada we’re probably going to be around 0.8 per cent for this year [2025], and just north of 1 per cent next year [2026]. These are not great numbers.”
She stressed the anticipated severity: “We think the middle of the year, the second and third quarters, are going to be deeper contractions than we initially anticipated based on what we’re seeing in terms of private sector job losses, the housing market not reacting to interest rates, consumers being cautious and sentiment being down – this is not a good combination.”
Monetary Policy Challenges and Government’s Role
Addressing the Bank of Canada’s likely policy response, Caranci anticipates further interest rate reductions but expressed skepticism about their efficacy. “We only put in two more rate cuts, which takes the policy rate down to 2.25 per cent,” she projected. This caution stems from “uncertainty over the effectiveness of the interest rate channel when a tariff policy shock creates a supply side shock.”
She argued that while some might suggest more aggressive cuts, “then you run the risk that let’s say a trade deal is reached and all of a sudden you have a housing market that comes rip roaring and then you’re in the pandemic situation where you get blamed for overstimulating.” Consequently, Caranci believes, “the policy tools rest with the government. This is a supply side shock. This is a confidence shock.”
“To me, this is a shift in Canada that is on the scale of an economic wartime period.”
Navigating Trade Turmoil and Tariff Uncertainties
International trade relations and tariffs remain a pivotal wildcard. Caranci detailed existing complexities for Canadian exporters: “For Canada, the presumption is that companies will increasingly apply to have their products qualify under USMCA, which are exempted from tariffs right now… as more companies put in the effort to get that paperwork in and qualify, the better it will be.” However, she cautioned, “That presumes USMCA qualified products will stay exempted, but we don’t know if that will remain the case.”
Clarity on tariffs is needed urgently. Caranci underscored the need for “significant clarity and stabilization and tariffs” by the third quarter of 2025, warning that without it, “it’s a very difficult operating environment for businesses and the price impacts will really start to come through on the consumer side.”
The China Challenge in Global Trade
The path to such stability is fraught, particularly concerning US-China trade negotiations. Illustrating the entrenched positions, Caranci explained, “China plays a long game… China already reprimanded the U.K. over their agreement with the U.S… China’s point is that when you have a trade deal with another country, it shouldn’t be targeting a third party, it should be between those two countries. So, China is going to be a hard negotiator.”
TD’s forecasts brace for a China-U.S. effective tariff rate of around 40 per cent, which Caranci predicts will cause “a pick-up of inflation happening around the third quarter you get this peak impact for the U.S. and Canada. It’s a one-time price shift.”
The Canadian unemployment rate, cited as 6.9 per cent nationally (Ontario 7.8 per cent) for April 2025, is expected to rise.
Canada’s Long-Term Economic Transformation
Beyond immediate concerns, Caranci painted a picture of a monumental long-term restructuring challenge. “The bigger challenge for Canada is not getting a tariff deal with the U.S. – that’s going to happen at some point – it’s what our economy looks like in five years,” she asserted. “To me, this is a shift in Canada that is on the scale of an economic wartime period. You’re trying to simultaneously reduce your dependence on the U.S., increase your domestic resiliency and increase your global presence.”
Execution Risks for Major Government Initiatives
Successful execution of ambitious government projects, like the “East-West corridor and doubling the size of the amount of housing,” is paramount. “The Liberal government has to execute with a fair degree of precision. This is all about execution,” Caranci warned, noting the risk of projects taking longer and costing more, directly impacting taxpayers. “The risk is that you incur more debt relative to the growth you drive in the economy… If you don’t get it right, you will be burdening future generations with higher taxes and potentially higher interest rates because Canada could end up getting a penalty imposed on it by international investors.”
Specific Housing Market Weaknesses
The housing market, particularly in Ontario and British Columbia, faces prolonged weakness. Caranci anticipates underperformance in 2025, with specific concern for the condo market in Ontario. “That is an area that we think we can see a 15 to 20 drop in prices from the peak, of which 10 percentage points might be this year,” she predicted. A revival, she suggests, “is a next year’s story versus a this year’s story.”
“Stagflation,” Unemployment, and the Canadian Dollar
When asked if stagflation posed a greater risk than recession, Caranci responded, “I would say they’re probably about even,” contingent on policy and external factors.
The Canadian unemployment rate, cited as 6.9 per cent nationally (Ontario 7.8 per cent) for April 2025, is expected to rise. “We think getting to 7.2, 7.3 per cent seems perfectly reasonable,” she stated, reiterating the potential for “about 100,000 jobs lost between now and the third quarter [of 2025].”
Despite interest rate differentials, the Canadian dollar’s stability is attributed to risk sentiment. “The interest rate differential between Canada and the U.S. is not what is driving our currency – it’s all about the risk,” Caranci clarified.
TD’s Contrasting Outlook
Caranci acknowledged TD’s Canadian GDP forecast might be below consensus (“around 0.8 per cent for Canada this year”), while their U.S. GDP forecast for 2026 is more optimistic (2 per cent), based on assumptions of Q3 2025 trade deals shifting the U.S. towards “growth accelerators.”
The overarching message from TD’s chief economist is one of profound caution and an urgent call for precise policy execution to navigate the risk to Canada’s economy.
