Economy

Trends to Watch

• Uncertainty to remain a persistent theme in 2026

  Tariffs and global trade policies will continue to weigh on Canada’s economic growth outlook, especially with CUSMA negotiations set to begin this year. While the base case scenario is for the agreement to remain broadly the same, it still represents a significant downside risk to the Canadian economy.

• GDP growth to slow in 2026 but long term outlook remains bright

  Annual GDP growth is forecast to slow to 1.3% in 2026 amid persistent market uncertainty, but partly also due to a temporary decrease in total population as a result of the recent shift in immigration policy.

• Interest rates and long term bond yields expected to remain flat

  The Bank of Canada is unlikely to make any further interest rate cuts and is expected to hold the policy rate at 2.25% throughout the year. Similarly, the Canada 10-year bond yield is also projected to end 2026 roughly flat year-over-year, provided global bond markets also remain stable.

Uncertainty to persist and weigh on the growth outlook

The Canadian economy in 2026 will likely have to continue navigating a global backdrop wrought with uncertainty and geopolitical tensions. At least through the first half of the year, after which there should be better clarity on the fate of CUSMA which has been vital to Canada’s economic resilience against U.S. tariffs. The consensus base case at the moment is for the North American free trade agreement to remain broadly the same with some minor tweaks, but it is still a significant downside risk to Canada if the deal is terminated or substantially scaled back.

At the same time, a ruling is still expected from the U.S. Supreme Court on the legality of the tariffs themselves. However, even if the current tariffs are abolished, the U.S. Administration has suggested they will be replaced with levies via some other mechanism.

Until such time that tariffs and global trade policies begin to definitively stabilize, they will continue to weigh on Canada’s outlook, limiting economic growth and impeding business decision-making.

Overall, annual GDP growth is forecast to slow from around 1.7% in 2025 to 1.3% in 2026. This is also partly due to a temporary contraction in population as the country works through its recent shift in immigration policy. Looking at the next five-year period, the prospects for the Canadian economy are brighter and among the top of the G7 nations. Additional upside potential also comes from the execution of the major Budget 2025 initiatives, as those impacts will only start to meaningfully materialize after a few years.

Interest rates in Canada are expected to remain flat throughout 2026 as the Bank of Canada has few compelling reasons for making any further cuts. The central bank considers the current policy interest rate of 2.25% as the appropriate level for keeping inflation contained while also providing a bit of economic support. However, a negative outcome on CUSMA negotiations, such as if the agreement were to be scrapped entirely, would be profoundly damaging to the economy and likely force the Bank of Canada to resume rate cuts.

On the other hand, if the economic outlook improves in 2026, then anticipation could start to grow for potential interest rate hikes starting in 2027. With the policy rate currently at the lower end of the central bank’s neutral range, strengthening economic conditions would give the Bank of Canada room to start considering normalizing monetary policy.

For longer term Canada bonds, yields could compress slightly in 2026 but are projected to end the year at roughly the same current levels. Global bond markets will continue to have a major influence over Canada long term yields, so volatility will remain a risk over the year.