Recession fears grip Canada, but Russell’s Bei Chen Lin says now is the time to stay invested
Canada's economy is already facing a critical moment, and the question of whether the country is already in recession – or about to fall into one – looms large for investors and policymakers alike.
BeiChen Lin, senior investment strategist and head of Canadian strategy at Russell Investments, puts the probability of a Canadian recession at 45 per cent. That figure is more than double the firm's 20 per cent estimate for the US, and it underscores a widening gap between the two economies that is shaping portfolio decisions and rate expectations north of the border.
“In traditional economics textbooks, we often think of a recession as being defined by two consecutive quarters of negative GDP growth. We don't have that yet in Canada, and the only reason we don't have that yet is because we had that really strong one-off performance in the third quarter,” explained Lin.
Still, he cautions against reading too much into that technicality, highlighting the C.D. Howe Institute's Business Cycle Committee, which is responsible for making the official call in Canada. According to Lin, they don’t need to see two negative quarters before declaring a recession.
Moreover, Lin points to COVID as an example where consecutive quarterly contractions didn't occur, yet the sudden stoppage in economic activity left little room for debate. The 2015 energy-sector slowdown was more contested - the Canadian dollar fell from $0.92 to around $0.67 over the course of that year, but the committee ultimately decided it did not qualify.
Whether this current period gets the official label may be beside the point. Notably, unemployment has climbed to around seven percent, and the output gap - the difference between where the economy should be and where it is - has turned negative, which signals a hallmark of recessionary conditions, Lin explained, adding a further rise in unemployment, weaker consumer spending, or another quarter of negative GDP growth could tip the balance.
"The fact that we're starting from this point of fragility means that it's very easy to walk across the line and go into an actual recessionary environment," Lin said. “Because of this difficult starting point, and because of the continued uncertainty that hovers over Canada's economy, that's one of the reasons why we do think the risk of a recession in Canada continues to be higher than that in the US.”
Lin believes investors are psychologically scarred by the global financial crisis and the COVID shock, and they instinctively equate any mention of recession with those extreme episodes. But he sees the current Canadian situation as different.
He suggests this slowdown has actually been visible for some time, and many businesses and lenders have already adjusted their behaviour in anticipation of weaker conditions, pointing to the Bank of Canada’s senior loan officer survey that found lenders have been tightening non-price terms - making credit harder to obtain and demanding higher credit scores - which is typical when institutions expect a downturn.
That prudence, together with the fact that the big six Canadian banks run CET1 capital ratios materially above OSFI’s minimum requirement, has, in his view, helped the financial system absorb the current strain and left it better positioned to withstand further shocks.
While Lin acknowledged that the word “recession” is unsettling, he believes Canada has the systemic capacity to handle an economic slowdown. After all, from Russell Investments’ perspective, episodes of market stress driven by recession fears can also create opportunity.
“We do see signs that the markets are getting oversold on recession fears in Canada. But that could be a signal for us that it's actually a good time to stay in the game potentially, and to look for opportunities to even add incremental risk to the portfolio,” noted Lin. “No one wants to be in a recession; no one wants to hear the word recession. But it is something I think investors can prepare for and think about how to look for the opportunity amidst that volatility.”
Yet, Lin sees Canada emerging from a difficult 2025, with the economy contracting in the second quarter and a preliminary expectation of another modest contraction in the fourth. The strong third-quarter GDP headline was misleading as it was largely the product of a sharp decline in imports, a data point that tends to be volatile. Two of the past three quarters are likely to show contractionary readings.
Unemployment has eased from its peak but remains just under seven percent. Lin acknowledges that cyclical risks have diminished somewhat compared to 2025, in part because of spillover effects from a resilient and re-accelerating US economy. Still, Lin believes Canada faces more headwinds than its southern neighbour.
Heading into 2026, Lin expects the global economy to move beyond mere resilience toward re-acceleration, driven by fading tariff effects, fiscal stimulus from the Big Beautiful Bill Act, tax cuts, and estimating for three Federal Reserve rate cuts in the third quarter of 2025.
"Our general expectation is that 2026 should be a year in which the global economy can shift away from just pure resilience while figuring out how to how to deal with these challenges, towards actual mastery and towards the potential for re-acceleration. This is no longer just an economy where they're learning how to ride a bike, this is an economy where they can now start to perhaps enter biking competitions," he added.
