Can Canada avoid a deepening recession?

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Hi, I'm Peter Armstrong, filling in for Jamie Poisson. Mark Carney is now the only leader in the G7 to have plunged his economy into recession. That's conservative leader Pierre Poilievre. Reacting to the news that Canada is technically, at least, in a recession. after two quarters of economic decline. Donald Trump has also seized on the news, renewing his call for Canada to become the 51st state. But a lot of economists dispute that this is a recession at all.

KPMG's chief economist wrote in a briefing note, Is Canada in a recession? Probably not, but whatever you want to call it, it's not good. But look, the economy is weak right now. It was weak before the trade war. It's been made weaker by the tariffs, the threats, and the uncertainty. Most Canadians already feel that. We know from very personal experience, the economy is in bad shape.

So how deep is this ditch that we're in? And how can we get out? I'm joined by Francis Donald, Senior Vice President, Chief Economist at RBC to sort that out.

Francis, welcome back. Thank you for having me. So I've never loved the pedantic debates over the technical definition of recession, because I'm really not sure what it tells me. So what I want to do here is focus on what we do know. How concerned do you think Canadians should be about the state of the economy? I don't think Canadians need economists to tell them what GDP is, to experience and know what's happening in their own economy.

So I understand in the past few days how much focus there's been on this recession word. Canadians likely feel very validated by finally seeing something like, headlines announcing that the country is in a recession because it's validating to so many of the challenges that Canadians have been experiencing from lack of affordability to food price increases to job markets that feel like they're just not running as well as they should. The challenge is that framing the economy as in a recession or not a recession is not particularly accurate and I'm not sure it's helpful either. Economists are likely not going to call this a recession. I'm not even sure where this idea of technical recession comes from

because two quarters of negative GDP is not the definition of a recession in Canada or the United States. It's often viewed as a precondition. But in Canada, we call a recession a period where you have pronounced persistent and pervasive three peas decline in real economic activity, which isn't playing out in the data, at least not in the past six months. Now, on one hand, economy, are really keen to point out this isn't a formal recession. But on the other hand, it's challenging to be too dismissive of what is a period of very weak growth. It's also challenging as an economist right now to talk about the Canadian economy because there are some really good things going on. They're just likely to impact the economy with a long lag. A lot of the economy's focus and growing

interest in a resource economy, for example, improving business sentiment. Maybe actually some improved U.S.-Canada trade relations. We'll see where that lands. Those are going to be really helpful, but they're probably going to be more helpful later in 20, 27 and beyond. And so in the meantime, we have to navigate a year that's going to be, Peter, as they say, the kids say these days very mid, low, but positive growth that doesn't feel like it's particularly strong with little pockets of strength and ongoing periods of weakness underneath it. But big picture, two things can be true at the same time.

Canada cannot be in a formal recession, and yet Canada can also be experiencing real pain that shouldn't be ignored either. Yeah. And I think that nuance is kind of what matters, right? Like, everybody knows. GDP is contracting. Unemployment is quite high. We lost, what, 100,000 jobs to start the year. What is the primary driver of that weakness?

Is it mostly the uncertainty caused by the trade war? Well, actually, I might push back a little bit. We've had some pretty low job creation in the country, but job creation is less firing. Usually when we think of lost jobs, we're thinking, you know, you get sent home at the end of the day, your job's not here, you're not getting a paycheck. But most of the weakness we've seen in Canada's job market has actually been low hiring and particularly low hiring of young people, those who have less than three years experience. And that's really critical because what we worry about is, when people lose their job, they also lose an income. But if you're going from being a student to not finding that job, that has some serious social, economic consequences, and we have to

take that seriously, but it's not the same impact under the surface. Layoffs have actually pretty low. This labor market in Canada has been described very similarly to the United States as a low-fire, low-hire type of environment, and that's likely to continue. And I like that, because it effectively is a good way to describe a frozen economy. It's not that anything's going particularly bad in Canada. It's just that, well, frankly, there's not much of a growth engine behind anything. If you look at consumer spending in the first quarter, which apparently was a recession, spending rose 1.5%. That's pretty good.

