Canada’s 2026 economic and market outlook: A ‘Double-Double’ half full

While Canada has escaped a recession since the COVID-19 pandemic, for many it has felt like a long period of economic indigestion, as the economy has had to contend with trade uncertainties, high inflation, low productivity, an imbalanced immigration system and a weaker housing market.

Heading into 2026, RBC Global Asset Management (RBC GAM) is forecasting still sluggish growth in Canada at just under one percent, which marks a modest deceleration from the slightly more than one percent growth pencilled in for 2025. We acknowledge that the growth outlook is by no means robust—yet our “glass half full” perspective is anchored on the notion that the outlook is getting “less bad.” 

In late 2025, a few, yet important, economic datapoints surprised to the upside. For example, last November, Canadian employment came in much firmer than expected, with the unemployment rate falling 0.4 percent to 6.5 percent. This marked the largest one-month decline since Feb. 2022, when labour markets were recovering from pandemic-related lockdowns, and is 0.5 percent below from the most recent peak unemployment in Sept. 2025. In addition, wage growth remained robust at four percent year-over-year for permanent workers. While labour market data can be volatile month-to-month, the drop in the unemployment rate in November was consistent with recent job openings data, which provided further evidence of the beginnings of a recovery in hiring demand in Canada.

Canadian GDP growth in Q3 came in at 2.6 percent year-over-year—also a positive surprise. Data broadly indicated that the economy is holding up better than feared, with much of the bounce back in net trade owing to a pullback in imports. While domestic demand and business investment were weak spots in the numbers, residential investment increased for the second straight quarter, while household spending continued to prove resilient.

Also notable was that, according to RBC Economic , Canadian consumer spending broadly outperformed forecasts in 2025. With slashes to immigration, population growth has meaningfully slowed. Yet this has underpinned a per capita increase in spending growth of 2.4 percent on an annual basis in the second quarter of 2025—the fastest pace in three years, according to RBC Economics .

Household balance sheets in Q3 remained healthy, with household net worth growing at a faster pace versus Q2. Lower debt payments on non-mortgage consumer debt, coupled with strong gains in the financial markets, provided a boost to household purchasing power and wealth. While home ownership costs remain elevated, they eased for the seventh straight quarter as of Q3 2025, with RBC’s national aggregate affordability measure coming in at ~53 percent—a healthy improvement from a high of more than 63 percent in 2023.

Canadian consumer spending held up despite soft sentiment

Although these improvements are not equally distributed across all segments of society, they still augment the overall purchasing power of Canadian consumers and portend growing wealth effects within the economy.

Canadian economy showing improvement

The positive economic surprises in late 2025 may or may not be signs of economic “green shoots” for the Canadian economy. There is no way to know for sure except for in hindsight. However, we would argue that economic recoveries can often be long, and they typically do not transpire in a linear fashion but rather in fits and starts. In our view, monetary policy easing and the injection of fiscal stimulus represent important drivers that could boost the growth outlook for Canada in 2026 beyond our present estimates.

Canada has been relatively successful in anchoring inflation closer to the Bank of Canada’s (BoC) target of two percent, after pandemic-driven inflation peaked at just above eight percent in 2022. The reduction in the inflation rate greenlit the BoC’s easing cycle in late 2024 to the tune of 1.75 percent, and drove down the overnight rate to 2.25 percent as of the end of 2025. In fact, rate cuts implemented by the BoC have been fairly substantial when compared to other central banks across the world.

Bank of Canada has delivered aggressive rate cuts

With inflation closer to the BoC’s target level, alongside signs of stabilization in the labour market, we believe the central bank is unlikely to cut rates further in 2026. But monetary policy tends to operate with a lag in the range of nine to 18 months. As such, we believe the stimulative impact of some of the more recent interest rate cuts are yet to be fully transmitted and felt economically.

The recently unveiled budget by the Carney administration may add modestly to growth tailwinds in the year ahead. The budget introduces important initiatives to foster greater investment via accelerated depreciation, infrastructure and defence spending, and investments in the resource sector. RBC GAM estimates that an incremental 0.5 percent of economic growth could be secured should such measures be executed properly. 

In our view, the interplay of monetary easing, fiscal stimulus, a rebased immigration policy and the outcome of future trade negotiations (as discussed in Section II below) are key determinants of the path for Canadian economic growth this year. While we tend to view recent developments across all of these key components as positive overall, we believe patience will be required for the economic benefits to play out over what could be a multi-year horizon.

The preservation of CUSMA is economically critical to Canada

Last fall, the U.S. formally began discussions regarding the future of the Canada-United States-Mexico Agreement (CUSMA) in anticipation of the formal review date of July 1, 2026. The negotiations involving its renewal or replacement are expected to transpire over the course of several months.

While the agreement does not automatically expire until 2036, the ramifications of this review seem far more fraught in light of the Trump administration’s exacting tariff agenda. More concerning is that any of the three countries that are parties to the agreement could choose to withdraw from it by providing six months’ notice. The other two options on the table are the extension of the agreement for another 16 years, or the triggering of annual reviews up until the agreement’s expiry in 2036.

