TD Bank chief economist expects 100,000 job losses and weak GDP as tariff strain deepens by third quarter
Canada is on the verge of a two-quarter recession, with a potential 100,000 job losses expected by the third quarter, according to Beata Caranci, chief economist at Toronto-Dominion Bank.
In a Q&A with The Globe and Mail, Caranci forecasts negative real GDP growth for both the second and third quarters. This marks a significant shift from TD’s March projection.
She now expects Canada’s 2025 growth to fall to 0.8 percent, down from the previous 1.3 percent.
The downgrade is attributed to private sector job cuts, a non-responsive housing market, and weak consumer sentiment.
“These are not great numbers,” she said, adding that a deeper contraction is now anticipated.
The housing market, once a consistent engine of economic momentum, has failed to respond to monetary easing.
As per Caranci, “even with 100 basis points of cuts, sales are going in reverse.”
Housing sales have declined by 20 percent since November, despite interest rate reductions by the Bank of Canada.
Ontario and BC are forecast to lead the national housing slowdown.
Caranci said that home prices in 2025 are projected to drop by 6 percent in Ontario and 4 percent in BC, with further weakness anticipated in 2026.
She warned that the condo market in Ontario could see a 15 to 20 percent drop from its peak, citing low sales-to-listings ratios and oversupply.
Caranci also expects Canada’s unemployment rate to rise to 7.2 or 7.3 percent.
The April unemployment rate stood at 6.9 percent nationally and 7.8 percent in Ontario.
She noted that a slowdown in immigration may partially cushion the unemployment rate by constraining the labour force.
According to Caranci, Canada's current effective tariff rate with the US stands at 12 percent due to duties on non-USMCA compliant goods.
However, she projects this rate could fall to 5 percent by year-end and potentially to 2.5 percent following a new USMCA agreement in late 2026.
“That presumes USMCA qualified products will stay exempted, but we don’t know if that will remain the case,” she noted.
Despite these trade uncertainties, the S&P/TSX Composite Index recently closed above 26,000 for the first time, marking ten consecutive days of gains.
However, Caranci cautioned that equity markets may be misjudging the durability of these gains, which are reliant on progress in major trade deals.
Caranci warned that the window for securing trade clarity is narrowing. She stated that if progress is not made by the third quarter, “the price impacts will really start to come through on the consumer side.”
She said optimism in markets could quickly reverse if no concrete deals materialise.
With respect to monetary policy, Caranci sees only two more rate cuts from the Bank of Canada, bringing the rate to 2.25 percent.
She cited Governor Tiff Macklem’s concerns about monetary policy’s limited effect in the face of supply-side shocks. “The housing market is telling us the answer is no, otherwise it would be reacting,” she said.
Caranci described the economic environment as a “confidence shock” more than a credit constraint.
Although Canada’s interest rates remain low relative to global peers, she said they are insufficient to stimulate demand while job security remains uncertain.
For the US, Caranci projects more resilience.
TD forecasts US real GDP growth of 2 percent in 2026, above the 1.5 percent consensus.
She attributed this optimism to expectations of tax cuts and deregulation becoming growth drivers once trade friction subsides.
Caranci said TD has based its forecasts on a third-quarter resolution to key trade disputes. If this happens, the Federal Reserve could cut rates three times.
However, she warned that without such progress, rate cuts may only follow if the US economy weakens enough to prompt action despite rising prices.
Caranci noted that inflation pressures are building, with data such as the Manheim Used Vehicle Value Index rising by 3 percent in April.
She also highlighted that retailers like Walmart expect to increase prices by late May. According to her, inflation metrics could spike by June or July.
On currency, Caranci said the Canadian dollar has been stronger than expected.
She attributed this to reduced risk sentiment due to signs of progress on US trade deals, rather than interest rate differentials.
She expects the loonie to remain in the low 70-cent range until a deal is secured.
Looking ahead, Caranci pointed to longer-term structural risks facing Canada.
“You’re trying to simultaneously reduce your dependence on the US, increase your domestic resiliency and increase your global presence,” she said.
She warned that Canada’s large-scale infrastructure plans require precise execution to avoid worsening the debt-to-GDP ratio and undermining investor confidence.
She said success will depend on the federal government’s ability to prioritise and manage projects effectively.
“This is all about execution,” she stressed, citing concerns over labour shortages and potential cost overruns.
Finally, Caranci acknowledged that TD’s 2025 GDP forecast for Canada is below consensus—0.8 percent versus 1.2 percent.
Conversely, TD’s 2026 forecast for the US is more optimistic than consensus due to assumptions that trade deals will drive renewed growth by the fourth quarter.
“The inhibitors are tariffs... the accelerators will be the tax cuts and deregulation,” she said.
