A global forecasting group has downgraded Canada’s economic outlook. Oxford Economics now expects the country’s economy to slip into recession this year and spill over into early 2026.
The Oxford Economics forecast, which underpins CoStar’s property-level forecasts, suggests that U.S. President Trump’s sweeping 25% U.S. tariffs on imports of Canadian goods, with a 10% tariff on energy, will take effect in the second quarter of the year and result in negative economic growth for at least another year.
Oxford Economics expects the Canadian economy to recover by mid-2026 under the assumption that most tariffs will be lifted following a renegotiation of the USMCA trade agreement. However, this assumption appears highly tenuous given the fractured state of political relations between Canada and the U.S. following the president’s recent annexation threats.
The new tariffs and heightened trade policy uncertainty are expected to weigh heavily on Canadian business investment and exports this year, leading to 180,000 layoffs and driving the national unemployment rate up to nearly 8% by 2026. Job losses and higher consumer prices are also expected to squeeze household disposable income, resulting in negative repercussions for consumer spending and further delaying a recovery in the housing market.
Canada’s economy was improving before the escalation in U.S.-Canada trade tensions. Fouth-quarter GDP growth came in above market expectations thanks to a solid contribution from consumer spending and private investment. Consumers and businesses hoped that 2025 would be a year of recovery ushered in by lower interest rates, thanks to the Bank of Canada's sharp series of rate cuts last year.
While the Bank of Canada has continued to cut interest rates in 2025, Oxford Economics believes that the central bank will be in a bind as it tries to balance the hit to demand from tariffs against higher prices, supply chain disruptions and the risk of increasing inflation expectations. Oxford now expects the Bank of Canada will hold its policy rate at 2.75%.
Oxford believes that interest rates are unlikely to return to near zero percent levels due to a resurgence of inflation, which is expected to increase to 3.4% this year, also due in part to a weaker Canadian dollar.
CoStar is incorporating Oxford Economics' latest forecast into its own models and will release an updated property market forecast in the coming quarter. Preliminary analysis suggests that the downgraded economic forecasts will negatively affect all property sectors in Canada, with industrial and office likely seeing the biggest impacts.