Our economic outlook for Canada

Continued resilience in export-oriented industries and supportive fiscal policy have Canada’s first-quarter GDP growth tracking at 1.7%, extending the better-than-expected momentum from 2025. A key driver has been the breadth of United States-Mexico-Canada Agreement (USMCA) tariff exemptions, which have preserved a relative advantage versus other U.S. trading partners on about three-quarters of Canadian exports. We expect these exemptions to remain a modest tailwind through 2026, even as the USMCA renegotiation window opens midyear.

Consumer resilience has been another cornerstone of Canadian economic strength since last year’s U.S. tariff announcements, though signs of moderation are emerging. Employment growth has softened, and the unemployment rate has risen to 6.9%. While the composition of unemployment among younger and less-tenured workers tempers the near-term impact on consumption, continued housing market weakness is likely to amplify negative wealth effects. As a result, consumer spending should become more sensitive to real income growth, which we expect to soften alongside the labor market and amid rising energy costs.

On the external front, elevated uncertainty and the energy price shock associated with the Middle East conflict has dampened global growth expectations. While Canada is among the few advanced economies we expect will see a modest near‑term GDP boost from higher oil prices, these benefits can be offset by declining external demand and Canadian household cost pressures from prolonged higher energy costs. These elevated energy prices also represent an inflationary shock, raising headline price pressures and the risk that disinflation stalls, complicating the near‑term monetary policy outlook. Although risks have tilted modestly toward a rate hike, we continue to expect no change in policy rates through 2026.