Business investment, when you look at things like softwares that are coming for and equipment purchases, those are higher going forward. So machinery did better. What pulled on the economy were things like a decline in residential investment. That's like lower broker commissions. And then we also had some one-off factors. For example, in the fourth quarter of last year, the government bought a ton of weapons. This quarter, they didn't buy very many.

That's like if you went and bought three guitars last quarter, Peter, and this quarter you drop at none, we would say that was a pullback in your spending. But is it really a sign of things being problematic or is it just lumpy? And then the most peculiar one is that we had a mechanical drag on growth because we had a big surge in import activity. The way that we calculate the impact of trade on the economy is net trade. So exports minus imports. Well, imports were really high. That's generally a signal of strength underneath the economy.

So when we put all these stories together, what we're seeing is no real engines of growth for 2026, but enough one-off factors that can move the dial on this number we call GDP both below and above 0%. One of the big problems I have with this recession call binary, are we in a good economy or are we not in a good economy, is that frankly, the number came in at negative 0.1%. But if it had come in at plus 0.1%, there would be no recession headlines, and yet it would be virtually the same economy for most to Canadians as they felt it.

And underlying all of this, Peter, there's another big issue that we've had with GDP in this country, which is it has neglected to think about how that GDP is dispersed amongst Canadians. One of the big challenges that we had talking to Canadians about growth in about 2022 to 2024 to 24 is that the economy appeared to be doing great. GDP growth was strong, but GDP growth per person, often called per capita GDP, was declining over that period. So individuals by that measures were experiencing recessions. That's in part because the population was becoming bigger.

We had the same pie divided by more people. Now we're in the reverse situation. The pie itself might have shrunk by a very, very little amount, but we have fewer people consuming it. So in Q1, we had per capita growth that actually rose 0.9% quarter over quarter. So effectively, Peter, you can choose all sorts of different metrics to develop a narrative for how the Canadian economy is doing. Effectively, what we have to do at the end of the day

is put them all together and say, where are the areas of strengths, where are the areas of weakness? And particularly right now, the key is to think out what is Canada going to look like in 2026 versus where it's going to be in 2028 and making sure we're aligning our expectations accordingly.

Before we're, we get to what it's going to look like in 2028, can we just talk about one more thing that fits into that sea of contradictions? And in this case, it's rising food prices, but inflation in general. A lot of people talk to us every day, every week about how bad inflation is, how bad they're feeling it at the pumps, at the checkout counter. How much does the sort of broadly speaking CPI fit in to this conversation about where we're, the picture we're trying to paint at the Canadian economy right now? Well, if you were thinking about economic health solely through the inflation lens, you would want to use a word like recession.

That's not the formal definition of one. But if you wanted to express the pain that Canadians have experienced on the affordability side of it, I can understand why you'd be looking for something as bold as the big R word, as we describe it. Canadians have gone through the biggest price level shock in most of their lives, unless they were adults in the early 1970s and, and paying at that point in their life. And those numbers aren't going backwards. When we talk about the inflation numbers running around 2%, and the Bank of Canada may imply that this is a good and healthy level, we're not saying that you're going to go backwards.

We're just saying you're going forwards, but at it's a slower pace and maybe what we saw in 2022. And now, problematically, we're dealing with the new price shocks at the pump, of course, and likely food prices are going to continue to rise. That's not a domestic issue. That's a global issue. It's happening to economies all over the world. And actually, we're experiencing a little bit less of the energy shock than our friends in Europe or Australia, for example. So distinguishing between those two factors is important, but it also complicates the story quite a bit. Because what we worry about is when prices get too high, prices in and of itself can create a pull on growth.

Really simply, if you have to spend an extra $100 a month at the gas pump, you're likely to pull back in other areas. Let's say, oh, actually what we traditionally see is at first when people experience price level shocks like that, well, they dip into savings. And it's true. Canadians have been pulling down on savings while maintaining the same amount of spending. After that, we tend to see Canadians and Americans will leverage debt to try to maintain some level of spending. That's when you start to see credit cards start to rise. Or we don't have data on this, but one thing we think about a lot, or there's sort of spread out payment systems where, you know, you can buy a new TV and then spread the payments out over 12 months. Those are likely to get used as well.

