Key Takeaways
- The Canadian economy has been resilient despite a difficult external environment, with a projected GDP growth of 1.7% in 2025.
- Consumer spending has been a key driver of economic growth, with a projected increase of 2.2% in 2025.
- The Trump administration’s tariffs have had a negative impact on Canada’s exports, but the country has been partially cushioned by exemptions on most southbound exports.
- The job market has lost steam, with employment growth softening and the unemployment rate ticking higher.
- Private-sector capital spending has been on a downward trajectory for the last decade, with Canada underperforming the US and other advanced economies in investment per employee.
Introduction to the Canadian Economy
The Canadian economy has weathered some recent stormy weather pretty well, but there are some dark clouds on the horizon. As the principal trading partner of Canada, the US has been ruled by a president who seems determined to unravel the post-war global economic and security order. This has created uncertainty and weighed on business investment in Canada. Additionally, Europe and China, two major economies, have been experiencing sluggish growth, which has also impacted Canada’s economy.
Global Economic Trends
The European economy, which accounts for one-fifth of the global economy, has been sluggish due to Russia’s war against Ukraine, high energy costs, and waning competitiveness. The huge Chinese economy has also lost a step, which has further impacted global economic growth. These trends have created a challenging environment for smaller countries like Canada, which rely heavily on international trade. The Canada-U.S.-Mexico trade agreement, which was pushed for by President Trump, is also uncertain, which adds to the complexity of the situation.
Canada’s Economic Resilience
Despite the challenging external environment, Canada’s economy has been surprisingly resilient. The country’s GDP is projected to grow by 1.7% in 2025, driven mainly by continued gains in consumer spending. Consumer spending accounts for more than three-fifths of all economic activity, and it is set to climb by 2.2% in 2025, matching last year’s pace. This has helped offset the impact of dwindling exports, sluggish business investment, and lackluster housing markets.
Impact of Tariffs on Canada’s Exports
The Trump administration’s tariffs have had a negative impact on Canada’s exports, particularly in the steel, aluminum, lumber, and auto sectors. However, the country has been partially cushioned by exemptions on most southbound exports. While exports will be lower in 2025 than the year before, the fall is less dramatic than analysts expected 6-8 months ago. This has helped mitigate the impact of the tariffs on Canada’s economy.
Job Market and Unemployment
Although Canada’s economy grew in 2025, the job market lost steam. Employment growth has softened, and the unemployment rate has ticked higher, averaging almost 7% this year, up from 5.4% two years ago. Unemployment among young people has skyrocketed, which is a cause for concern. With the economy showing little momentum, employment growth will remain muted next year.
Investment and Productivity
Unfortunately, there’s nothing positive to report on the investment front. Adjusted for inflation, private-sector capital spending has been on a downward trajectory for the last decade. Canada has underperformed both the US and several other advanced economies in the amount of investment per employee. The investment gap with the US has widened steadily since 2014, which means Canadian workers have fewer and less up-to-date tools, equipment, and technology to help them produce goods and services compared to their counterparts in the US and many other countries. As a result, productivity growth in Canada has been lackluster, narrowing the scope for wage increases.
Policy Implications
Preliminary data indicate that both overall non-residential investment and business capital spending on machinery, equipment, and advanced technology products will be down again in 2025. Getting clarity on the future of the Canada-U.S. trade relationship will be key to improving the business environment for private-sector investment. Tax and regulatory policy changes that make Canada a more attractive choice for companies looking to invest and grow are also necessary. This is where government policymakers should direct their attention in 2026 to support the growth of the Canadian economy.