While U.S. President Donald Trump’s trade war continues to hit the Canadian economy, economists say Canada might just narrowly avoid a recession.
Economists define a recession as two consecutive quarters of an economy contracting. In the second quarter of 2025, Canada’s tariff-hit economy shrank by 1.6 per cent.
In the third quarter, which ends in September, economists are expecting a bit of a bounceback.
The Canadian Chamber of Commerce’s Business Development Lab is projecting that Canada’s economy will grow by 1.7 per cent in the third quarter. While that is soft growth, it would mean that Canada technically avoids a recession.
After five straight quarters of Canadian business confidence plummeting, the Chamber of Commerce predicts “business confidence held flat in Q3.”
However, the report added that this was cause for “caution rather than renewed optimism.”
The resilience in the Canadian economy was led by smaller firms, which have been able to pivot quickly to make their exports CUSMA-compliant in order to avoid tariffs, the report added.
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“Micro-exporters recorded the fastest gains in U.S. sales, helping to offset muted optimism among larger firms,” the report said.
TD Bank predicts a quarterly growth rate of 0.8 per cent for Q3, which would mean a recession would be technically avoided.
The Royal Bank of Canada is also projecting Canada’s economy to grow modestly in the third quarter.
“Early readings suggest the contraction in Q2 growth was not likely repeated in Q3,” the RBC report released last week said.
While Canada will avoid a large-scale recession, RBC predicted that Ontario could face “localized recessions” in some tariff-hit markets.
“Ontario is clearly in the eye of the trade war storm, and we expect the province to face persistent economic headwinds throughout 2025 and into 2026 as it adapts to the new rules of trade,” RBC said.
The report said central-southern Ontario and southwestern Ontario – where Ontario’s manufacturing workforce is concentrated – are being pummelled by Trump’s tariffs.
Bank of Canada governor Tiff Macklem said last week that under the current tariff regime, a recession is not expected, but growth is expected to slow. He added that the slower growth is “not going to feel good.”
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