Our economic outlook for Canada

Recent data suggest the Canadian economy is regaining momentum after a brief slowdown around the turn of the year. While real GDP contracted in both the fourth quarter of 2025 and first quarter of 2026, it rose 0.5% month over month in April, challenging the narrative that Canada has entered a more sustained downturn. Household spending and underlying economic activity have remained more resilient than headline GDP figures suggest, supported by lower interest rates, solid income growth, and improving momentum across several manufacturing and trade-sensitive industries.

Higher oil prices are beginning to generate economic tailwinds as anticipated, supporting activity across Canada’s mining, quarrying, and energy sectors. At the same time, firms outside the broader natural resources sector increasingly report that rising energy costs and uncertainty surrounding the North American trade outlook are weighing on investment plans and business sentiment. Even so, the stronger-than-expected recent data have reduced the likelihood of a more pronounced slowdown, and we continue to expect growth to gradually improve through the remainder of 2026.

The labor market remains broadly uninspiring. Unemployment has fluctuated within a relatively wide range over the past year, reflecting a labor market that continues to struggle with insufficient hiring rather than excessive layoffs. Weakness continues to be concentrated among younger workers and recent labor force entrants, while job losses among prime-age and higher-tenure workers remain limited.

Inflation has evolved in a constructive direction despite renewed energy price pressures. While higher oil prices have lifted headline inflation, underlying measures continue to suggest that broader price pressures are gradually easing. This should allow the Bank of Canada (BoC) to look through much of the energy-driven inflation impulse, provided broader inflation expectations remain anchored. With the economy still operating with modest excess supply and core inflation trends moving in the right direction, we expect the BoC to remain on hold through year-end 2027.