We expect Canada to have another modest year of growth in 2026 amid ongoing trade tensions with the United States and a continuing oil glut that will dampen export prices.
While Prime Minister Mark Carney’s budget will bolster growth and employment conditions, it is not a panacea for the broader pressures on the Canadian economy and cannot completely offset the drag from trade tensions with the U.S.
We expect an overall increase in growth of 1.4 per cent, fueled by a modest 1.6 per cent increase in household consumption and a 1.3 per cent increase in gross fixed investment.
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With the recent passage of the budget, the economy stands a chance of responding better than expected, with growth accelerating more than our forecast implies.
A sluggish employment environment, in which we anticipate only a slight drop in the unemployment rate—to 6.7 per cent from the current 7 per cent—is in the process of resetting. Next year, Canada, Mexico and the U.S. will renegotiate their trade agreement.
The Bank of Canada is in a difficult position that will not get any easier. While we think the central bank will cut rates again at its December policy meeting, market participants are not pricing in any further rate relief in 2026 as the central bank takes a back seat to the fiscal authority in its attempts to bolster growth.
The world economy has yet to fully adapt to the trade shock. Growth in Canada’s real gross domestic product recently dropped to an annual rate of less than 1 per cent, so a well-timed fiscal boost is welcome, as is any further reduction in the policy rate by the Bank of Canada.
But while the demand for labour is falling, prices of consumer goods are increasing above the central bank’s 2 per cent target, which makes it difficult for the bank to implement a more robust accommodative policy.
This situation presents a difficult task for the monetary authorities; there is only so much they can do to counter an external trade shock.
In the sections that follow, we analyze the slowing of the labour market, the increased prices of essential goods and the potential for economic growth.
We end with a look at Canada’s financial conditions, which are slowly deteriorating along with the prospect for economic growth, at least for now.
Labour market
Canada’s labour market has yet to fully absorb the tariff shock and the disruption to the North American economy. This is evident in a labour force that has remained stagnant this year.
We expect solid improvement in 2026, but the domestic labour market has a surplus of available workers, which suppresses wage growth.
For this reason, the timing and magnitude of the Carney budget are critical to the growth of the economy and the prospects for higher consumption via wage growth.
Real GDP growth
The American attempts to dismantle the North American trading bloc are clearly having a detrimental effect on Canada’s inflation, its labour market and its economic growth.
Canada’s all-industries real GDP growth decelerated from a solid 1.7 per cent in 2024 to less than 1 per cent for this past June, July and August.
The tariffs are having an impact on prices and profits while taking a toll on labour, spending and economic growth.
Yet because of U.S. tariff policy, there is no way of knowing how long this deceleration will continue. The Canadian economy is likely experiencing more than just a cyclical downturn; it is undergoing a structural transition.
The trade conflict with the U.S. has diminished Canada’s economic prospects as tariffs reduce Canada’s productive capacity while adding costs.
This damage, in our estimation, is why the attempt by the Carney administration to bolster Canadian defense and infrastructure while pulling back from the previous administration’s environmental regulation is well timed.
Financial conditions
The external shock of the tariffs limits the ability of monetary policy to boost demand while maintaining low inflation.
And with inflation likely to remain elevated if tariffs remain in place, monetary policy can only reduce the cost of credit and leave the fiscal authority to address broader economic conditions.
Still, financial conditions in Canada remain modestly positive even as GDP growth falls toward zero.
As with U.S. financial markets, the price and volatility of Canadian securities remain only somewhat neutral. With commodity prices trending lower and the Canadian dollar losing ground, it will be another difficult year for both fiscal and monetary policymakers.
Interestingly, the forward markets think it unlikely that the Bank of Canada will continue to cut its policy rate.
As of late November, the overnight index swap market anticipates the Bank of Canada will put policy on hold over the next 12 months, and estimates only a modest probability of a rate cut.
