Canada has entered a recession introduced on by its escalating commerce dispute with the U.S., in accordance with a brand new forecast from Oxford Economics. However the financial drag could also be softened over time due to a pointy enhance in federal defence spending, which can also be anticipated to push bond yields greater.
In its newest outlook, Oxford revised its GDP forecast barely greater for 2025 to 0.9%, up from 0.8%, to replicate Ottawa’s latest pledge to lift army spending to 2% of GDP by the tip of this fiscal yr. The federal government additionally plans to steadily ramp up funding to satisfy NATO’s new 5% goal by 2035.
That further spending will help development in later years, however Oxford expects it to be deficit-financed, elevating the federal debt burden and long-term borrowing prices. Its new forecast places the 10-year Authorities of Canada bond yield at 4.0% by 2027, up from 3.84% in final month’s estimate.
Increased yields placing strain on mortgage charges
Oxford’s up to date forecast arrives amid elevated bond yields, which have already been impacting mounted mortgage price pricing. As Canadian Mortgage Traits beforehand reported, lenders throughout the nation have been steadily growing charges throughout numerous phrases in latest weeks, reflecting greater funding prices and financial uncertainty.
As for variable-rate pricing, Oxford expects the Financial institution of Canada to carry its coverage price at 2.75% for now because it weighs the opposing forces of slowing development and chronic inflation dangers.
Whereas Oxford doesn’t rule out one other one or two quarter-point price cuts, it says the coverage price is unlikely to fall under 2.25% except inflation continues to ease and the financial system wants further help.
Tariffs stay the swing issue
The forecast was formed by vital uncertainty round Canada–U.S. commerce relations. On the time, the agency warned that and not using a new financial and safety settlement, and if U.S. President Donald Trump adopted by on his risk to impose 35% tariffs on non-USMCA Canadian items, the recession may deepen and drag on.
“U.S. tariffs will result in fewer Canadian items exports, whereas uncertainty and a weaker job market will harm home demand,” the report mentioned. Oxford tasks a 0.8% peak-to-trough GDP contraction from Q2 to This autumn 2025, and anticipates the unemployment price may rise to 7.6% (from 6.9% at the moment) as job losses unfold past trade-exposed sectors.
However whereas development is anticipated to stay weak, inflation pressures are constructing. After falling to 1.9% year-over-year in June, Oxford says headline inflation may rebound to three% by mid-2026 as momentary Canadian tariff aid expires in October and provide chain disruptions feed into costs.
Outlook snapshot
| 2024 | 2025 | 2026 | 2027 | |
|---|---|---|---|---|
| GDP development | 1.6% | 0.9% | 0.4% | 3.0% |
| CPI inflation (y/y) | 2.4% | 2.3% | 2.6% | 1.9% |
| Unemployment price | 6.4% | 7.2% | 6.7% | 6.2% |
| 10yr bond yield (finish of interval) | 3.23% | 3.65% | 3.91% | 4.00% |
| Coverage price | 3.25% | 2.75% | 2.75% | 2.75% |
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Final modified: August 7, 2025