Canada’s economy is set to get a small boost from increased defence spending—but it won’t be enough to dodge a looming recession, according to a new report from Oxford Economics.

The report, released Wednesday, projects that Ottawa’s defence plans will raise real GDP by 0.1 percentage points this year and next. That puts growth at just 0.9 per cent for 2025 and a meagre 0.4 per cent for 2026.

Last month, Prime Minister Mark Carney committed to hitting NATO’s defence spending target of two per cent of GDP by the end of this year, with a long-term plan to ramp that up to five per cent by 2035. The report assumes this increase will be funded by a larger federal deficit—though it was published before Ottawa’s recent pledge to cut operating costs by 15 per cent over the next three years.

Without additional savings, Oxford warns, the higher spending could mean a permanently elevated debt-to-GDP ratio for the federal government.

Still, the added investment won’t be enough to lift Canada out of what Oxford calls a “trade war-induced recession,” which it says already began last quarter. The firm predicts this downturn will last through the end of 2025, with GDP shrinking 0.8 per cent overall before stabilizing.

Despite stronger-than-expected job gains last month—83,000 new positions—Oxford believes that won’t last. The report forecasts 140,000 job losses as the recession deepens and spreads beyond industries hit by U.S. tariffs. Unemployment is expected to rise from 6.9 per cent in June to 7.6 per cent by year’s end.

Ongoing uncertainty over U.S. trade policy is a major driver of this forecast. New tariffs and instability, the report says, will cause businesses to pause investments, slow production, and lay off workers.

Oxford Economics expects the Bank of Canada to keep its policy rate steady at 2.75 per cent through the turbulence but doesn’t rule out further rate cuts if things worsen. At the same time, inflation is projected to rise to 3 per cent by mid-2026, limiting the bank’s ability to stimulate the economy with lower borrowing costs.

The report warns that the combination of recession and rising inflation could lead to more private sector defaults, distressed home sales, and a heightened risk of a deeper downturn or even a financial crisis—though that remains unlikely for now.

Oxford’s outlook assumes current tariff levels between Canada and the U.S. hold steady through the rest of the year. But if U.S. President Donald Trump follows through on a proposed 35 per cent tariff on Canadian goods starting August 1, the recession could deepen. Alternatively, a new economic and security agreement by that date could soften the blow.

Even with these challenges, Oxford ranks Canada 27th out of 164 countries in terms of economic risk. With a risk score of 3.3 out of 10, Canada trails the U.S., Australia, France, and Germany but scores better than Mexico, Japan, and China.