Canada 2026 Economic Outlook
The Canadian economy has deteriorated rapidly as it tries to adjust to a world dominated by protectionism, and new challenges posed by its southern neighbor. Rabobank expects weak GDP growth for the Canadian economy in 2026 due to tariff impacts and the continuing effects of slowed business investment in 2025.
Canadian Gross Domestic Product Growth
Several economic activity factors lead Rabobank to forecast GDP growth for Canada’s economy to be less than one percent.
Canada’s key trading partner, the US, is a central driver for Canadian economic growth. The tariffs levied against Canada by the US have contributed to a slowing of Canadian economic activity and GDP growth. Since becoming prime minister last year, Mark Carney has signaled an interest in negotiation with the US. In 2026, the USMCA review will be a critical step in the evolution of the trading relationship between Canada and the US. Even if trade relationships improve, Canada’s exports of key products like steel and natural resources will take time to recover.
The Bank of Canada released a Q3 Business Outlook Survey and saw responses seeming to indicate subdued business investments due to concerns over soft Canadian export sales due to tariffs. Weak domestic sales are contributing as well.
Canada’s unemployment rate dropped over the second half of last year. However, those gains came in part-time jobs, while the job market shed full full-time jobs, indicating that the unemployment rate figures could be masking weakness in the labour market as a whole.
Inflation
Consumer Price Index inflation has been near the central bank’s target, or at least within tolerance. The Bank of Canada prefers to use Common Consumer Price Index inflation as its measurement and common CPI inflation was running at 2.8 percent, above the central bank’s target of 2 percent but within the tolerance band.
Fiscal Policy
Canada’s federal budget under the “Canada Strong” initiative aims to make investments in infrastructure, housing, innovation and national security.
Affordability of housing is a central concern as evidenced by expenditures in the Build Canada Home initiative. The housing market in Canada currently faces a high house price-to-income ratio and the initiative aims to double housing starts over 2024 levels.
The government plans significant increases in defense spending to expand personnel, upgrade capabilities and reinforce domestic supply chains in critical sectors to reduce reliance on the US as a trading partner in these areas.
Interest Rates
The Bank of Canada has settled on an overnight interest rate of 2.25 percent. The tone from the central bank suggests that this may be a prolonged hold on any additional interest rate cuts. The overall monetary policy strategy seems to be prioritizing stability over stimulus.
Overall, Canada’s economy faces an unstable international trade picture ahead of the review of the USMCA that’s clouding its overall economic outlook. Tariffs and the lagged effects of slowed business investment will contribute to weak Canadian gross domestic product growth in 2026.
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