Is Canada in a recession?

What is a recession?

The most common definition of recession is two consecutive quarters of negative real (inflation adjusted) gross domestic product (GDP) growth. This is often referred to as a technical recession. But this definition is only useful in retrospect, as the numbers aren’t available in real time. For example, we may be living through a recession in June 2025, but until Statistics Canada publishes numbers for second-quarter GDP at the end of August and Q3 GDP at the end of November, we can’t confirm that. 

Rather than waiting for the official verdict, we can look at other statistics like unemployment, average income, housing starts and consumer spending as indicators of a shrinking economy.

What happens during a recession?

In a recession, unemployment rises and average income falls. People reduce their spending, so inflation often declines (but not always). Housing starts fall. Corporate profits drop. These effects can be caused by many different factors. 

The first wave of COVID-19 caused a recession, as did the 2007–2008 U.S. financial crisis. Poorly timed economic policies like interest-rate hikes can stall the economy and trigger recession. Currently, the U.S. trade war is fuelling unemployment, business disruption and uncertainty in Canada, potentially contributing to a recession. 

On average, recessions last less than a year. In the U.S., the National Bureau of Economic Research (NBER) reports that American recessions since 1945 have lasted about 10 months. The range is significant, however, with the shortest, the COVID-19 recession, lasting only two months (though they spanned two quarters). The Great Recession following the U.S. financial crisis lasted about 18 months. 

A depression is a severe, long-lasting recession, although the distinction isn’t well defined.  Some say a depression is a recession where GDP drops 10% or more. The longest period of contraction during the Great Depression of the 1930s lasted three and a half years. According to the Federal Reserve Bank of San Francisco, during that period real output in the U.S. fell nearly 30% while unemployment rose to 25%. No modern-day recession has been anywhere near as long or as devastating.

Will Canada go into a recession in 2025?

A survey of 34 economists by Bloomberg News in May 2025 concluded that Canada was already in the early stages of recession. They pointed to metrics such as rising unemployment and a slowing housing market. At the same time, the Organization for Economic Development (OECD) was forecasting weak growth and high unemployment but no recession. Regardless of whether we’re in a recession or not, almost every commentator agrees that the outlook for the Canadian economy is currently negative.  

Canadian consumers are clearly expecting a downturn. According to the Bank of Canada’s Q1 2025 Canadian Survey of Consumer Expectations, respondents expected their financial well-being to decline over the next 12 months. People estimated the probability of losing their jobs in the next 12 months as slightly more than 20%, compared to around 11% a year earlier and 5% 10 years ago. 

Are Trump’s tariffs to blame for a recession in Canada?

The Canadian economy was slowing down before U.S. President Donald Trump launched his trade war against Canada with “Liberation Day” on April 2. Slowing immigration was a key factor unrelated to U.S. politics. Unemployment was rising and average income was falling. Tariffs accelerated the slowdown, increasing unemployment, hurting consumer confidence and wreaking havoc on businesses. 

The impacts continue to ripple through the economy, with potential home buyers fearful of taking on mortgages in case they lose their jobs, and businesses pausing expansion plans while they grapple with dramatic changes in the cost of inventory and materials. Regardless of how long the tariffs last, the uncertainty they’ve created has caused consumers and businesses to rethink spending plans.  

What happens to the housing market in a recession?

Although housing prices often fall in a recession, recessions don’t always go hand-in-hand with housing crashes. Some economists believe that factors like low inventories of homes, limited new supply from builders and strong demand will protect the housing market from a crash. 

Housing prices in some Canadian markets have already declined. Royal LePage’s Q1 2025 national housing market report found aggregate home prices in the Greater Toronto Area fell 2.7% year-over-year to $1.1 million, while homes in Greater Vancouver declined 0.7% to $1.2 million. Over the same period, however, other markets, including Quebec City, Montreal, Edmonton and Halifax, saw increases. Data from Ratehub.ca saw mortgage affordability improve in April 2025 in seven major markets including Hamilton, Toronto and Vancouver. (Ratehub.ca and MoneySense.ca are both owned by Ratehub Inc.) There’s no guarantee these trends will continue, but so far, the recession is good news for prospective home buyers.

While the U.S. experienced a housing crash in 2008, the worst since the Great Depression, unique factors were at play. The subprime mortgage market had grown dramatically, with banks and other financial institutions lending money to high-risk borrowers. Lenders were willing to lend to almost anyone, popularizing terms like NINJA loans (“no income, no job or assets”) and “liar” loans, where no proof of income was required. Regulations banning this type of lending have since been implemented in the U.S. In Canada, the subprime industry remained small and stricter banking regulations prevented much of the risky behaviour that caused the U.S. crash.

Best investments during a recession

A recession in Canada doesn’t necessarily mean a stock market crash. Economies and stock markets don’t move in sync. Russell Investments reports that, in the past, stock market returns have been positive in 16 U.S. recessions and negative in 15 recessions. 