The preservation of CUSMA is a critical underpinning of the economic narrative for Canada in the years to come is hardly debatable. When the U.S. slapped a blanket 25 percent tariff on Canadian and Mexican goods earlier last year—which was later increased to 35 percent for Canada in August—CUSMA served as a crucial shield for the country’s exporters. According to RBC Economics, in Q2 of 2025,  approximately 90 percent of U.S. imports from Canada were free of tariffs as a result of the exemptions covered under CUSMA. 

U.S. imports from Canada by tariff provision

Furthermore, this agreement has resulted in the average effective tariff rate for Canada coming in around the low-to-mid-single-digit range—well below the average U.S. tariff rate on all imports in June. A reconfirmation and continuation of CUSMA in its current form would enhance Canada’s competitive position as a trading partner with the U.S., relative to other countries.

Effective tariff rates by country

Even though we’ve been here before, this time feels different. The stakes for Canada feel particularly high considering persistently soft economic data, high unemployment and anemic GDP growth.

History offers an ambiguous barometer of what may come to pass. On the one hand, if the Trump administration’s approach to tariff negotiations is anything to go by, one would be right to expect a series of tense and potentially volatile months ahead in parallel with heightened economic uncertainty for Canadians. The Trump administration may very well leverage Canada’s reliance on U.S. trade in its favour (as it has done in the past). On the other hand, we are somewhat heartened by the fact that the general direction of tariffs overall has been “better than feared.”

In the spirit of every cloud having a silver lining, the Trump administration’s particularly bellicose stance towards its trade relationship with Canada has been a critical impetus for national introspection and a much-needed discussion around the desirability of the latter’s disproportionate economic reliance on its southern trading partner. Even in the event that the current U.S. administration dials down its trade rhetoric and reinstates CUSMA, arguments for greater domestic dependence and a build-out of trade with non-US trading partners are gaining traction in Canada.

Canada’s 2025 federal budget outlined a comprehensive strategy for economic diversification. It introduced a goal to double non-U.S. exports over the next decade, with the intention of generating $300 billion more in such trade through several initiatives. For example, the Trade Diversification Corridors Fund is a $5 billion investment over seven years in transportation infrastructure (i.e. ports, rail and airports) to improve access to global markets. On the domestic front, the budget pledged $5 billion over six years under the Strategic Response Fund to help businesses in adversely trade-impacted sectors (i.e. steel, aluminum, forestry and agriculture) to adapt and diversify. Other initiatives include major transportation projects to unlock new trade gateways, and a $2 billion pledge to make strategic investments in critical minerals.

The fate of CUSMA will have a meaningful impact on U.S. trade and economic growth

While a great deal of energy and ink are justifiably being expended on the critical nature of the agreement to Canada’s economic outlook, it is important to note that the fate of CUSMA also has the potential to be significantly consequential for several trade sensitive sectors in the U.S.

RBC Economics estimates that the average effective U.S. tariff rate faced by U.S. importers currently sits close to 15 percent – a sizeable jump from under three percent last year—and the highest rate since the 1930s (although this is largely as a result of duties on imports from regions other than Canada).

U.S. average import duties rising to highest since 1930s

In Trump’s new global trade “playbook,” the existence of CUSMA stands out as a safeguard that affords all parties involved—including the U.S.—a relatively lower tariff bill. By RBC Economics’ assessment, at least 90 percent of U.S. goods exported to Canada in 2024 had zero tariffs thanks to the agreement. Notably, Canada was the top export market for 32 U.S. states in 2024. Canada and Mexico together buy close to five times more made-in-America products and services than any other country in the world. The two countries combined form America’s top customer.

To the extent that CUSMA exemptions are ultimately eliminated, the average effective U.S. tariff rate faced by U.S. importers could move as high as 20 percent , according to RBC Economics’ estimates. It’s also unclear how the White House will deal with revisions to CUSMA that would require congressional approval.

In our view, the successful renegotiation of NAFTA (CUSMA’s predecessor) during Trump’s first term provides some grounds for optimism. Similarly, the president’s decision to allow tariff exemptions for those goods that are CUSMA-compliant is also a positive sign. Lastly, given the trade and economic benefits conferred by CUSMA on the U.S. itself, we suspect Trump will be politically motivated to show his voter base—for whom “affordability” seems to be the key economic issue—that a successful agreement has been secured in time for the mid-term U.S. elections coming in the fall of 2026.

CUSMA 2.0 may come with modest compromises and concessions from Canada

In a nod toward trade reconciliation, and to lay the groundwork for smoother negotiations on CUSMA, Canada has already stepped up its military and border security spending in recent months. In addition, Canada has scrapped the Digital Services Tax (DST) on major U.S. internet-based companies operating in the country, while eliminating retaliatory tariffs on U.S. goods that are in compliance with CUSMA.

As discussions unfold, we suspect other points of contention that the Trump administration may raise with Canada include the country’s supply-management system for dairy, eggs and poultry, for which tariffs on U.S. imports are high. Higher North American content in automobiles (currently at 75 percent), alongside demands that a specific portion of each vehicle be made of U.S. auto parts, may also be raised. The perceived “insular” nature of Canada’s banking and financial industry may also be brought into question.

All told, we believe the forging of CUSMA 2.0 will require some concessions from Canada, but the more meaningful contours of the framework are likely to remain intact.

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