Tariff uncertainty could cause ‘modest recession,’ new summer outlook warns

The uncertainty around the tariffs imposed by U.S. President Donald Trump on Canada could cause a “modest recession” in 2025, a new report by Deloitte says.

The report noted that Canada’s economy will grow by 1.1 per cent by the end of 2025, accelerating to 1.6 per cent by next year.

However, the uncertainty around Trump’s tariffs will continue to cause economic damage.

Deloitte chief economist Dawn Desjardins said in the report that “the extreme rise in policy uncertainty” in Canada’s relationship with its largest trading partner, the United States, “now exceeds levels experienced during the pandemic.”

She said this “is taking a toll on confidence with consumer and business confidence measures falling to the lowest levels outside the pandemic.”

Desjardins said the uncertainty will delay business investment in Canada and hiring will be hit.

“A modest recession is likely to occur this year,” Desjardins said.

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The report said that while Canada’s exposure to Trump’s tariffs has been less than the average tariffs on other countries, with Canadian exporters complying with the Canada-US-Mexico Agreement (CUSMA) escaping the 25 per cent Trump tariffs, the uncertainty is hurting trade with the U.S.

“Recent data however showed a sharp drop in Canadian exports to the US which may continue over the months ahead especially for products, like steel and aluminum and finished autos, that continue to face steep tariffs,” the report said.

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Ontario will be particularly hard hit given its exposure to industries with large tariffs in place, the report said, with B.C. and Quebec also expected to take a hit.

Canada’s growth will largely be led by energy-exporting Alberta, as well as Saskatchewan and Newfoundland and Labrador, the report said.

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During its last interest rate announcement earlier this month, the Bank of Canada held interest rates steady. While the economy may continue to soften, the central bank has indicated that its focus will turn to keeping prices low.

The Deloitte report forecasts only two more interest rate cuts for the rest of the year from the central bank.

“With tariffs set to nudge inflation higher over the coming months, the Bank is likely to cut interest rates only two more times in July and September, when the economy is contracting mildly, before pausing and turn the stimulus baton over to government,” the report said.

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The Mark Carney government’s ‘One Canadian Economy’ bill, which aims to knock down federal barriers to interprovincial trade and remove some regulatory measures for big projects, will also likely give the economy some boost by the end of the year, the report said.

“Many provinces are following suit to reduce interprovincial trade barriers and build more infrastructure, boding well for our economic resilience and long-term prosperity,” the report said.

“Overall, we expect to see modest growth in fiscal operational spending and a ramp up in government investment starting in the final quarter of this year,” it added.

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The report notes that employment has already taken a hit in Canada’s manufacturing sector, which has been impacted by U.S. tariffs on steel, aluminum, softwood lumber and cars.

This is likely to hit hiring across the broader economy, it said.

“We are seeing that weakness spill into other industries with transportation and warehousing and business services also recently reducing their workforces,” the report said.

Deloitte forecasts unemployment to be around 7.3 per cent in the third quarter of 2025, but drop below seven per cent by early next year.

Weak job numbers will also mean Canadians are likely to spend less. Lower immigration numbers will also contribute to lower household spending, the report said.