Canada’s economy shrank in Q2 2025, but experts say decline isn’t deep or prolonged enough to declare recession — yet
Canada’s economy shrank by 0.4 percent in the second quarter of 2025, driven by a sharp 7.5 percent drop in exports and a 9.4 percent fall in investment in machinery and equipment, according to a new communiqué from the C.D. Howe Institute’s Business Cycle Council (BCC).
The contraction was steeper than expected and led the Bank of Canada to cut its policy rate, fueling concerns about a possible recession.
Despite these developments, the BCC has determined that current conditions do not yet meet the criteria for a recession. The Council defines a recession as “a pronounced, persistent, and pervasive decline in real economic activity.” Their methodology does not rely on hard-and-fast rules, but rather on several guidelines, including the duration, depth, and breadth of the downturn.
GDP decline in second quarter
The Council noted that the second quarter’s GDP decline is the first negative quarter of 2025, thus meeting the initial recessionary criterion. However, members agreed that the contraction was not yet large or prolonged enough to declare a recession.
“While the Canadian economy is under clear stress, the current contraction does not meet the definition of a recession with the data we have available,” said Jeremy Kronick, Vice-President, Economic Analysis and Strategy at the C.D. Howe Institute and BCC Co-Chair.
“We are monitoring developments closely, and will reconvene if the data show further deterioration.”
The BCC’s diffusion index, which measures the breadth of economic weakness across industries, has been below the critical 50 threshold in two of the last three months to June. However, the three-month average stood at 50 in June and has remained at or above that level throughout 2025, except for April.
The Council also pointed out that GDP grew by 0.4 percent in the first quarter of 2025, and the cumulative growth rate for the first half of the year remains slightly positive at about 0.1 percent. Statistics Canada’s advance estimate for July 2025 suggests a modest 0.1 percent increase in real GDP by industry.
A majority of Canadian companies are actively preparing for a potential recession, with many shifting focus from long-term planning to short-term survival strategies, according to a recent survey.
Labour market data for Canada
Labour market data, however, remains a concern. Payroll employment decreased by 0.2 percent in June, and the Labour Force Survey released on September 5 reported a decline of 66,000 jobs (0.3 percent) in August, with the unemployment rate rising to 7.1 percent—the highest since August 2021.
The Council noted that this weak employment data could undermine any positive momentum from the July GDP estimate.
The BCC emphasized that it will continue to monitor economic indicators and will meet again to reassess if GDP contracts in the third quarter. The next Statistics Canada report on quarterly GDP by expenditure (for Q3 2025) is scheduled for release on November 28.
As economic clouds gather over Canada, both statistical indicators and workplace sentiment suggest the country may be on the brink of a recession.
“Never before in the annals of recorded Canadian economic history has the economy managed to escape an official recession with such a dramatic move off the cycle low,” said David Rosenberg, chief executive at Rosenberg Research and Associates.
