Oxford: Canada is already in recession, but defense spending boosts growth and bond yields

According to new forecasts from Oxford Economics, Canada has suffered a recession caused by the escalating trade dispute with the United States. However, economic resistance may ease over time due to sharp growth in federal defense spending, which also promises to increase bond yields.

In the latest outlook, Oxford has raised its GDP forecast slightly above 2025, up to 0.9% and above 0.8% to reflect Ottawa’s recent commitment to increase military spending to 2% of GDP by the end of the fiscal year. The government also plans to steadily increase funding by 2035 to achieve NATO’s new 5% target.

Additional spending will support growth in the next few years, but Oxford is expected to be deficit funds, increasing federal debt burden and long-term borrowing costs. Its new forecast puts Canada’s 10-year government bond yield at 4.0% in 2027, up from its estimate of 3.84% last month.

Higher yields put pressure on mortgage rates

Oxford’s latest forecasts arrive at a rise in bond yields, which has affected the pricing of fixed mortgage rates. As Canadian Mortgage Trends It was previously reported that lenders across the country have been steadily raising interest rates in recent weeks, reflecting high capital costs and economic uncertainty.

As for the pricing of variable rates, Oxford expects the Canadian Bank’s policy rate to be currently at 2.75%, as it weighs the opposing forces of slowing growth and the risks of sustained inflation.

While Oxford does not rule out another or two quarter-point reductions, it says policy rates are unlikely to fall below 2.25% unless inflation continues to ease and the economy needs additional support.

Tariffs remain swinging factor

The forecast is shaped by significant uncertainty surrounding the Canadian-U.S. trade relations. At the time, the company warned that there were no new economic and security protocols that the recession could deepen and delay if U.S. President Donald Trump complied with his threat of 35% tariffs on non-USMCA Canadian goods.

“U.S. tariffs will lead to a decrease in Canadian commodity exports, while uncertainty and weaker job markets will hurt domestic demand.” Oxford predicts that peak-to-trend GDP will shrink to 0.8% from the second quarter to the second quarter of 4225, with unemployment likely to rise to 7.6% (currently 6.9%) as job losses exceed the trade exposure sector.

But, despite expected growth to remain weak, inflationary pressures are increasing. Oxford said the University’s headline inflation rate was 1.9% year-on-year in June as relief from Canada’s temporary tariffs expired in October and supply chain disruptions were priced.

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Last modified: August 7, 2025