Summary
Both the US and Canada are in greater danger of experiencing a recession as a result of rising unemployment, trade disputes, and a slower economy.
Introduction
Tensions over international trade and changing monetary policy are putting the US and Canada at greater risk of experiencing a recession. According to Michael Novik, Senior Investment Manager at Northern Markets, market volatility, declining growth, and growing unemployment are important signs. Economic data indicates that monetary, trade, and fiscal forces are changing the economic trajectory of these countries.
Signs of a US Economic Slowdown and Recession
In early 2025, the United States economy started to show signs of slowdown. Although the Federal Reserve’s recent decision to hold rates steady was expected, it also led to downward revisions in growth projections. Furthermore, unemployment predictions were also adjusted to rise. In Feb 2025, the unemployment rate surged to 4.1% from 4.0% in the previous month, which was slightly above the market expectations.
The number of unemployed persons reached 7.05M after increasing by 203,000. Meanwhile, the employment figures were also stressful, as they declined by 588,000, with a 62.4% drop in labour force participation. Furthermore, the employment-population ratio also reflected broader labour market weakness by dropping to 59.9%.
At the same time, the US economy is also facing external pressures. In January 2025, the imports were increased by 10%, approximately $36.6B, which pushed the total to a record high of $401.2B. The reason behind the increased import supplies by businesses was the anticipation of new tariffs from the Trump administration. Major sectors that added to the rise of imports overall were industrial supplies, consumer goods, and finished metals. The trade tensions due to tariffs from the Trump administration have raised concerns over long-term consumer spending and inflation.
In an effort to maintain liquidity in the face of tighter financial conditions, the Federal Reserve cut monthly reductions in Treasury holdings from $5B to $25 billion from April in order to delay its balance sheet runoff. However, as concerns about an economic downturn deepened, the yield on the 10-year US Treasury dropped to 4.2%, the lowest level since early December, showing a rise in demand for safe assets.
US Currency Movements and Equity Market Reactions
US stocks saw brief increases in spite of more general economic worries. Major indices increased by around 0.5% on Thursday, March 20, 2025, building on gains from the previous day following the Federal Reserve’s decision to keep rates steady. The technology and pharmaceutical industries did well; Meta gained 2.7%, while Amazon, Nvidia, and Eli Lilly all had increases of more than 1%. However, not every industry participated in the rally. For example, US-listed shares of PDD fell after the company missed sales expectations.
The currency markets were also reacting to how the economy is changing. Despite falling Treasury yields and dovish policy signals, the US Dollar Index (DXY) rebounded to 104 on Thursday after hitting a five-month low of 103.2 earlier in the week, as global central banks such as the SNB and ECB voiced concerns about growth risks associated with US tariffs.
Canada’s Economy Is Hurt by Trade Tensions
Both internal and external causes are putting pressure on Canada’s economy. The S&P/TSX Composite Index, which mirrored Wall Street’s cautious optimism but was burdened by worries of a worsening global trade war, remained below 25,060 on Thursday. As talk grew about a potential April snap election, political unpredictability increased, with market concerns about the stability of policies centred on incoming Prime Minister Mark Carney.
The Canadian labour market presented a mixed picture. While labour force participation fell to 63.5%, the lowest level in four months, the unemployment rate stayed at 6.6% in February 2025, keeping its three-month low. Although there was a 17,900 decrease in unemployment, net employment only grew by 1,100, which was much less than what the market had predicted.
In addition, the OECD downgraded its growth prediction for 2025 and 2026 to 0.7%, reflecting a worse economic picture for Canada. The US tariffs on Canadian goods were a major source of inflationary pressures that caused the consumer price index to rise 2.6% year over year in February. The end of a federal sales tax break and rising food and energy prices are contributing factors to this pace, which is the quickest in eight months.
Currency volatility and monetary policy in Canada
The Bank of Canada recently cut interest rates by 0.25%, bringing the benchmark rate down to 2.75%. While this move aims to support growth, high inflation and rising core prices are making it tricky to consider further cuts. In the meanwhile, investors wanted greater compensation for longer-term debt due to continuing inflation, and the yield on Canada’s 10-year government bond rose over 3.1% from a two-year low of 2.83%.
Trade dynamics have also impacted Canada’s currency. The Canadian dollar recently retreated from a three-week high, weakening past 1.43 per US dollar. Growing trade tensions, a loss in investor confidence, and growing interest rate differences between the US and Canada were the main causes of this fall. As a result of growing doubts about Canada’s economic stability, futures and options markets show a growing number of negative wagers on the loonie.
Comparative Analysis: US and Canada Economic Risks
Although the economies of the US and Canada are closely related, each country has different difficulties as a result of the current crisis. Monetary tightening and trade policy uncertainty have reduced corporate investment and slowed job creation in the US. Rising import prices and persistent inflationary fears are also putting pressure on consumer demand.
Similar trade pressures are exacerbated in Canada by political unpredictability and a decline in the demand for commodities worldwide. Price increases for raw materials, especially metal ores and concentrates, which rose 4.7% month over month in February, have not been able to counteract the 4.7% decline in crude energy products. Additionally, the high demand for electronic devices and transportation drove Canada’s imports to a record CAD 70.5 billion in January 2025, significantly widening the trade gap.
Conclusion
The danger of a recession is increased by the growing economic difficulties that both the US and Canada confront as of early 2025. The main issues are monetary policy constraints, trade interruptions, and labour market decline. “The alignment of these factors suggests that both economies are entering a period of heightened financial risk, requiring careful navigation of policy decisions and fiscal strategies to mitigate deeper economic downturns,” said Michael Novik, Senior Investment Manager at Northern Markets.
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