Our economic outlook for Canada

Canada enters 2026 on firmer ground than expected, supported by a resilient consumer and an effective tariff rate among the lowest for U.S. trading partners. After a turbulent 2025 marked by tariff shocks and uneven labor dynamics, Canada’s fundamentals are stabilizing. Consumer spending continues to anchor growth, aided by real wage gains and limited job losses. While unemployment rose earlier in 2025 amid weak hiring for new entrants, late-year momentum signaled resilience.

Fiscal policy will provide a modest tailwind this year through infrastructure and sectoral support, while our expectation of a strong U.S. economy offers an external boost. These dynamics suggest real GDP growth of roughly 1.6% in 2026, and we expect unemployment to trend lower as slower population growth supports higher job-finding rates among younger workers.

In 2025, core inflation measures eased, signaling moderating underlying price pressures and enabling the Bank of Canada to cut rates by one percentage point. However, with core inflation still above target, stabilization in the labor market, and policy rates aligned with our estimate of neutral, we see little scope for further cuts, or hikes, in 2026. (The neutral rate is the interest rate that would neither stimulate nor restrict economic activity.)

Risks remain around United States-Mexico-Canada Agreement negotiations and commodity price volatility, but Canada’s competitive positioning and pragmatic policy mix suggest continued resilience as global conditions stabilize.