But you reach a tipping point where high prices start to mean you can't go to dinner anymore. Or you're not taking the family vacation. Sometimes you see people pulling back on the amount of food they're buying. They tend to substitute first from beef to chicken over to peanut butter, which is one of the lowest cost. forms of protein. And then you just see people pulling back more substantially as a whole. So when we think about affordability, we have to change the way we maybe measure and rank our economy away from what is your GDP number, which moves and gets impacted by things like weapons purchases and auto plants being retooled with which pulled on Q1 number. And more towards

what is the aggregate health of the economy and what is the aggregate potential for it. And, you know, people like me go on the radio when the inflation numbers come out and talk about the headline rate of inflation as though it's one thing. But different households are feeling this in very different ways. Some increased costs mean they dip into savings a little bit. Some mean they have to go to the food bank to put food on the table for their kids. Is that gap growing right now in this moment? So what we know from research is that inflation doesn't hit all households proportionally. And particularly food price inflation and energy price inflation, well, those hit lowest income Canadians most. And that's because they spend more of their income on those effective necessities.

We know that Canadians are disproportionately impacted based on different types of inflation coming through. We also know that not all wage growth can keep up. It's very common in Canada and in the United States to say, well, in the past five years, prices may be up over 25%, but so too, our wages. And that's true in aggregate, but it's not true for low and middle income Canadians who have experienced more inflation and less wage growth under the surface. And maybe one last point on this, Peter, which is we also talk in aggregates not just across households, but across the country. And we see different inflation rates and different growth rates across all of the provinces. We expect Alberta this year to grow

at two and a half times the national average. They're benefiting from higher energy prices, population inflows, investment that is actually rising, not falling. So this recession narrative is far less applicable in a place like Alberta than it is in Ontario, where unemployment rates are still quite high.

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Find a history of the United States in 100, objects on the 99% of visible feed wherever you get your podcasts. I want to start talking about that opportunity because that GDP report that came out that set off this whole debate and showed the economy contracted also gave us the flash estimate for what statistics Canada thinks is going to happen in April. And April's flash estimate shows a pretty healthy rebound. So, you know, some even saying, sure, we might be, have been in a recession, but we're probably already out of it.

How much of that rebound we are expecting to see in April is simply the rising price of due to the ongoing situation in the Strait of Hormuz and the war in Iran? Well, we've already seen March data is looking better. And April, I'll remind you, it was two months ago. We also have forward-looking data. So I have data that tells me where layoffs will probably be in July or August. And all of this culmination of data is looking better. I have to put a big asterisk on this as well, however, because data gets revised.

It's entirely possible that that Q1 number, in part because it was so tiny, actually gets revised upwards. Now, with that as a massive caveat, most of our data tells that the economy is going to grow a little below 1% this year. That's not great. And yet, it comes with a giant asterisk that there are several things that are being done in the economy, particularly from a federal and provincial government level, that highly suggests that 2027, we'll start to look a lot better. And this is where I struggle when I talk about Canada because we are fairly optimistic

that 2027 and beyond is going to start showing a different type of Canadian economy. One where productivity starts to improve. One where AI implementation starts to take hold. One where the labor market starts to balance more. And we start leveraging some of the fantastic resources in a responsible and sustainable way that could create a very solid growth path for Canada, one that could be close to the envy of the

world. That's in the data. But we got to get there. And getting there means traversing most of 2026 and into 2027. So when we say we're cautiously optimistic based on things we see, such as a pickup and business confidence that's coming forward, higher energy prices, we've got the benefits of those rate cuts from the Bank of Canada that are starting to filter through the system. and very low layoffs, well, that's good news. But it's only enough good news to get us close to, you know, a little under 1%. If I told you made $100 this year and next year you'd make $101, you wouldn't feel like that's much of a race.

And using that as a way to lure in foreign investment, direct foreign investment into some of these bigger projects that they're trying to work on. here. How did Canada sort of go from the second fastest growing economy in the G7 to the first to slip into a recession? And I think more to the point, what does that tell those pools of foreign capital about the potential for investment here in Canada? Well, Peter, it's not a recession. We have to completely eradicate this idea that two quarters of negative GDP is a recession. If we go forward and the economy does much worse, that could happen. It's not our base case. could we see, you know, oil prices fictually, let's just say fictually, surge much higher, Canadians get hit, they pull back on spending, the labor market weakens, that would be a recession.

