The Hidden Recession: Is Canada Already in One?

The Canadian economy isn't technically in a recession, but it certainly feels like one to most households. According to RBC economists, the country's economic setup is raising concerns. They warn that rapid population growth is boosting GDP, but it's only masking the real issues. More meaningful economic indicators, such as household consumption and employment, are eroding at a pace never before seen outside of a recession.

Canada's Rapid Population Growth Is Hiding a Weak Economy 

Canada defines a recession as two consecutive quarters of declining real gross domestic product (GDP). The country has managed to keep real GDP positive, thus avoiding the dreaded label. However, this measure is growing solely due to the surging population. 

“Canada’s population grew by 6% from Q2 2022 to Q1 of this year, adding 2.1 million new consumers to the economy,” explains Carrie Freestone, an economist at RBC. 

She notes that consumer spending accounts for more than half of GDP, and immigration is boosting the number of consumers. While this is good for the overall numbers, it doesn’t reflect the actual economic health. 

More bluntly, the economy is only growing in aggregate because of the increase in consumers due to aggressive immigration. Consumers themselves are weaker, and policymakers are focusing on increasing volume rather than improving quality of life. 

“Without higher population boosting demand, the Canadian economy almost certainly would have contracted outright over the last two years,” according to Freestone. 

Canadian Households Face Recession-Like Economy, Despite the Window Dressing 

Outside of aggregate GDP, major economic indicators are printing recession-like data. The bank highlighted three areas of particular concern: output, household consumption, and employment. 

Adjusting output to the population reveals a very different picture than the aggregate data. Per-capita real GDP has declined in six of the past seven quarters and is now 3.1% below 2019 levels. This decline over the past few months is the largest observed outside of a recession. 

Declining per-capita output often indicates that households are struggling, which is confirmed by consumption data. RBC notes that average household spending is down 2.6% since peaking post-pandemic and is now 2% below 2019 levels. Inflation and rising interest rates have cut into purchasing power, contributing to this decline. 

Weak demand and low output have sent unemployment climbing, similar to what happens during a recession. Since hitting a record low post-pandemic, the unemployment rate has climbed by 1.6 percentage points. Historically, an increase of 0.5 points typically results in a recession within the following eight quarters. Canada has seen three times that increase in just over a year. 

“Since the 1970s, Canada has never had a trough-to-peak increase in the unemployment rate of that size without the economy going through a recession,” says Freestone. 

The bank expects some relief in the future, but it's not exactly around the corner. 

“We expect real per capita GDP will likely still be negative through the end of this year but will turn positive in the second half of 2025 as headwinds from higher interest rates continue to fade,” concludes Freestone. 

Other forecasts have been slightly less optimistic about that timeline without a major shift to the structure of Canada’s economy. 

What is a Hidden Recession? 

A hidden recession refers to a situation where the economy shows signs of a recession in many aspects, such as employment rates and consumer spending, but GDP growth remains positive due to other factors like population growth. This can create a misleading picture of economic health, masking underlying issues that affect the average household. 

Could Canada Be in a Hidden Recession? 

Given the current economic indicators—declining per-capita GDP, reduced household consumption, and rising unemployment—it's possible that Canada is experiencing a hidden recession. While GDP numbers suggest growth, the reality for many Canadians is economic hardship, resembling conditions typically associated with a recession. 

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