What is a 'modest recession' and why might Ontario be facing one?
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Ontario's Financial Accountability Office (FAO) is predicting a 'modest recession' for the province this year if U.S. tariffs remains in place.
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The report from the FAO released this week analyzes the impact of U.S. tariffs including those on steel, aluminum, automobiles and automobile parts, and Canadian retaliatory tariffs. It suggests that if these tariffs remain in place, Ontario's real GDP growth would slow to 0.6 per cent in 2025, less than half the 1.7 per cent growth expected in the absence of U.S. tariffs.
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'This implies that a modest recession would occur in 2025,' the report states. 'In 2026, Ontario's real GDP growth would be 1.2 per cent, compared to 1.9 per cent growth in a no tariff outlook.'
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FAO's Chief Economist and Deputy Financial Accountability Officer, Paul Lewis, told National Post there's no agreed-upon definition for a 'modest recession'; it's a matter of comparing one recession with another.
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That said, a recession is defied as two successive quarters of negative economic growth, so a modest recession would fit that category as well.
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Lewis said that, leaving out the extreme situation that was the pandemic, Ontario has seen five recessions in recent history. Two of them, in 1992 and 2003, could be deemed modest, with two quarters of roughly 0.8 per cent decline. The other three, in 1982, 1990 and 2008, were deeper and lasted longer, with declines of between five and six per cent.
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Does an Ontario recession mean a Canadian recession?
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Not necessarily, although there is usually overlap because Ontario's economy represents almost 40 per cent of Canada's. So anything that drags down the economy in that province is going to affect the country as a whole. Ontario's 2003 modest recession was not shared by the country, which saw only one quarter of negative growth.
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How is it a recession if the FAO still predicts 0.6 per cent growth?
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'The economy ended the year 2024 with some pretty good momentum,' Lewis said. 'So to get to that annual number that we have in our report of 0.6 per cent, you'd have to have some declines through the course of the year if you're looking at the quarterly data.'
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Why are tariffs such a big drain on the economy?
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According to the FAO report, the U.S. is Ontario's biggest trading partner. 'In 2024, the U.S. accounted for 77 per cent of the province's international goods exports and 60 per cent of its services exports.'
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It adds: 'An estimated 933,000 Ontarians worked in U.S. export-related jobs in 2024, about one in every nine jobs in the province, with 536,000 of these jobs in the goods sector. Ontario's manufacturing sector is particularly reliant on U.S. trade, with 40 per cent of its production exported to the U.S.'
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'As soon as you start to announce these kinds of things you create uncertainty,' he said. 'Uncertainty by itself causes growth to slow somewhat. Companies aren't sure so they put investment plans and hiring plans on hold for a while, just until they can sense what the lay of the land is.'
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