The Canadian economy is projected to enter a recession, largely influenced by U.S. tariffs, according to forecasts from Export Development Canada (EDC). These tariffs are expected to have detrimental effects not only on Canada but also on the U.S. economy. The Organization for Economic Cooperation and Development (OECD) predicts that U.S. GDP growth will decline from 2.8% in 2024 to 1.8% in 2025 and further to 1.5% in 2026, with tariffs being a significant factor in this downturn.

While U.S. tariffs are a major contributor to Canada’s economic challenges, they are not the sole issue. The EDC highlights that Canada has experienced poor real GDP per capita growth from 2015 to 2025, which is largely attributed to ineffective government policies. The impact of these policies is expected to linger, making recovery difficult.

Economists from the C.D. Howe Institute recently noted that in the second quarter of 2025, machinery and equipment investment per worker in Canada was less than one-third of that in the U.S. They pointed out that new investments are failing to keep pace with depreciation and population growth, leading to a decline in the stock of capital per worker.

The situation has prompted government action. Recently, Industry Minister Mélanie Joly sent a letter to Stellantis CEO, threatening legal action over the company's decision to move Jeep production from Ontario to Illinois. This move could result in the loss of approximately 3,000 jobs at the Ontario plant and up to 10,000 additional jobs in the auto parts sector, according to an industry group.

In response to Stellantis’ plans, the government has emphasized its commitment to making strategic investments to enhance business competitiveness. This includes a $5 billion Strategic Response Fund, a new reskilling package for workers, and a comprehensive Buy Canadian Policy. However, critics argue that relying on taxpayer-funded initiatives to support businesses is not a sustainable solution.

The Liberal government’s approach to economic recovery has drawn criticism for its reliance on increased government spending. This strategy has historical roots in Keynesian economics, which advocates for state intervention in the economy. However, some economists argue that such interventions often lead to inefficiencies and economic downturns.

As Canada navigates these economic challenges, the effectiveness of government policies and interventions will be closely scrutinized. The ongoing impact of U.S. tariffs and domestic economic strategies will play a crucial role in shaping the future of the Canadian economy.