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BMO’s GDP Forecast for Canada: Navigating Recession Risks and Trade Tensions

Eli GrantTuesday, Apr 29, 2025 4:03 pm ET
16min read

As Canada prepares to release its first-quarter 2025 GDP data, BMO’s latest economic projections highlight a fragile equilibrium between cautious optimism and significant downside risks. The bank’s analysis, rooted in its market surveys and financial performance, underscores an economy teetering between modest growth and potential recession. Below is an in-depth look at what investors should watch—and worry about.

The GDP Outlook: Growth, But with Strings Attached

BMO forecasts Canada’s real GDP growth to end 2025 at a median of 1.0% year-over-year, with a 21.7% chance of negative growth (below 0%). By 2026, growth is projected to edge up to 1.7%, though the risk of recession remains elevated. The bank’s surveys reveal a stark reality: a 38% probability of recession (defined as two consecutive quarters of contraction) in the next six months, dropping to 40% over the following six months. Even in the 18–24 month window, the median recession probability remains at 20%, suggesting persistent uncertainty.

The Upside and Downside Risks

BMO identifies easing trade tensions as the top upside risk, with 96% of surveyed participants citing it as a potential growth catalyst. A resolution to global trade disputes, particularly with the U.S., could unlock pent-up demand for Canadian exports—from autos to energy. However, the downside risks are more immediate and formidable: increased trade tensions (also cited by 96% of respondents), weaker consumer spending (41%), and tightening global financial conditions (33%).

The Inflation and Monetary Policy Crossroads

Headline CPI inflation is expected to average 2.4% by end-2025, edging closer to the Bank of Canada’s 2% target by 2026. Yet, the path to normalization remains bumpy. BMO anticipates the central bank’s policy rate will decline to 2.25% by year-end 2025, with further easing to 2.13% by 2026. This dovish stance reflects concerns about economic softness, with risks skewed toward lower-for-longer rates (44.5% of respondents).

BMO’s Financial Performance: A Mirror of Economic Woes

BMO’s Q1 2025 results offer a snapshot of the Canadian economy’s vulnerabilities. While its Canadian Personal and Commercial (P&C) banking division saw 10% revenue growth due to higher net interest income, this was offset by a 60% surge in provisions for credit losses (PCL). The PCL spike—driven by uncertainties around trade policies, consumer leverage, and commercial lending—points to heightened caution. The bank’s Common Equity Tier 1 (CET1) ratio held steady at 13.6%, a testament to its capital strength, but also a reflection of rising risk-weighted assets amid economic uncertainty.

The Housing Market: A Wildcard in the System

The Canadian housing market, a perennial concern, remains a key risk factor. With 77% of respondents believing GDP is below potential output (a negative output gap), weak housing activity could amplify the slowdown. BMO’s surveys note 33.8% probability of 1–2% GDP growth in 2025—a range that hinges on whether housing stabilizes or continues its decline.

Investment Implications: Proceed with Caution

For investors, BMO’s analysis paints a nuanced picture. Defensive sectors—utilities, consumer staples, and healthcare—may outperform in a low-growth environment. Meanwhile, energy stocks could benefit if oil prices rise to the US$70 per barrel forecast for 2026. However, financials, including BMO itself, face headwinds from widening credit provisions and flat yield curves.

BMO Trend

Conclusion: A Delicate Balancing Act

BMO’s GDP forecast underscores an economy balancing on a knife’s edge. While growth is possible, the risks are asymmetrically skewed toward contraction. The bank’s own financial metrics—rising PCLs and cautious rate expectations—reflect an environment where trade tensions and consumer fragility loom large.

Investors should prioritize liquidity and downside protection. With a 38% chance of recession in the next six months and 21.7% odds of negative GDP growth in 2025, the data suggests caution prevails. However, BMO’s 13.6% CET1 ratio and diversified operations offer a glimmer of resilience—a reminder that even in uncertainty, some institutions are prepared to weather the storm.

The coming GDP release will be a litmus test. Should growth beat expectations, it could unlock a modest relief rally. But if the data aligns with BMO’s pessimism, the Canadian economy may face its toughest test yet—a reality investors must price in now.

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Electrical_Green_258
04/29
Housing market's a wildcard, brace for impact, folks.
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Fidler_2K
04/29
With 38% chance of recession, I'm hedging with defensive plays. Anyone else going cautious?
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iamsam22222
04/29
@Fidler_2K What’s your time horizon for holding these defensive plays? Are you thinking short-term or long-term?
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breakyourteethnow
04/29
BMO's forecast feels like a rollercoaster ride—ups and downs, loops and corkscrews. Buckle up, traders.
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Nichix8
04/29
@breakyourteethnow What's your take on the energy sector?
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Corpulos
04/29
I'm holding some $AAPL and $TSLA, balancing growth potential with caution. How's your mix?
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Interesting_Award_86
04/29
BMO's call on easing trade tensions as the upside risk feels like a long shot. What's your take?
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shroinvestor
04/29
@Interesting_Award_86 BMO's call? Risky bet, IMO.
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Anonym0us_amongus
04/29
@Interesting_Award_86 Long shot, yeah. Markets unpredictable.
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bobbybobby911
04/29
$BMO's financials facing headwinds, but that CET1 ratio is a safety net. 🤑
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CaseEnvironmental824
04/29
Housing market's a wildcard, folks. If it tanks, GDP could follow. Keep your stop-loss tight.
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Empty_Somewhere_2135
04/29
Consumer spending weakness could be a game-changer. Any insights on consumer sentiment?
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whoisjian
04/29
Trade tensions could boost $TSLA if Canada exports rise.
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Lunaerus
04/29
Housing market's wildcard status has me pondering diversification. What's your strategy to mitigate risks?
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Serious_Procedure_19
04/29
Tightening global financial conditions scare me more than recessions. Thoughts on protecting portfolios?
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MasterDeath
04/29
Defense sectors could outperform in a slowdown scenario.
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PhilosophyMassive578
04/29
@MasterDeath True, def sectors tend to hold up better in downturns.
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Empty_Somewhere_2135
04/29
Energy stocks might shine if oil hits $70/barrel. 🤔
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Shinoskay9
04/29
BMO's strong capital, but credit provisions are spiking.
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iamsam22222
04/29
Energy stocks could rally if oil hits $70. Any energy bets in this volatile landscape?
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