Canada’s business community is bracing itself for a downturn in the near future. The Bank of Canada (BoC) released the results of its Market Participant Survey (MPS) for Q1 2025. The survey, a poll of financial market experts, shows expectations for GDP growth have fallen, while the probability of a recession has climbed sharply. The central bank is expected to slash rates further this year, but the era of low rates is over. Even after cuts, the outlook still sees the overnight rate above anything seen throughout the 2010s.
Canadian GDP Growth Forecasts Slashed Significantly For 2025
Canada’s business community is losing confidence in the country’s outlook. The median estimate for annual GDP growth came in at just 1.0% for 2025, shedding 0.8 points from the Q4 estimates. Sentiment hasn’t impacted next year’s forecast as severely, with annual growth seen at 1.7 points, down just 0.2 points from last quarter.
Canadian Recession Probability Surges For 2025
The median probability of a recession in Canada (percent) by range of probability (months). MPS report Q1 2025 vs Q4 2024.
Source: Bank of Canada MPS.
Expectations of a recession in the short-term saw a sharp uptick with the experts. The median probability of one occurring within the next 6 months rose to 38% in Q1 2025, an uptick of 12 points from the previous quarter. For the 6-to-12 month window, the probability rose 10 points to 40%.
Medium-term expectations didn’t shift quite as much. The median probability of a recession within 12 to 18 months remains unchanged at 30%, while the odds fell 5 points to 20% for expectations within 18 to 24 months. In other words, the view shifted to more volatility in the near-term than later.
Canadian Inflation Expected To Remain Stable, Era of Low Rates Over
Despite recession fears, inflation expectations edged higher but stayed within the BoC’s target range. The median forecast for 2025 (2.4%; +0.4 points q/q), and 2026 (2.0%; unchanged) are both within the central bank’s tolerance target of 1 to 3 points.
Despite seeing price growth 20% higher this year, expectations of rate cuts strengthened. The median forecast expects the Bank of Canada (BoC) policy rate at 2.25% by the end of 2025, shedding an extra 0.25 points from last quarter.
Interestingly, none of the forecasts see the overnight rate falling below 2.0 points through 2027. That would be lower than the 5.0 points seen just last year, but higher than anything experienced in the 2010s. In fact, the country hasn’t seen the overnight rate at 2.0% or higher from 2008 to 2022. An issue that can have a profound impact on the outlook for real estate price growth.
The era of low rates may indeed be over, and we’re entering the era of “higher for longer.” At least, that’s what experts see in the short-term.
Yesterday’s election appears to have a minimal impact on the outlook, according to the experts. Trade tensions were the biggest factor, with 96% of experts citing easing or worsening relations as key to the outlook.
Smaller but still considerable upside factors include larger than expected stimulus (67%), and looser monetary policy (37%). Rounding out the downside are weaker consumer spending (41%), geopolitical risks (33%), and global financial risks (33%). In other words, the external environment is a headwind that may concern Canada when it comes to the downside.