Our economic outlook for Canada

Recent data suggest Canada has slipped into a shallow technical recession, with GDP falling at a 1% annualized pace in the fourth quarter of 2025 and a further 0.1% in the first quarter of 2026. Even so, the weakness looks less alarming than the headline implies. Output was distorted by temporary factors, including a surge in gold imports and seasonal plant shutdowns that weighed on auto exports, while final domestic demand has been resilient.

Trade policy uncertainty tied to the U.S. and the fate of the United States-Mexico-Canada Agreement (USMCA) continues to restrain business confidence and delay non-residential investment, while elevated oil prices should provide a partial offset through improved trade volumes for a major energy exporter.

Oil tailwinds should help growth activity rebound modestly through the middle of 2026, even if higher energy costs weigh on household spending and keep non-energy firms cautious. Reflecting the weaker starting point, we have lowered our 2026 GDP forecast to 1.5%, with only a modest improvement to 1.6% in 2027.

The labor market has remained broadly uninspiring, with the unemployment rate fluctuating within a range of about 6.5% to 7% this year and showing little sustained momentum in either direction. Recent weakness has been concentrated among younger and less-tenured workers, a composition that helps cushion the immediate impact on aggregate consumption. Still, softer hiring, declining home prices, and elevated energy costs may gradually encourage more precautionary saving and weigh on consumer spending.

Inflation, by contrast, has broadly evolved in a more constructive direction. Core price pressures have continued to ease, giving the Bank of Canada room to look through what it sees as supply-driven energy shocks, at least so long as inflation expectations remain anchored. As a result, we expect policy to remain on hold through year-end 2027.