Our economic outlook for Canada

As the first quarter of 2026 unfolds, Canada finds itself navigating a familiar but evolving set of geopolitical and trade-related headwinds that continue to complicate its domestic economic outlook. While most Canadian exports to the U.S. remain tariff‑exempt under United States-Mexico-Canada Agreement rules, the persistence of trade policy uncertainty has reinforced a cautious stance among firms, suppressing business confidence and nonresidential investment.

Despite these disruptions, the Canadian consumer appears poised to maintain the strength that anchored much of the economy’s resilience in 2025. Recent labor force data showed the unemployment rate edging lower to 6.5%, driven less by a resurgence in hiring than by lower labor force participation, an early sign of the demographic slowdown expected to shape the next few years. Rising full-time employment, real wage growth, limited job losses, and positive wealth effects from the financial markets should keep a solid floor under consumption, helping offset soft business investment. Elevated oil prices linked to the Iran‑related conflict should also provide a mild boost for Canada as a net energy exporter.

Fiscal policy will add a modest tailwind through targeted sectoral initiatives and ongoing infrastructure programs. Considering these factors along with expectations for above‑trend global growth, we forecast Canadian real GDP to expand by 1.8% in 2026. Core inflation eased through late 2025, giving the Bank of Canada (BoC) room to cut rates cumulatively by a full percentage point last year. However, with inflation still slightly above target and underlying wage growth proving sticky, policy now appears firmly set at neutral. The BoC held its policy rate at 2.25% in January 2026, and we see little rationale for additional rate moves in either direction this year, barring an unforeseen shock.