Oxford: Canada already in recession, however defence spending to carry progress and bond yields

Canada has entered a recession introduced on by its escalating commerce dispute with the U.S., in response to 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 increased.

In its newest outlook, Oxford revised its GDP forecast barely increased for 2025 to 0.9%, up from 0.8%, to replicate Ottawa’s current pledge to lift navy spending to 2% of GDP by the top of this fiscal yr. The federal government additionally plans to steadily ramp up funding to fulfill NATO’s new 5% goal by 2035.

That further spending will help progress 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.

Larger yields placing strain on mortgage charges

Oxford’s up to date forecast arrives amid elevated bond yields, which have already been impacting fastened mortgage price pricing. As Canadian Mortgage Developments previously reported, lenders throughout the nation have been steadily rising charges throughout varied phrases in current weeks, reflecting increased 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 progress 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 beneath 2.25% until 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 with no new financial and safety settlement, and if U.S. President Donald Trump adopted via 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 damage home demand,” the report mentioned. Oxford tasks a 0.8% peak-to-trough GDP contraction from Q2 to This fall 2025, and anticipates the unemployment price may rise to 7.6% (from 6.9% presently) as job losses unfold past trade-exposed sectors.

However whereas progress is predicted 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 short-term Canadian tariff aid expires in October and provide chain disruptions feed into costs.

Outlook snapshot

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Final modified: August 7, 2025