Ottawa’s enhanced defense spending plans are expected to bolster Canada’s economy, but not sufficiently to prevent an impending recession, according to a new report from Oxford Economics. This analysis indicates that commitments to increase defense spending will improve real gross domestic product (GDP) by only a tenth of a percentage point in both 2023 and 2024, leading to annual growth rates of 0.9% this year and 0.4% next year. Prime Minister Mark Carney recently announced a plan to achieve NATO’s defense expenditure target of 2% of GDP by year-end, with long-term commitments from last month’s NATO summit suggesting an increase to 5% of GDP by 2035. The report posits that these spending plans are likely to be funded by heightened federal deficits, a projection made prior to Ottawa’s announcement of a 15% reduction in operating expenses over the next three years.
Despite the anticipated boost in GDP from defense investments, Oxford Economics warns that this will not be enough to extricate Canada from a recession precipitated by trade tensions. Forecasts suggest that the economy shrank in the previous quarter and may experience an overall decline of 0.8% in real GDP. The firm also highlights that the labor market has shown some resilience, adding approximately 83,000 jobs last month in a surprising turn against typical economic expectations, yet this stability may be short-lived. The ongoing uncertainty regarding U.S. trade policy, compounded by new tariffs, is likely to deter investment, reduce production, and ultimately lead to significant job losses.
The report projects a loss of 140,000 jobs by the year’s end, which could elevate the unemployment rate from its current level of 6.9% to 7.6%. While the Bank of Canada is expected to maintain its interest rate at 2.75%, there is speculation that it may need to consider additional rate cuts in response to the prevailing economic conditions. This uncertainty in monetary policy is further complicated by anticipated inflation, predicted to rise to 3% by mid-2026, which could limit the central bank’s capacity to enact supportive monetary measures that would encourage borrowing and spending.
Furthermore, the interaction of recessionary conditions with rising inflation poses risks of increased defaults among private-sector businesses and distress in the housing market. Oxford Economics notes that the convergence of these factors could deepen the recession significantly and potentially lead to a severe correction in home prices, raising concerns about a financial crisis. The analysis assumes that current tariff levels between Canada and the U.S. will persist throughout the year, though the situation could worsen should U.S. President Donald Trump follow through on threats of imposing additional tariffs.
Conversely, should negotiations yield a new economic and security pact by the specified deadline in early August, it may provide substantial relief for the Canadian economy. Nevertheless, Oxford Economics paints a relatively favorable picture for Canada’s overall economic risk compared to other advanced economies, distilling such risk into a score of 3.3 out of 10. This positions Canada 27th among 164 countries analyzed, ranking it lower than peers such as the U.S., Australia, France, and Germany, yet above nations like Mexico, Japan, and China.
In summary, while Ottawa’s boosted defense spending plans may provide a marginal uplift to GDP, they are unlikely to circumvent the broader economic challenges Canada faces. As the country navigates trade disputes and potential recessionary pressures, the federal government’s financial strategies must adapt to sustain economic stability and employment levels, all while monitoring inflationary developments that could complicate future fiscal policies. The geopolitical landscape and trade relationships will remain critical in shaping Canada’s economic trajectory in the coming years.
