Our economic outlook for Canada

Canada’s economic resilience in the face of external trade pressures has been a recurring theme since early 2025. Exemptions under the United States-Mexico-Canada Agreement originally provided Canada with a significant relative tariff advantage compared with other U.S. trading partners, but the renewal of U.S.-Canada trade tensions and tariff escalation have tempered the advantage. The persistent trade uncertainty remains a headwind, but we expect growth to settle near 1.5% through 2027 as resilient domestic demand offsets some of the external pressure.

Labor market conditions remain stable but uninspiring. Unemployment has hovered around the mid-6% range, with weakness concentrated among younger workers and recent labor-force entrants. Slower population growth and moderating wage growth have helped bring labor demand and supply into better balance. We expect unemployment to remain near current levels through 2027, consistent with an economy growing at a positive but modest pace.

Geopolitical developments and higher energy prices have pushed headline inflation higher since February. Beneath these pressures, however, underlying inflation trends are more encouraging. Core inflation remains anchored around 2%, suggesting domestic inflation pressures are not an immediate concern for policymakers. That leaves the Bank of Canada in a relatively comfortable position domestically, even as the global policy backdrop has become less supportive. A more hawkish shift by the Federal Reserve and other central banks makes significant policy divergence harder to sustain. We therefore expect one 25-basis-point rate increase before the end of 2026 and another in 2027, which would bring the policy rate to 2.75%.