Canadian Economic Outlook: OECD Sees Flat Growth In 2025, Recession Averted

Natalie Brooks

5 min read

Post on May 28, 2025

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Factors Contributing to Flat Growth in the Canadian Economy (2025)

Several interconnected factors are contributing to the OECD's prediction of flat economic growth for Canada in 2025.

Global Economic Slowdown

The global economy is facing significant challenges. High global inflation, persistent supply chain disruptions, and escalating geopolitical instability are all impacting economic activity worldwide. These global factors significantly influence the Canadian economy:

• Reduced Canadian Exports: Global economic slowdown reduces demand for Canadian goods and services, impacting export-oriented sectors.
• Decreased Foreign Investment: Uncertainty in the global market makes foreign investors hesitant to commit capital to Canada.
• Dampened Consumer Spending: Global uncertainty can lead to reduced consumer confidence, impacting domestic spending.

The interconnected nature of the global economy means that even relatively strong domestic performance can be negatively impacted by external shocks.

High Interest Rates and Monetary Policy

The Bank of Canada has implemented a series of aggressive interest rate hikes to combat inflation. While effective in curbing inflation, these higher interest rates have a chilling effect on economic activity:

• Increased Borrowing Costs for Businesses: Higher interest rates increase the cost of borrowing for businesses, reducing investment in expansion and new projects.
• Reduced Consumer Spending: Higher interest rates make borrowing more expensive for consumers, leading to reduced spending on big-ticket items like homes and cars.
• Impact on Housing Market: The housing market, a significant driver of the Canadian economy, is particularly vulnerable to higher interest rates.

The Bank of Canada's monetary policy, while necessary to control inflation, is a contributing factor to the projected flat growth.

Resilience of the Canadian Labor Market

Despite the economic headwinds, the Canadian labor market has shown remarkable resilience:

• Low Unemployment Rates: Unemployment rates remain relatively low, indicating a strong job market.
• Strong Employment Growth: Job creation, while possibly slowing, continues to outpace population growth in many sectors.
• Wage Growth: Wage growth, although lagging inflation in some sectors, remains a positive indicator of economic health.

This strong labor market is a significant factor mitigating the negative impacts of other economic challenges and contributing to overall economic stability.

Reasons Why a Recession Was Averted (According to the OECD)

While flat growth isn't ideal, the OECD believes that several factors have prevented a recession in Canada:

Government Spending and Fiscal Policy

Government spending and fiscal policies have played a crucial role in cushioning the impact of economic headwinds:

• Targeted Support Programs: Government initiatives aimed at supporting businesses and individuals have helped to maintain consumer spending and investment.
• Infrastructure Investment: Investments in infrastructure projects have stimulated economic activity and created jobs.
• Social Safety Nets: Robust social safety nets have provided a buffer for vulnerable populations during economic uncertainty.

Strong Commodity Prices

Canada benefits from its abundant natural resources. Strong commodity prices, particularly in energy and other resource sectors, have provided a significant boost to the economy:

• Increased Government Revenue: High commodity prices translate into increased government revenue, allowing for increased spending on social programs and infrastructure.
• Boosted Exports: Strong demand for Canadian commodities increases export earnings, contributing positively to the trade balance.
• Positive Impact on Related Industries: The strength of the commodity sector positively impacts related industries and job markets.

Resilient Consumer Spending

Despite higher interest rates and economic uncertainty, consumer spending has remained relatively strong:

• High Savings Rates: Canadians have accumulated significant savings during the pandemic, providing a cushion against economic shocks.
• Strong Labor Market: The robust labor market supports consumer confidence and spending.
• Government Support: Government support measures have also helped to support consumer spending. However, this also contributes to higher household debt levels which is a potential risk factor.

Potential Risks and Uncertainties for the Canadian Economic Outlook

While a recession seems to have been avoided in 2025, several risks and uncertainties remain:

Global Economic Uncertainty

The global economic landscape remains highly uncertain:

• Geopolitical Instability: Ongoing geopolitical tensions could escalate, further disrupting global supply chains and impacting the Canadian economy.
• Potential for a Deeper Global Recession: The possibility of a more severe global recession cannot be ruled out, posing a significant threat to Canadian exports and investment.
• Inflationary Pressures in other Countries: Persistent inflation in major trading partners could impact the Canadian economy.

Inflationary Pressures

Inflationary pressures, although easing, persist:

• Further Interest Rate Hikes: The Bank of Canada might need to implement further interest rate hikes if inflation proves more persistent than anticipated.
• Impact on Economic Growth: Continued high interest rates could further dampen economic growth and consumer spending.
• Wage-Price Spiral: The potential for a wage-price spiral, where rising wages fuel further inflation, is a concern.

Conclusion: Navigating the Canadian Economic Outlook: Flat Growth, Recession Avoided—For Now

The OECD's prediction of flat growth for the Canadian economy in 2025, while not ideal, is a relatively positive outcome considering the global economic headwinds. The avoidance of a recession is attributed to several factors, including strong commodity prices, a resilient labor market, government spending, and relatively strong consumer spending. However, significant risks remain, primarily stemming from global economic uncertainty and persistent inflationary pressures. It is crucial to remain vigilant and monitor the evolving economic situation closely. To gain a deeper understanding of the Canadian economic outlook and its future trajectory, consult further resources such as the Bank of Canada website, Statistics Canada, and OECD reports. Staying informed about the Canadian economic outlook is crucial for navigating the complexities of the current economic landscape.