Canada's Recession Crossroads: Navigating Trade Risks and Resilient Sectors

The Canadian economy faces a pivotal moment in 2025, with Deloitte’s stark prediction of a recession in the second and third quarters—GDP contractions of -1.1% and -0.9%—driven by trade policy uncertainty and its ripple effects. As businesses scale back investments and unemployment rises, the path forward hinges on resolving cross-border tensions and leveraging sectors showing relative strength. Here’s how investors should parse the risks and opportunities.

The Recession Catalyst: Trade Policy and Structural Challenges

The looming downturn stems from heightened uncertainty around Canada’s preferential access to U.S. markets under CUSMA. A full 22% of firms have delayed investments due to trade-related anxieties, with business investment projected to fall 11.5% in Q2. Deloitte warns that permanent loss of U.S. market access could slash Canada’s GDP by 3% by 2030—a stark reminder of how intertwined the economies remain.

Job losses are concentrated in trade-sensitive sectors: manufacturing, steel, aluminum, and services. The Financial Accountability Office of Ontario estimates 68,100 jobs lost in Ontario alone in 2025, rising to 137,900 by 2029. Unemployment is expected to peak near 7.5% in Q3, though the impact remains uneven—some sectors like grain exports (up 11% in Q1) and coal are bucking the trend.

Corporate Performance: Resilience Amid Headwinds

While the macro outlook is grim, certain companies are navigating the storm better than others:

Canadian National Railway (CNR): Steady Operations, Caution Ahead

CN reported Q1 diluted EPS growth of 8% to C$1.85, driven by strong grain and petroleum shipments. Its operating ratio improved to 63.4%, reflecting cost discipline. However, CN warns of “heightened recessionary risks” from global tariffs. . Investors should monitor its Q2 results (May 28) for signs of demand erosion.

Alimentation Couche-Tard (ATD.A): A Takeover Opportunity

The convenience store giant’s NDA with Seven & I Holdings hints at a potential $47B takeover—a rare bright spot in a sluggish retail environment. The deal’s success hinges on regulatory approval and whether it can offset slowing sales in traditional gas stations.

Lithium’s Lows and Banks’ Buffers

Albemarle’s Q1 net loss of $340K underscores lithium’s slump (prices down 34%), while banks like National Bank ($484B in assets) and TD ($2.09T) are cautiously optimistic, with earnings releases in late May offering clues about credit quality and lending appetite.

Key Risks and Investment Traps

1. Tariffs and Trade: U.S. aluminum tariffs alone could cost Alcoa $90M in Q2, and broader trade disputes could amplify job losses.
2. Currency Volatility: CN’s assumption of a C$0.70/USD exchange rate highlights risks for import-dependent sectors.
3. Energy and Commodity Prices: CN’s crude oil price assumption of $60–$70/bbl leaves room for downside if demand weakens further.

Where to Find Value

• Resilient Sectors: Grain exports (CN’s 11% gain), coal, and infrastructure plays like CPK (despite CIBC’s downgrade) may offer defensive positions.
• Bank Stocks: TD and National Bank’s asset diversification and strong capital reserves position them to weather a slowdown better than peers.
• M&A Plays: Couche-Tard’s potential takeover suggests active deal-making in defensive sectors like retail and energy.

Conclusion: A Cautionary Buy-and-Hold Strategy

The Canadian economy is in a recession, but the contraction is expected to be temporary, with Deloitte forecasting a 2.4% rebound in Q4. Investors should prioritize companies with: - Exposure to stable commodities (grain, coal) or resilient consumer needs.- Low leverage and strong liquidity, like the big banks.- Global diversification to mitigate U.S. trade risks.

The FAO’s job loss projections and CN’s warnings are sobering, but sectors like rail (despite operational hiccups) and convenience retail (via Couche-Tard) offer pockets of resilience. For now, a selective approach—avoiding trade-sensitive manufacturers and betting on infrastructure and consumer staples—seems prudent.

In short, Canada’s 2025 recession is a test of structural weaknesses, but investors who focus on companies with global reach, diversified revenue streams, and strong balance sheets can navigate the choppy waters—and position themselves for the eventual rebound.