Key Takeaways
- Canada’s economy showed resilience in 2025 despite trade tensions with the US, with no recession and improving household balance sheets.
- The country’s economic growth is expected to stabilize in 2026, with a focus on six key themes: trade risks, demographics challenges, regional fragmentation, affordability, monetary to fiscal transfer, and the future at play.
- Canada’s trade relationship with the US is a major factor in its economic growth, with ongoing discussions about the extension of the USMCA trade agreement.
- Demographic challenges, including an aging population and changes in immigration policy, will have significant implications for the economy.
- Regional fragmentation will continue, with different provinces experiencing varying levels of economic growth and challenges.
- Affordability pressures will persist, with ongoing concerns about housing prices, interest rates, and income inequality.
- The monetary to fiscal policy handoff will be a key theme, with the government taking a more prominent role in supporting the economy.
- Canada’s growth pivot will start to take shape, with a focus on private investment, fiscal strategies, and major projects and defence investment.
Introduction to Canada’s Economic Resilience
Canada’s economy faced significant trade tensions with the US in 2025, with fears of a catastrophic trade shock and a potential recession. However, the country’s economy showed resilience, with no recession and improving household balance sheets. The country added jobs, and household balance sheets improved over the course of the year. In 2026, Canada’s economy is expected to stabilize further, with a focus on six key themes that will drive economic growth and development.
Trade Calibrations Continue
Canada’s trade relationship with the US is a major factor in its economic growth, with ongoing discussions about the extension of the USMCA trade agreement. The fate of the exemption for Canadian exports to the US will be a core focus in 2026, as discussions to extend the agreement beyond its scheduled expiry in 2036 kick off in the summer. However, the agreement hasn’t prevented significant sector-specific tariffs from being imposed on products like steel, aluminum, copper, lumber, and vehicles. Canada is still in the early phases of recalibrating its economy towards new products and customers, an awakening that will progress regardless of Washington-Ottawa conversations.
Demographic Challenges Compound
Demographic challenges, including an aging population and changes in immigration policy, will have significant implications for the economy. The federal in-migration policy reversed in late 2024 and into 2025, resulting in the largest decline in Canada’s population since 1946. In 2026, this recalibration of in-migration volumes and types will be a dominant theme, with year-over-year population growth expected to be flat. This will have implications for rental markets, the pool of available labor, wage growth, and post-secondary education funding.
Rise of the Regional Economies
Regional fragmentation will continue, with different provinces experiencing varying levels of economic growth and challenges. Canada as a whole has shown resilience in 2025, but that headline masks vastly different crosswinds impacting provinces and local economies. In 2026, viewing Canada’s story in contrasting local colors will become even more important, with some regions seeing positive momentum, others hitting major headwinds, and some experiencing a mix of both.
Affordability Pressures Aren’t Going Away
Affordability pressures will persist, with ongoing concerns about housing prices, interest rates, and income inequality. Canada’s cost of living challenges are not new, and neither are the groups most impacted by them. The post-pandemic surge in inflation coupled with a historic rise in interest rates created a fresh affordability shock for Canadians that continues to weigh today. In 2026, inflation is set to moderate to just above 2%, but structural affordability challenges remain at the forefront.
The Monetary to Fiscal Handoff
The monetary to fiscal policy handoff will be a key theme, with the government taking a more prominent role in supporting the economy. The Bank of Canada cut rates four times in 2025, bringing a total of 275 basis points of cuts since 2024. However, the central bank has frequently emphasized that monetary policy is not always the best tool to support the country. Governor Tiff Macklem laid the foundation of this view, stating that monetary policy can’t do everything and that the country needs to avoid the temptation to overload monetary policy by expecting more of it than it can deliver.
Canada’s Growth Pivot Starts to Take Shape
Canada’s growth pivot will start to take shape, with a focus on private investment, fiscal strategies, and major projects and defence investment. Addressing Canada’s structural economic weaknesses will not be quick or easy, but the seeds of its transition will become more apparent in 2026. Private investment is key, but even with firmer growth into 2026 in the outlook, the gap left by low business investment in recent years is large. Fiscal strategies include using government investment incentives and spending to boost growth and confidence so business investment can accelerate.