Economic Growth Expectations
Based on a survey by the Bank of Canada in the first quarter of 2025, financial market participants signaled a shift toward a more cautious view of Canada’s economic growth trajectory. The median projection for real gross domestic product growth by the end of the year has been adjusted down to 1.0 percent. Expectations for 2026 show a modest increase to 1.7 percent, indicating some recovery but remaining below long-term averages. These figures reflect a broad sentiment that economic momentum is likely to remain restrained in the near term.
Recession Concerns
The perceived risk of a recession has risen noticeably. Market participants now estimate a 38 percent chance of a recession occurring within the next six months, a significant increase compared to prior outlooks. Over a 6-to-12-month horizon, the estimated probability rises slightly to 40 percent. These higher recession odds are indicative of a more fragile economic environment and a growing sense of uncertainty.
Inflation Projections
Participants revised their inflation expectations upward. The median forecast for headline consumer price inflation by the end of 2025 is now 2.8 percent. For the end of 2026, inflation is projected to decline to 2.4 percent. Although these figures suggest inflation will move closer to target levels, the near-term persistence above two percent continues to shape expectations for policy and growth.
Interest Rate Path
Market participants foresee a gradual decline in the policy interest rate over the next two years. The current projection is that the rate will remain at 2.75 percent through the second quarter of 2025. A reduction to 2.50 percent is expected by the end of the year, with a further decline to 2.25 percent by the end of 2026. This anticipated path suggests that monetary policy is seen as gradually easing to support growth, without a sharp pivot.
Perceived Risks
Survey respondents identified several downside risks that could impact Canada’s economic outlook. The most commonly mentioned were renewed trade frictions with the United States and weakening consumer activity. These risks are seen as having the potential to constrain both growth and investment. On the upside, some participants pointed to the possibility of trade stabilization and stronger fiscal measures as factors that could unexpectedly improve economic conditions.
Summary
The first-quarter 2025 market survey presents a picture of cautious optimism tempered by ongoing challenges. Growth forecasts have been scaled back, and inflation is expected to remain slightly above the target range for longer than previously anticipated. Recession risks have increased, and monetary policy is projected to remain steady before gradually loosening. Key uncertainties—particularly around trade relationships and consumer strength—will likely continue to weigh on economic sentiment through the remainder of the year.
