Given the uncertainties linked to geopolitical issues and the trade war with the United States, Canada will experience at least another year of economic gloom but will avoid a recession.
Economist Jimmy Jean, from the Desjardins Group, presented his economic and financial outlook during a webinar held on June 11.
In recent days, figures published on gross domestic product (GDP) growth suggested that Canada had entered a technical recession, with a decline in GDP for two consecutive quarters. Jean points out that the contraction in the first quarter of 2026 was 0.1%, "which is very low. This figure could even be revised," he says. This was indeed the case for the data for the fourth quarter of 2025, the decline of which was reduced to 0.4% after a data revision.
He observes that domestic demand was still strong in the fourth quarter of 2025, and that the contraction noted in the first quarter of the current year is linked to strong gold imports. "This is often associated with financial transactions and tends to reverse from one quarter to the next," he says.
Household consumption spending and private investment in machinery and equipment are still on the rise. "This is a signal that we are not in a recession. In a recession, none of this happens," he says.
The other element he observes is the proportion of different economic sectors experiencing a decline in their revenues. When 60% of industries experience a contraction, that's a threshold that corresponds to a recession. "Currently, we're still at 50%-50%, so we haven't reached that critical threshold." This corresponds to the relative stagnation of GDP he mentioned earlier.
Demographics and GDP per capita
Regarding GDP per capita, since the peak reached in the fourth quarter of 2022, Jean has observed some recovery, explained by the slowdown in population growth caused by immigration. Canada, however, remains behind the United States, where GDP per capita growth is significantly higher.
One factor that could help Canada close this gap is the use of generative artificial intelligence (AI) to improve productivity. Until now, we've seen little impact on productivity due to the scale of the investments required. “But now we’re seeing this impact, and that justifies the stock market’s enthusiasm,” he says.
The adoption rate of generative AI for producing goods or offering services remains significantly lower in Canada than in the United States. In the U.S., where AI adoption is more pronounced, productivity gains are most noticeable. “Companies here are still very cautious in this regard,” he says.
Real GDP growth prospects remain modest in Quebec, at 0.3% in 2026 and 1.6% in 2027, according to Desjardins’ forecasts. For Canada as a whole, the forecasts are 0.6% in 2026 and 2% in 2027.
Measures adopted by various levels of government to help households combat food inflation should yield results in the coming quarters. “This represents an additional $3.1 billion in disposable household income,” says Jimmy Jean. This cash injection will be welcome for lower-income families who struggle to save.
The Canadian job market improved in May 2026, but the unemployment rate in Quebec for 25- to 54-year-olds is showing a worrying upward trend. “We’ve talked a lot about youth unemployment in recent years, but the impact on the economy is limited. However, 25- to 54-year-olds are families, and if one member of a couple loses their job, it impacts consumption and the housing market,” he explains.
Macroeconomics and uncertainty
Threats made by the United States administration regarding the future of the Canada-United States-Mexico Agreement (CUSMA), the imposition of tariffs on several key industrial sectors, and the rise in fuel prices since the start of the war in Iran at the end of February, are all factors contributing to uncertainty.
According to Jimmy Jean, the oil market will take a long time to recover from these three months of disruption. Energy costs were reducing inflation in 2025, but the conflict in the Middle East is having the opposite effect in 2026, and this impact will persist until the second half of 2027, according to Desjardins' forecasts.
In the case of the CUSMA, the probability that Canada's proposal to extend the free trade agreement for 16 years "is zero," according to Jimmy Jean. The United States is trying to negotiate separate bilateral agreements with Mexico and Canada. It is still possible that the United States could decide to tear up the CUSMA with six months' notice. In 2027, sectors that were protected from the tariffs imposed by the Trump administration would no longer be.
It is highly likely that we will find ourselves in the same situation on July 1st where nothing will have changed. "The uncertainty is now structural," he says. The imposition of export tariffs on processed goods, in effect since April 6, is severely damaging the Quebec economy. “Nothing will change as long as the Trump administration is in power; this unpredictability is deeply ingrained in the economy,” he adds.
Government efforts to facilitate interprovincial trade and diversify export markets are a good thing, according to the economist, but the construction of major infrastructure projects, such as a new pipeline or port facilities, takes several years to materialize.
The peace dividend
The colossal sums that the federal government plans to invest in defence, with the budget increasing from $40 billion per year to over $150 billion, could have a significant impact on the Canadian economy. Since the end of the Cold War, which followed the fall of the Berlin Wall and the collapse of the Soviet Union in the late 1980s, the share of global GDP devoted to defense spending has steadily declined. From 6% in 1960, it had fallen to 4.5% in the 1980s, and was projected to be less than 2.5% in 2025.
Governments were able to use their resources for other purposes. Economists refer to this phenomenon as the "peace dividend." The renewed arms race is more like a "conflict tax," according to Jimmy Jean. "Bringing military spending up to 5% of GDP will have a significant impact on public finances," he says. In the context of the aging population that threatens Canada, and all Western countries, maintaining the welfare state will become very difficult. Especially if we invest so much in defense without these expenditures having an impact on innovation and productivity in Canada, Jean adds.
The optimal scenario for this spending would be one where defense research and development attracts private investment, creating local benefits and allowing Canadian companies to develop their skills and expertise. The worst-case scenario would be if this military spending maintains the country's dependence on foreign suppliers, without any national technological gains.
In such a case, public deficits would widen even further, forcing the government to borrow more, impacting bond yields. Higher interest rates affect the private sector's investment prospects, he explains.
Therefore, these increased defense expenditures must have a structuring effect on the economy. Otherwise, the defense sector simply absorbs resources from the private sector without generating any real benefits. This only increases the size of the state in the economy, creating a crowding-out effect that is negative for private investment and GDP per capita, he explains.
For investors, Jimmy Jean suggests prioritizing asset classes exposed to vital inputs that protect the Canadian economy from inflation, including critical minerals and energy. He says he expects a 12% to 15% return on stock market indices in Canada and the United States in 2026.