It could very well develop into that if the U.S. economy or there was some form of very persistent financial market disruptions, that could pull on people's wealth and create a recession. But this should not be a discussion of if we're in a recession right now, we do not hit the definitions. So we got to stop even asking that question. I get that. But like it is out there and people are talking about it. And you go to these rooms full of foreign capital and investment firms that are asking you about the situation in Canada. And they're reading the same thing too.

So I guess my question is what are their questions about this? And what is your answer to? So what's really fascinating is the case for Canada to attract foreign capital and investment has very little to do with what growth was doing in 2025 or 2026. It has entirely to do with the potential for where Canada can be in five to 10 years. This government's been in the process of laying the foundations for a stronger, more resilient, more independent Canadian economy. That process is settling in during that time as we make major investments, major changes. As we do all that, the data is going to be uneven. And, you know, We see some weakness.

Almost all foreign capital, and particularly global pinch funds and capital allocators, they're long-term investors. Literally, they're thinking out over 10 years, 20 years, 25 years, as to where growth will likely look and where are the long-term unpriced opportunities. So they're looking for what is the medium-to-long-term potential, and they're also looking for where are the relative winners and losers. And this is why the concept of where does Canada rank relatively across the world becomes really important. Because capital, just think, you know, a pension fund sitting in Sweden needs to disperse that capital.

They need to make money for their future pensioners. It has to go somewhere. So where can you put it where you have the best chance? And sometimes the best chance is lower growth than you might want. And this is why the Canada story becomes so interesting because it hits the cross current of those two things. It looks like in the next five to ten years, Canada will be a relative winner. Why? Because it has the resources and access to resources that the global economy appears to need. That is all the things that you've already seen and you appear to write about all the time from critical minerals to uranium to energy to electricity, forestry, agriculture, all of the things that Canada

was blessed with are becoming the relative winners on a go forward. And I suspect, regardless of who was in government right now, Canada would be getting a lot of eyeballs on it because at the nexus of our new prime minister and the global trade war, is the development of AI happening at the same time? Is this rise in geopolitical conflicts that are creating regional trade blocks? So the interest in Canada extends beyond what is happening domestically to us to the rest of the world looking for a grocery list of items that Canada, just by what we've been blessed with, happens to take the box on. The benefit for Canada is that it's also been met in the moment with a, with policymakers that appear we want to leverage that moment and are looking to do that internationally.

I have a question here about the Kuzma renewal discussion. How crucial is this next month? And do you expect we could see any injection of certainty back into the trade relationship with the United States? And there's so much going on on this. Even this morning with the team, we were parceling out, hey, let's make a list of all the things that have happened just in the past three days. You know, June 1st, June 2nd, and we're recording this on June 3rd. And we effectively came down to the idea that there's three buckets of activity happening with trade right now. One of them is that you might have seen that the United States has said they're going to impose a 10% or 12.5% tariff on 60 countries because, in their words, they failed to effectively enforce a prohibition of the importation of goods produced to force labor.

Trump's trade czar, James and Greer, what is he saying about it? Well, he also put out a statement. It says the failure of our most important trading partners to address the importation of goods made with forced labor is unacceptable. This creates a dynamic where American workers are forced to compete globally on an unlevel playing field. He goes on to say we will no longer tolerate this disparity. Huh? Well, what is that? Well, this is effectively, you might remember back in February of 2026, the U.S. Supreme Court struck down tariffs that President Trump had put in place, often called the AIPA tariffs.

and this is a legally more durable way of applying broad-based tariffs. But the most important thing that came up from this is that you might remember here, about 90% of trade that we send to the United States is tariff-free because it qualifies for the Kuzma exemptions. So anything that is covered with Kuzma or a USMCA for on the U.S. side is excluded. And this asterisk within this was extremely important for us this morning because it told us that the United States is still seeing that Kuzma carve out is incredibly important to it and isn't threatening it.

