Canada’s economy is expected to experience only modest expansion in 2026, continuing a trend of subdued performance observed in 2025. While supportive monetary and fiscal policies are anticipated to ease some pressures, growth will likely remain constrained by lingering trade tensions and softening business sentiment. The Bank of Canada is expected to keep its policy rate steady throughout the year, maintaining accommodative financial conditions to support economic activity. n nA key factor influencing the trajectory will be the recovery of business confidence, which declined in 2025 amid concerns over Canada’s trade relationship with the United States, its largest economic partner. Although tariff exemptions under the United States–Mexico–Canada Agreement (USMCA) are expected to remain intact, the scheduled review of the pact in July 2026 may keep firms cautious about making large-scale investments. Consumers may benefit from lower borrowing costs, but spending will likely be tempered by a softer labor market and slower immigration growth compared to the strong inflows seen in 2023 and 2024. n nOverall, GDP growth in 2026 is projected to be slightly below the 1.7% anticipated for 2025. Federal and provincial governments are implementing measures to stimulate investment, including reducing regulatory barriers and increasing infrastructure outlays. The federal budget includes provisions to strengthen the supply side of the economy by approving major resource and infrastructure projects, boosting defense expenditures, supporting industries affected by U.S. tariffs, and promoting trade diversification. These actions are expected to contribute meaningfully to output growth beyond 2026. n nLabor market conditions weakened in early 2025, particularly in sectors exposed to U.S. tariffs such as steel, aluminum, lumber, and automotive manufacturing. The unemployment rate rose more than 1.7 percentage points above its post-pandemic low by November 2025. Business surveys suggest employers are not planning significant hiring nor widespread layoffs, pointing to a stagnant employment landscape. With labor force growth slowing after immigration-fueled gains in previous years, the jobless rate is expected to stabilize at current levels. n nInflation increased in 2025 after reaching lows in mid-2024, with the headline rate aligning with the Bank of Canada’s 2% target and underlying measures near the upper end of the 1%–3% range. Despite this, inflation expectations remain well anchored. Given that the economy has grown below its potential for three consecutive years, upward price pressures are expected to stay limited. Risks related to supply chain disruptions and higher import costs will persist into 2026, though weak domestic demand should prevent broad pass-through to consumers. As a result, the central bank is expected to remain on the sidelines, with the policy rate held at a mildly accommodative 2.25%. n nThis low-interest environment will ease mortgage renewal burdens for households in 2026, many of whom locked in loans during periods of historically low rates. It could also support a modest rebound in the housing sector, which struggled over the prior two years. n nThe export sector remains the most uncertain component of the economy. While current USMCA carve-outs are expected to continue, their long-term status is unclear. The assumption is that the U.S. administration will allow existing exemptions to remain and that the 2026 agreement review will lead to negotiations over trade irritants rather than withdrawal. Article 34.6 of USMCA permits any party to exit with six months’ notice, but there are no indications any country intends to do so. Under this scenario, Canadian exporters should continue to benefit, and demand for Canadian goods may recover. The federal government aims to double exports to non-U.S. markets by investing in infrastructure that strengthens alternative supply chains. n— news from Deloitte
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Global economic outlook 2026
Canada n n– Dawn Desjardins n nThe Canadian economy is expected to continue to face challenges in 2026, although supportive monetary and fiscal policy will alleviate some of the stress; growth is projected to firm modestly following a subdued performance in 2025. The evolving geopolitical landscape will likely influence how Canada’s economy transitions in the year ahead. The government has introduced policy changes aimed at catalyzing business investment. Financial conditions are assumed to remain supportive, with the Bank of Canada expected to hold the policy rate steady throughout the year. n nThe key will be a recovery in business confidence, which dropped in 2025 amid growing concerns about Canada’s trading relationship with its largest partner, the United States. Tariff exemptions afforded by the United States–Mexico–Canada (USMCA) trade agreement are expected to remain in place in 2026, although the agreement review slated for July 2026 will likely keep businesses cautious. Consumers will feel relief from lower interest rates, although somewhat softer labor market conditions and slower immigration growth will keep spending in check. n nOverall, we expect the economy to grow at a slightly slower pace than 2025’s projected 1.7%. Canada’s governments are putting on a full-court press to spur investment by reducing regulatory hurdles and boosting infrastructure spending. The federal government’s budget includes measures that will help the supply side of the economy by greenlighting large projects in the resource sector and infrastructure, boosting defense spending while supporting sectors impacted by US tariffs, and encouraging trade diversification. These measures, combined with provincial government initiatives, are expected to make a solid contribution to GDP growth in 2026 and beyond. n nLabor market conditions softened in early 2025, especially in sectors most impacted by US tariffs, including steel and aluminum, lumber, and finished autos. The unemployment rate trended higher and was over 1.7 percentage points above the post-pandemic low in November 2025.5 Business outlook surveys indicated that employers aren’t looking to increase their workforce over the year ahead but, importantly, are also not looking to cut employees. Therefore, the labor market will likely remain soft; and with labor force growth reversing after strong immigration-led gains in 2023 and 2024, the unemployment rate is projected to remain around current levels. n nInflation trended higher in 2025 from the lows of mid-2024, with the headline rate in line with the Bank of Canada’s 2% target and underlying measures trading closer to the top of the 1%-to-3% target band.6 Inflation expectations, however, remain contained, and given the economy expanded below its potential pace for three successive years, price pressures are expected to remain limited. Risks of price escalation from disrupted supply chains and increased costs of Canadian imports will likely persist in 2026, although the passing down of these costs to consumers is not expected, given weak underlying demand. Against this backdrop, we expect the Bank of Canada to move to the sidelines, with the policy rate expected to remain at a slightly accommodative 2.25%. n nThis lower-rate environment will help ease the pressure on households renewing mortgages in 2026, many of which were taken when interest rates were at all-time lows. This will also support a recovery in the housing market after two years of weak performance. n nBy far, the area of the economy facing the greatest uncertainty is the export sector, where USMCA-associated carve-outs that are currently in place remain at risk. Our assumption is that the US administration will allow these exemptions to remain in place and that the review of the agreement slated for July 2026 will result in negotiations about trade irritants but will not lead to any exits from the deal. n nNotably, Article 34.6 of the agreement allows any country to withdraw with six months’ notice,7 but there has been no indication that any of the parties is considering this option at the time of writing. Thus, we expect Canadian exporters to continue to benefit, and demand for Canadian goods to recover in 2026. The federal government aims to double the percentage of Canadian exports to non-US countries by spending on infrastructure to facilitate and reinforce such supply chains.