Our economic outlook for Canada

Canada’s economic resilience in the face of external trade pressures has been a recurring theme since early 2025. Exemptions from the United States-Mexico-Canada Agreement initially provided Canada with a significant tariff advantage relative to other U.S. trading partners, but recurring trade escalations have kept a cloud over business sentiment. The continued resilience of Canadian consumers, coupled with AI-related capital spending and oil-price tailwinds to the resource sector, should help alleviate the drag from weak business sentiment. Meanwhile, we’re watching the potential for recent U.S. political developments to increase the likelihood of progress in U.S.-Canada trade negotiations.

Canadian labor market data have been volatile, as low rates of hiring and separations can amplify month-to-month swings in net employment growth. Unemployment has oscillated in the mid-to-high 6% range, with weakness concentrated among younger workers and recent labor-force entrants. We expect unemployment to remain near current levels through 2027, consistent with an economy growing at a modest but positive pace.

Higher energy prices have kept headline inflation measures elevated since February. Beneath these pressures, however, underlying inflation trends are more encouraging. Core inflation remains at or below 2%, suggesting that domestic inflationary pressures are not an immediate concern. However, the global policy backdrop has become considerably more hawkish, and with the Canadian dollar already weaker than other G7 currencies, the Bank of Canada (BoC) has limited scope to diverge from the global policy trajectory. Following its 25-basis-point increase in October, we expect the BoC to make two additional rate hikes by the end of 2027, which would bring the policy rate to 3%.