Canada’s economy appears to be in a shallow recession as of mid-2025, according to a recent report from Oxford Economics. This mild economic contraction is being driven by multiple factors, including ongoing trade tensions with the United States, global inflationary pressures, and cautious consumer spending. However, an anticipated increase in federal defence spending may provide a fiscal stimulus that helps stabilize growth, although it could have side effects on borrowing costs and mortgage rates.

Signs of a Shallow Recession

A recession is generally defined as two consecutive quarters of negative GDP growth. Oxford Economics suggests that Canada’s economy has experienced a mild decline in output, but the downturn is less severe than previous recessions due to underlying economic resilience. Key sectors such as energy and technology have shown relative strength, while others, like manufacturing and retail, are struggling.

Trade disputes with the U.S., Canada’s largest trading partner, continue to weigh on exports, reducing business investment and disrupting supply chains. Inflation remains elevated, eroding consumer purchasing power, although recent data suggests inflationary pressures may be easing slightly.

Defence Spending as a Growth Catalyst

One of the more optimistic aspects highlighted by Oxford Economics is the federal government’s plan to increase defence spending substantially. This fiscal stimulus is expected to boost demand for domestic manufacturing and services related to defence contracts. The increased spending could help create jobs and support growth in related sectors, softening the recession’s impact.

However, this injection of government spending may also have implications for bond markets. Increased borrowing by the government to finance defence projects could drive bond yields higher, which, in turn, influences interest rates across the economy, including mortgage rates.

What Rising Bond Yields Mean for Mortgages

Bond yields and mortgage interest rates often move in tandem because lenders price mortgages based on the yields of government bonds, which are considered low-risk benchmarks. If bond yields rise due to increased government borrowing, mortgage rates could follow suit.

Higher mortgage rates increase borrowing costs, making home loans more expensive and potentially slowing housing market activity. For homeowners with variable-rate mortgages, rising rates translate directly into higher monthly payments. Those with fixed-rate mortgages may avoid immediate impacts but could face higher rates upon renewal.

Advice for Homeowners and Buyers

In this uncertain economic environment, Mortgage.Expert advises current and prospective homeowners to:

Monitor Interest Rate Trends: Stay informed about central bank policy announcements and bond market movements.
Consider Fixed-Rate Mortgages: Locking in a fixed rate can provide protection against rising borrowing costs.
Review Financial Health: Ensure debt levels and credit scores are in good standing to secure favorable mortgage terms.
Plan for Budget Flexibility: Account for possible increases in mortgage payments or other household expenses.

This cautious approach can help homeowners navigate a recessionary period while safeguarding their financial stability.