Even when a recession triggers a bear market—a market decline of 20% or more—staying invested is almost always the best strategy because, like recessions, bear markets are usually short-lived, lasting only 11 months on average.

Investors who sell during periods of market volatility often miss out on the upswing when markets recover. According to Franklin Templeton, if you’d invested $10,000 in the S&P 500 at the beginning of 2005, you’d have $71,750 at the end of 2024, an average annual return of 10.35%. But there were 5,033 trading days over those 20 years, and if you missed the 10 best days, you’d have only $32,871, an average annual return of 6.1%, If you’re anxious about the stock market, remember that from 1937 to 2024, returns for the S&P 500 were positive in 67 calendar years, or 76% of the time. Over the long term, stock markets tend to go up. 

In a 1987 letter to shareholders of his company, Berkshire Hathaway, chairman Warren Buffett famously advised investors to “Be fearful when others are greedy and be greedy when others are fearful.” Stock market declines often create rare opportunities to buy great companies at discount prices, but only for investors who aren’t frightened off by the short-term slump. 

Whether you buy individual stocks or own equities through mutual funds or exchange-traded funds (ETFs), drastically overhauling your portfolio in response to fear of a recession makes little sense, given that recessions typically last less than a year. 

However, you may want to review your asset allocation—the mix of equities, fixed income, cash and other asset classes in your portfolio—to make sure it aligns with your risk tolerance, time horizon and spending goals. Would a recession in 2025 change any of these for you?

If you’re worried about losing your job, for example, you may be more risk-averse than in the past and prefer to hold more cash, reducing your exposure to equities and other more volatile investments. 

Best stocks to own in a recession

Defensive stocks are often the best performers in a downturn. Consumer staples, health care, telecommunications and utilities are considered defensive sectors. Even during a recession we continue to buy food, electricity and pharmaceuticals.  

Cyclical stocks are the opposite: shares in businesses that do best when the economy is expanding. Consumer discretionary, financials, real estate, industrials, information technology, materials and communication services are cyclical sectors. When the economy is booming, more people are buying new cars, furniture and other non-essentials. Most materials companies sell minerals, chemicals, forest products, packaging and other products consumed in higher quantities in a growing economy. 

Sector rotation is a strategy where investors move in and out of different sectors in response to changes in the economic cycle. As the economy expands and contracts over time, they attempt to profit by owning the right sectors at the right time. 

In theory, sector rotation sounds simple. In practice, it’s complicated. You need a clear understanding of where we are in the economic cycle, considering monetary policy, interest rates, inflation and other factors.

You need to know which sectors and industries are most likely to outperform given the economic outlook. Sector definitions are broad and not every stock or industry performs in line with the sector in which it’s included. Sector rotation also requires the ability to accurately predict shifts in the economy early enough to take advantage of them.  

Expectations of a recession in Canada have already driven up the prices of some ETFs focused on defensive sectors like consumer staples, utilities and health care. For example, iShares S&P/TSX Capped Consumer Staples Index ETF (XST) increased 26.8% over the past year (to May 30, 2025), an impressive performance for a fund primarily invested in grocery store stocks. Similarly, BMO Equal Weight Utilities Index EFT (ZUT) rose 21.5%. However, TD Global Healthcare Leaders ETF (TDOC) increased only 0.6%. The S&P/TSX Composite was up 17.5% over the same period while the S&P 500 increased 12.65%. 

Clearly, you can profit by owning defensive stocks going into a recession if you pick the right sectors and get the timing right. Experts also often recommend investing in companies with strong records of paying dividends. Bonds are another option, as they move in the opposite direction to equities most of the time. Less volatile than equities to begin with, they tend to rise in value during recessions when inflation and interest rates fall. Aggressively repositioning your portfolio in response to anticipated economic changes can reduce diversification, however, and if you don’t get the timing right, your return may be lower than the overall market’s. Since most recessions last less than a year, you may be better off waiting out the downturn. 

How to prepare for a recession

For most people, the number one risk in a recession is job loss, which can lead to additional risks like defaulting on debt or even bankruptcy. Business owners may face shrinking revenues or business failure. 

Eliminating consumer debt is one of the best ways to prepare for a recession. Make sure you have an emergency fund, enough cash set aside to cover six to 12 months of regular expenses. This will protect you in case of job loss or sudden unexpected expenses, like car repairs or veterinarian bills. If you’ve been living beyond your means or paycheque to paycheque, now’s a good time to cut your spending. 

If you’re retired or nearing retirement, chances are you have a fairly low-risk portfolio and are less exposed to higher-risk asset classes. Most retirees are spending down their investment portfolios, so make sure you have cash and fixed-income investments available to fund your spending plans for the next year or so. Avoid selling assets that have declined due to negative economic events and are likely to rebound when the outlook brightens. 

