Canada enters late 2025 under a cloud of uncertainty. Soft labour market data and negative Gross Domestic Product (GDP) growth in Q2 point to a deteriorating economic backdrop, though the household sector has nonetheless been more resilient than feared. We see risks skewed to the downside given ongoing trade uncertainty and slowing population growth, though fiscal policy stands out as a potential offset.

Catalysts and Milestones to Watch

Late October: Canadian 2025 budget
September/October/December: Bank of Canada rate decisions
July 2026: United States-Mexico-Canada Agreement (USMCA) renewal deadline
September/October: U.S. Supreme Court ruling on tariffs

What Are the Main Risks to Our Call?

As cliche as it sounds, the Canadian economy faces significant uncertainty as we head into the late stages of 2025. The starting point for the economy is fairly weak. The GDP contracted in 2025Q2, and we look for growth just above zero in 2025H2. We do not look for a recession, but the margin for error is razor thin. Inflation pressures appear to be moderating, and as such we believe the conditions are in place to support two more Bank of Canada cuts this year.

We see three key risks to our view:

Broadening tariff impacts,
More fiscal stimulus and
Mortgage resets in 2026

Many of the risks facing the economy are, to some extent, two-sided. Take the tariff situation: while there is clearly scope for the Canada-U.S. trading relationship to deteriorate further, it’s also plausible that the two countries could resolve the recent dispute. Nonetheless, it seems likely to us that the full impact of U.S. tariffs has yet to be felt in Canada, as the trade outlook has been too volatile for businesses to fully adjust to the new reality.

Fiscal stimulus risks are theoretically two-sided, but we’d be very surprised to see the government deliver less stimulus than promised. Certainly, recent announcements from the government suggest a risk of more spending, not less.

The final risk really focuses on the health of the consumer sector. Canadian household spending has been more resilient than expected over the last 18 months, despite painful mortgage resets in 2024 and sharply slower population growth through 2025. However, a large swath of low-rate mortgages renew in 2025; high household savings rates should provide a buffer, but there is still a risk that the next round of mortgage resets weigh on household spending. The overall balance of risk around our forecast tilts slightly to the negative side of the scale.

Theme 1: Tariff Uncertainty

The Canadian outlook remains clouded by uncertainty around U.S. trade policy six months after tariffs were first imposed. Exemptions for USMCA compliant goods have helped cushion the blow, but we still estimate that the effective tariff rate on Canadian exports will settle near 8% with 60-80% of Canadian exports already eligible for preferential treatment. An effective tariff rate of 8% would still preserve some advantage for Canadian dollar exports against other advanced economies, but direct comparisons are more difficult with inconsistencies between policy-implied tariff rates and the lower effective rate from calculated duties. Nonetheless, it is hard to see further relief without changes to sector-specific tariffs on autos and metal products.

Economic data is still giving off mixed signals on the impact from tariffs. Take the 2025Q2 National Accounts for example. Net exports shaved approximately 8pp (percentage points) from headline growth, but there was far less evidence of tariffs spilling over into other sectors. Real machinery and equipment spending is sitting at the lowest level on record (going back to 1981), but household spending had one of its best quarters since the pandemic. Headline GDP would have been much softer without the resilience in household consumption or residential investment, not to mention the 5% increase for government spending.

Broadly speaking, it’s still hard to escape the notion that tariffs are leaving a mark on the economy, but a recession is not a foregone conclusion. We look for essentially no growth in 2025Q3, and a modest increase in economic activity in 2025Q4, bringing Q4 on Q4 GDP growth to just 0.4% year over year. For context, the Bank of Canada had this at 0.7% year over year for 2025Q4 in their July Monetary Policy Report, and 2024Q4 growth clocked in at 2.3% year over year. Ongoing resilience from households will be a key theme to watch.