Now, meanwhile, we also got some reductions in tariffs. Now, they were minimal, but on those steel and aluminum tariffs, we've now have a narrow carve-out. Mostly it looks like to help some American farmers, but we actually have a reduction in some tariffs being applied to some things like agriculture machinery and residential HVAC equipment. We actually saw tariffs fall. That should have been the headline. So those two things happen, and then, of course, we have Kuzma happening in the background. And Peter, I have to say, I think you've done a really great job of helping us all understand exactly what can happen here.

There's effectively three things that can happen. And I don't sit in Washington or Ottawa. So I can't tell you exactly what it is, but we can give you a framework to think about it. We can either, for example, let's actually just take one step back, a reminder that Kuzma, our free trade deal, doesn't expire. this year on July 1st. It expires 2036. And so this mandatory review is to confirm whether all three parties, Mexico, United States and Canada, actually want to extend beyond 2036 out to 2042. Now, Canada has already written, we've got our Canada U.S. Trade Minister Dominique LeBlanc who formally sent a letter. To my American and Mexican counterparts yesterday, where I confirmed, as you know,

that Canada would be ready to extend the Kuzma agreement by 16 years. Which was pretty clear. We'd want that. So that could be number one. We'll wait for the U.S. to respond. The second thing is the one of the parties could not confirm. They could say, we're not sure we want to do that. But this is so key, and I know you've been highlighting this as well, even if the United States says they don't want to extend beyond 2036, Kuzma stays in force. It doesn't disappear. It stays in play. they're just not extending the automatic termination of it from 2036. The problem is, if they say we don't want to extend between 2036, we enter what some have called zombie Kuzma, which is that every single year we have to go and have the same meeting. And as someone who's really tired of talking about Kuzma, Peter, I hope that's not what happens. But it's a possibility. Yeah, I don't need to write about Kuzma until 2036 or 2042. That would be fine with me. And then there's the third. part of this process, which isn't actually part of this process, but it's maybe something that we

should remember. The United States or Mexico or Canada can withdraw from Kuzma for any reason whenever they want with six months written notice. They could, in theory, do that next month, but they could have also done it last year, and they didn't, and I think that's telling, or they could confirm renewal to 2042 and next year say, psych, we're out. That's a lot. That's That's entirely possible. So there's a little bit of false confidence in this Kuzma process as being very binary, good or bad. Good would be everyone confirms renewal. Bad would be, actually, we're going to be out in six months.

But there's a lot of little wiggle room there. I've already taken too much of your time. But I have one last question that I want to wrap with you on your sense of the path ahead. Because I feel very bullish. I can see the path for Canada and for Canada's economy to emerge from this period, stronger and better, and I see us moving down that. But at the same time, I see tariffs in the trade war and the energy shock that doesn't seem to want to end. One percent growth this year is lousy and easy to nudge into the ditch. How do you square those two things in your mind?

And what would you have our listeners think of as they try to square it in their minds? You know, there's this pull when you're someone who talks about the economy regularly to either be bullish or bearish. There's this pull to either be optimistic about what lies ahead. Maybe you want to be optimistic because you feel excited and you want to be supportive of the change or you want to lift people up. And sometimes there's a pull to be bearish because you see challenges that exist all around you and you want to validate people's experience and you want to highlight where there's problems that need to be fixed. But if I had one hope, it would be that we, actually can merge the two, that we stop qualifying an economic view as bullish or bearish,

as GDP will rise or fall. And we start recognizing that there are segments of this economy that are going to offer real potential and change lives. And there are segments that are going to do poorly. So rather than having sort of one picture of where the aggregate will go, to maintain the understanding that it's a mosaic of stories, when we miss that the headline is just an average of a million stories, we miss the real opportunities and the real risks that exist under the surface. So to your first question, you know, two things can be true. There can be so many things that are going to go right for Canada. And I believe that as an economist and also as a proud Canadian. And there's also a lot of work to be done. And I also believe that as a Canadian and as an

economist. You know, Francis, I love talking to you about the economy. I always come away a little smarter and feeling better about things. So thank you for that. Thank you for this. It's been great to chat. What a pleasure. Thank you so much.

That's all for today. I'm Peter Armstrong. Jamie will be back tomorrow. Thanks for listening. For more CBC podcasts, go to cBC.ca slash podcasts.