The best investment strategy is to diversify, don’t panic and don’t be tempted to time the market. People who sell in a market slump often miss the rebound. No one can predict the timing accurately, and missing out on an upswing can have a significant impact on your long-term performance.

12 questions about recessions, answered

1. When was Canada’s last recession?

COVID-19 caused a recession in 2020, with negative economic growth of 1.9% in Q1 and 11.3% in Q2. The economy bounced back in Q3, with growth of 8.9%. 

2. What happens in a recession?

Not every recession is identical. What they all have in common is shrinking economic output, falling corporate profits and rising unemployment. Historically, housing prices drop during a recession, but during the COVID-19 downturn, Canadian housing prices and mortgage rates both went up instead of down. 

3. What years did we have recessions?

Canadian recessions since 1929

4. Is a recession good or bad?

A recession is a normal part of the business cycle. Whether it’s good or bad depends on your situation. Interest-rate cuts benefit people who are taking out mortgages but hurt buyers of guaranteed investment certificates (GICs). Historically, housing prices drop in a recession—great if you’re a buyer, but not so great if you’re a seller. One study found death rates dropped in areas with higher unemployment during the Great Recession of 2007 to 2009. The author, a health economist, attributed the reduced mortality to cleaner air. In a recession, fewer people commute to work and factories and offices create less air pollution. 

5. Will Canada go into a recession in 2025?

In May 2025, economic forecasters from TD Bank, BMO, National Bank and Deloitte were predicting a recession in 2025. Experts at the Organization for Economic Co-operation and Development (OECD), CIBC, RBC and Scotiabank disagreed, forecasting low GDP growth but not the decline that defines a recession. Others say we’re already in the middle of a recession. We won’t know who’s right until Statistics Canada reports GDP numbers later this year. 

6. Is Canada struggling economically?

Many blame U.S tariffs and trade uncertainty for our troubles, but Canada was struggling economically before these issues hit the headlines. Our economy hasn’t grown in a decade, according to RBC. Our productivity has fallen behind. We’re now 30% less productive than the United States. Housing affordability has also been declining, and many households carry high mortgage debt. The OECD forecasts rising unemployment this year and next, from 5.4% in 2023 to 7.3% in 2026. The Fraser Institute’s 2024 report on “Canada’s economic stagnation” described our growth as “abysmal,” arguing that high immigration has masked the fact that per capita GDP has been shrinking for some time.

7. Is Canada going into a deep recession?

“Deep recession” is another name for an economic depression, which is an unusually severe recession. There’s no formal definition, but some people define a depression as a recession where GDP declines 10%. Depression in Canada in 2025 is highly unlikely but not impossible.

8. How should I shop for food during a recession?

Food costs are a big part of most households’ budgets. Spending less can help people weather an economic downturn. According to one study, during the 2007–2009 recession, American shoppers spent more time shopping for deals, used more coupons, bought more products on sale and more generic goods and chose larger package sizes.

9. Do interest rates go down in a recession?

Interest rates typically go down in a recession. Central banks like the Bank of Canada and the Federal Reserve in the U.S. often cut interest rates to stimulate the economy. 

10. Is Canada in a housing crisis?

In Canada and around the world, people are facing a housing affordability crisis, according to the International Monetary Fund. The IMF estimates Canada needs to add 500,000 homes a year to meet demand, which has been growing due to steadily increasing incomes and immigration. Over the past 20 years, we’ve only added 150,000 to 250,000 housing units a year. In public opinion surveys, housing tops households’ lists of pressing issues, above health care and education. 

11. What cities have the greatest housing shortages?

In September 2024, Easy Reno identified the five Canadian cities with the worst housing shortages, based on population growth (using 2016 to 2021 census numbers), sales-to-new-listing ratios and changes in home prices from July 2023 to July 2024. Sherbrooke, Que., was worst, followed by Halifax, Edmonton, Saskatoon and Calgary. 

12. Is homelessness rising in Canada? 

The lack of affordable housing is a contributing factor to rising homelessness in Canada. According to the Canadian Alliance to End Homelessness, in nine communities that collect monthly data, homelessness increased 52% on average from before the pandemic to December 2023. Some communities have since been able to reduce homelessness, but others have seen the problem increase 131%. 

Read more about the economy:

• How Canada’s inflation rate is affecting your finances
• Making sense of the Bank of Canada interest rate decision on June 4, 2025
• The price of a trade war? Gen Z might be paying for decades
• How young investors can respond to stock market volatility
• How much income do you need to buy a home in Canada?

About Stephanie Griffiths

Consulting editor Stephanie Griffiths was an award-winning investor for almost 20 years before returning to her roots in journalism, completing a Master’s degree in 2016.

Linkedin