Our economic outlook for Canada

As we approach the one‑year mark of the U.S. tariff announcements and the resulting global trade policy shock, the relative resilience of the Canadian economy is noteworthy. Real GDP grew 1.7% in 2025, the slowest pace since 2020 but well above post-tariff forecasts. An important contributor to the better‑than‑expected outcome was the preservation of United States-Mexico-Canada Agreement (USMCA) tariff exemptions, which provided meaningful support to Canadian export industries. We expect these exemptions to remain a tailwind even as the USMCA renegotiation window opens later this year.

Still, the outlook has become more complicated in recent months. Elevated uncertainty and the energy price shock associated with the Middle East conflict are likely to weigh on global demand. Canada is among the few advanced economies that may see a modest near‑term GDP boost, roughly 10–20 basis points, from higher oil prices given its status as a net energy exporter. (A basis point is one-hundredth of a percentage point.)

However, this growth impulse comes alongside an inflationary shock, raising headline price pressures and the risk that disinflation stalls in the near term, complicating the near‑term monetary policy outlook. As a result, the oil shock makes it more difficult for the Bank of Canada to pivot toward rate cuts, reinforcing our expectation that the policy rate will remain unchanged at 2.25% through year‑end 2026.

The Canadian consumer also proved more resilient than expected in 2025, which was another positive surprise. Looking ahead, recent labor market data points to a gradual cooling in consumer momentum. Employment growth has softened, and the unemployment rate has risen to 6.7%, with weakness still concentrated among younger and less‑tenured workers. While this composition tempers the near‑term impact on aggregate consumption, rising slack and slower hiring suggest the labor market may provide less support to household spending in 2026 than it did last year.