Economic forecast for Canada

05.06.2026

Canada’s economy slowed in late 2025 and early 2026 as trade uncertainty, weak business investment, softer labour-market conditions and high household debt weighed on activity. Growth is expected to remain modest in 2026 before improving in 2027 as real incomes recover, monetary policy becomes less restrictive and investment gradually strengthens. Inflation is projected to rise temporarily in 2026 due to higher energy prices, before easing back close to the Bank of Canada’s 2% target in 2027. Fiscal deficits remain moderate, but public debt is high on a gross basis, while Canada’s low net debt position and strong institutions provide important resilience.

Growth remains weak but should gradually improve

Canada’s real GDP growth slowed in late 2025, with the economy entering a technical recession after two consecutive quarters of annualised contraction. The slowdown reflected tariff uncertainty, weaker business investment, slower hiring and cautious household spending. However, the weakness was not broad enough to suggest a deep recession, and early indicators pointed to some rebound in spring 2026.

Growth is projected to remain modest in 2026, at around 1.2%, before strengthening to 1.6% in 2027. The recovery should be supported by lower borrowing costs, recovering real incomes, continued population growth, public infrastructure spending and a gradual improvement in private investment. However, productivity weakness, housing affordability constraints and trade dependence on the United States will limit the pace of recovery.

Inflation rises temporarily due to energy prices

Inflation moderated during 2025 but rose again in early 2026 as higher energy prices pushed up gasoline and transport costs. The Bank of Canada expects inflation to average around 2.3% in 2026 before easing to about 2.1% in 2027, close to the 2% target.

Core inflation has been more stable, suggesting that the energy shock has not yet become a broad-based inflation problem. Still, risks remain from fuel prices, shelter costs, tariffs, wage pressures and supply-chain disruptions. Monetary policy is therefore likely to remain cautious until inflation expectations are clearly anchored.

Labour market softens

Canada’s labour market weakened in 2025 and early 2026, with unemployment rising toward 7% before expected gradual improvement. Hiring slowed as businesses responded to weaker demand and uncertainty around trade policy. Youth employment and interest-sensitive sectors such as construction, real estate and retail were especially exposed.

The unemployment rate is projected to decline only gradually, from 6.8% in 2025 to 6.3% in 2027. Population growth will continue to expand labour supply, while slower immigration targets may ease some pressure on housing and public services. Wage growth should remain positive, but weaker labour demand will limit further acceleration.

Fiscal position remains manageable

Canada’s fiscal deficit widened in FY2025/26, reflecting higher programme spending and slower revenue growth. However, the deficit remains moderate compared with many advanced economies, and the government’s Spring Economic Update pointed to a lower deficit than previously projected.

The fiscal deficit is expected to narrow gradually in 2026–2027 as growth improves and spending restraint takes effect. Gross public debt remains high at around 110% of GDP, but Canada’s net debt position is much stronger than the gross figure suggests because of large public pension assets and strong subnational balance sheets. Still, ageing, defence, housing, healthcare and climate-related spending needs will put pressure on fiscal policy.

External position remains exposed to US demand and commodities

Canada’s current account is expected to remain in a small deficit in 2025–2027. Energy exports, metals, agriculture, services and investment income provide support, but import demand, weak productivity and exposure to US trade policy weigh on the balance.

The external outlook remains highly sensitive to oil prices, US demand, USMCA review developments, tariffs, commodity prices and global financial conditions. Canada’s diversified export base and strong institutions provide resilience, but heavy dependence on the US market remains a central vulnerability.

Overall outlook

Canada’s outlook is stable but subdued. Growth is expected to remain weak in 2026 before improving gradually in 2027, while inflation should return close to target after a temporary energy-driven rise. Fiscal and external positions remain manageable, but structural challenges are significant. Sustained improvement will depend on stronger productivity, housing supply, infrastructure investment, business competitiveness, trade diversification and successful adjustment to a more uncertain North American trade environment.

Sources:

Bank of Canada, Monetary Policy Report, April 2026.

Bank of Canada, Financial Stability Report, 2026.

Government of Canada, Spring Economic Update 2026.

Government of Canada, Budget 2025 and Fiscal Reference Tables.

International Monetary Fund, World Economic Outlook, April 2026.

International Monetary Fund, Fiscal Monitor, April 2026.

OECD, Economic Outlook, Volume 2026 Issue 1: Canada.

Statistics Canada, National Accounts, Labour Force Survey and Government Finance Statistics, 2025–2026.