Our economic outlook for Canada

Canada’s economy continues to face meaningful challenges, but resilient consumer fundamentals and favorable tariff positioning have helped maintain a modest growth trajectory. Trade-sensitive sectors including autos, steel, and lumber remain challenged and, with United States-Mexico-Canada Agreement (USMCA) renegotiations set to commence in July 2026, trade policy uncertainty is likely to remain elevated for the foreseeable future.

USMCA exemptions have played a pivotal role in 2025, keeping the effective tariff rate on Canadian exports to the U.S. in the mid-to-high single digits, well below that of other U.S. trading partners. This relative trade advantage has supported our above-consensus GDP growth forecasts for 2025 and 2026. Additionally, Canada’s new budget proposal aims to bolster public investment and support key sectors affected by trade developments, contributing to a more stable economic outlook.

The Canadian consumer has been a bright spot in 2025, buoyed by consistent rate cuts, positive real wage growth, and low rates of job losses. Similar to the U.S., unemployment has edged higher, driven by low hiring activity and an influx of younger workers and new labor force entrants. However, this dynamic poses less risk to consumption than broad-based layoffs. The October employment report reflected labor market resilience as employment increased by 67,000, driven by part-time work, and the unemployment rate fell from 7.1% to 6.9%. We expect the unemployment rate to end 2025 at 7.3% before modestly improving in 2026 as slower labor supply growth supports new-entrant hiring.

The Bank of Canada lowered its policy rate by 25 basis points to 2.25% in late October, citing continuing economic concerns, but indicated a bias toward holding the rate steady for the indefinite future. With core inflation still above target, labor market conditions stabilizing, and policy rates aligned with our neutral estimate, we do not anticipate further rate changes in 2026.