Our economic outlook for Canada

The Canadian economy entered the second half of 2026 with more momentum than previously anticipated. Real GDP expanded at a 3.3% annualized pace in the second quarter, following a modest upward revision to first-quarter growth. The rebound was broad-based, supported by stronger exports, resilient consumer spending, and a notable increase in business investment. As a result, recession concerns that emerged earlier in the year have largely faded, although trade policy remains the dominant risk to the outlook.

Following the breakdown of U.S.-Canada negotiations in August, the United States imposed 50% tariffs on approximately $20 billion of Canadian goods, including plywood, liquor, electrical equipment, and hockey gear. Canada responded with tariffs on a comparable value of U.S. imports. With little prospect of meaningful negotiations resuming before the U.S. midterm elections in November, and with the United States-Mexico-Canada Agreement review ongoing, the trade conflict appears likely to persist well into 2027.

Labor market conditions remain relatively stable. Employment unexpectedly declined in August, but the unemployment rate held at 6.4%, near its lowest level in two years. Hiring remains uneven across sectors, with trade-exposed industries facing greater uncertainty while labor demand in domestically focused sectors has proven more resilient. As in many advanced economies, recent labor market challenges are heavily concentrated among newer entrants to the workforce.

Inflation remains above target, driven largely by elevated energy prices, though measures of core inflation are much closer to the Bank of Canada’s 2% objective. The primary inflation risk now comes from the supply side. New tariffs, elevated energy prices, and potential disruptions to global supply chains could temporarily push prices higher in certain sectors. The key question is whether these pressures begin to influence inflation expectations more broadly.

At its September meeting, the Bank of Canada left its policy rate unchanged at 2.25% for a seventh consecutive meeting but emphasized that persistent energy inflation and tariff-related price pressures could complicate the disinflation process. That consideration, alongside more hawkish policy rate stances in much of the developed world, has led us to revise our policy rate forecast. We now foresee the Bank of Canada hiking by a quarter percentage point before the end of year and again next year, eventually taking the policy rate to 2.75%.