Canada could soon face a recession that would extend throughout the rest of the year as United States President Donald Trump’s tariff war upends economies and trade around the world, according to a new analysis by Desjardins Group.

The financial services firm is calling for Canada’s economy to contract 1.3 per cent in the second quarter, followed by two more consecutive contractions of 0.4 per cent and 0.3 per cent in the third and fourth quarters, respectively, with the economy rebounding “somewhat” at the start of 2026.

The definition of a recession is two consecutive quarters of negative growth.

“U.S. economic policy is expected to hold back trade, investment, job creation, consumption and growth here in Canada,” the report said.

In tandem with dimming economic prospects, the report expects the unemployment rate in Canada to rise to 7.4 per cent in the second quarter, from 6.6 per cent currently, and then eight per cent in the third quarter.

Desjardins is basing its estimates on Trump’s policies that have been implemented so far, including higher tariffs on Chinese imports, a 25 per cent tariff on steel and aluminum, 25 per cent tariffs on goods from Canada and Mexico and 10 per cent on energy.

“Despite temporary exemptions on (Canada-United-States-Mexico-Agreement)-compliant goods, we can expect more protectionist measures to come.” Desjardins said.

The firm thinks Trump will end those exemptions in April and also expand tariffs on other countries, with relief from the duties arriving in 2026 when levies on most products are reduced to 10 per cent from 25 per cent and to zero per cent from 10 per cent on energy.

But some damage has already been done.

The Bank of Canada in its January Monetary Policy Report said “the threat of tariffs is already affecting financial markets and business decisions.”

The central bank’s report modelled various tariff scenarios where the U.S. imposes 25 per cent tariffs and Canada responds in kind, and said that, in the baseline scenario, Canadian gross domestic product would decline 2.5 percentage points in the first year and 1.5 percentage points in the second year and come in flat in the third year.

Another Bank of Canada report on how businesses and households were reacting to trade tensions said people are planning to spend less because they are worried about their job security and financial health.

Workers in industries such as oil, mining, manufacturing and agriculture — considered highly sensitive to trade — were the most worried about their jobs.

That report, released March 12, also said businesses indicated they were planning to reduce their hiring and investment plans as well as increase their prices in response to tariffs.

Not surprisingly, inflation expectations are on the rise, the report said.

The latest consumer price index (CPI) data said inflation jumped 2.6 per cent in February, mostly due to the end of the GST/HST break. But there were also signs of rising core inflation, which strips out volatile items such as food and energy. Economists are expecting inflation to continue rising on the tariff threat.

Other homegrown hurdles won’t help Canada’s economy much, either, Desjardins said, referring to “rapidly slowing population growth and an impending spike in mortgage renewals at higher interest rates.”

Statistics Canada on Wednesday said Canada’s population rose at a slower pace in 2024 than in previous years as Ottawa took steps to reduce the total number of temporary residents.

Retaliatory tariffs — which have been imposed by Canada on $60-billion worth of U.S. imports — “will further deepen the economic drag while forcing inflation higher,” Desjardins said.

But the U.S. economy will also feel the heat from tariffs, which is why Desjardins expects the Trump administration will ultimately “ease up on tariffs on imports” as inflation rises and the possibility of a recession there looms.

Desjardins has U.S. GDP contracting 0.5 per cent and 0.4 per cent in the second and third quarters, respectively, before rebounding 1.4 per cent in the fourth.

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Canada’s canola industry, which includes farmers and a growing crushing and processing industry, is entering uncertain times as China imposes 100 per cent tariffs Thursday and operates under the threat of looming tariffs from the United States.

Canadian canola meal and oil face 100 per cent tariffs from China starting on March 20. The provinces of Saskatchewan, Alberta and Manitoba have been lobbying the Canadian government for help for farmers, but no relief has yet been announced.

Meanwhile, canola producers also face possible 25 per cent tariffs from the U.S. starting April 2, along with potential reciprocal tariffs as part of U.S. President Donald Trump and his administration’s attempts to overhaul trade policy.

Read more on the tariffs on Canadian canola and what they mean for farmers and beyond. — Michael Joel-Hansen, Saskatoon StarPhoenix

• Prime Minister Mark Carney is hosting Canada’s premiers today in Ottawa as the provinces grapple with the effects of Chinese and U.S. tariffs.
• Finance Minister Francois-Philippe Champagne will host a meeting with provincial and territorial finance ministers in Montreal
• Today’s Data: Statistics Canada releases retail sales numbers for January and a flash estimate for February.
  
• Earnings: Cameco Resources Inc.

• At the front lines of the trade war: what’s exempt, what isn’t, and what’s still to come
• Bank of Canada will work to minimize risk in face of trade war, Macklem says
• Are great rates and affordable mortgages enough to draw wary homebuyers?

This landlord wants to make two of his tenants his sole beneficiaries on the promise they maintain a sixplex for 10 years and allow his stepdaughter to live in one of the apartments for a decade. He wonders if such a will can be enforced? Or is there a better way? Read more here.

McLister on mortgages

Want to learn more about mortgages? Mortgage strategist Robert McLister’s Financial Post column can help navigate the complex sector, from the latest trends to financing opportunities you won’t want to miss. Plus check his mortgage rate page for Canada’s lowest national mortgage rates, updated daily.

Financial Post on YouTube

Visit the Financial Post’s YouTube channel for interviews with Canada’s leading experts in business, economics, housing, the energy sector and more.

Today’s Posthaste was written by Gigi Suhanic with additional reporting from Financial Post staff, The Canadian Press and Bloomberg.

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