Buckle Up for Another Rough Ride in 2026

With 2025 almost over and 2026 just a few short weeks away, it seemed apt to explore some of the big themes we think will shape next year and how they will influence Canada’s economy.

US trade policy will likely continue to be a dominant driver of global economic activity in 2026. The tariff dynamic introduced in 2025—on−again, off−again, threatened and actual—is expected to continue in 2026, particularly in the context of the Canada–United States–Mexico Agreement (CUSMA) review. In such a climate, businesses are likely to stay on the sidelines, reluctant to invest when the future is so unpredictable. With a deadline of July 1, how Canada’s economy evolves afterward will depend on whether an agreement is reached, for good or for ill. If CUSMA moves to annual reviews, the unknown will become entrenched when it comes to trade. Notably, we expect the US administration’s trade policy to lead to higher inflation stateside. And with the US midterm elections coming up next November, the risk of further trade disruptions will rise as policymakers may seek to divert attention from domestic economic woes.

The US economy is becoming increasingly reliant on capital investment linked to artificial intelligence (AI), raising concerns about the sustainability of its torrid pace. Indeed, in the first half of 2025, more than 90% of the admittedly weak US real GDP growth was linked to AI−related investment. This speaks to the vulnerability of the US economy to any retraction in the current exuberance for building data centres and other AI−supporting infrastructure in 2026. In contrast, investment in information processing equipment and software contributed only about 10% to Canadian real GDP growth over the same period. This suggests there is still a significant opportunity for Canada—resource−rich, less populated and colder—to attract more of this sort of investment, to the extent that it can increase its power output in upcoming years.

Investment in trade−supporting and resource−enabling infrastructure should start to accelerate this year as global supply chains reorient. Trade volumes dipped globally through the middle of 2025 but have since rebounded as countries diversified away from the United States. At the same time, the good ole US of A resumed importing, albeit at higher prices for businesses and consumers alike. Meanwhile, China’s dominance in rare earth minerals, solar panels and electric vehicles is becoming increasingly entrenched. Canada continues to look for new and willing trading partners while accelerating investment in everything from roads and rail to ports and pipes to get conventional energy, critical minerals and all manner of manufactured goods to global markets. Accelerated approval of “nation−building projects” through the Major Projects Office, as well as building dual−purpose defence infrastructure, should help to support increased economic activity.

A pullback in US leadership from the North Atlantic Treaty Organization (NATO) is leading to greater defence spending by Europe and Canada. This should really start to ramp up in 2026, motivated by the urgency of the ongoing conflict in Ukraine that shows little sign of ending. The Government of Canada has pledged to boost defence spending to 2% of GDP by the end of the current fiscal year, which has already helped to bump up real GDP in 2025. Defence outlays are expected to increase to 3.5% of GDP by 2035 plus another 1.5% of GDP in defence−related spending—NATO’s current target. While long overdue, particularly in Canada’s case, the coordinated global push for greater defence spending raises the risk that prices could rise quickly, causing inflation in the sector. Canadian taxpayers could get less bang for their buck as a result.

Little of this comes for free, as advanced economies are substantially increasing deficits and issuing debt to guard against an increasingly unpredictable world. The US federal government is expected to run deficits in the range of 5–7% of GDP annually over the next decade, according to the Congressional Budget Office. Gross federal debt stateside could reach 135% of GDP by 2035, with debt held by the public approaching 120% of GDP, up from less than 100% last year. Larger planned deficits, greater expected bond issuance and pro−inflationary policies have pushed longer−term bond yields materially higher south of the border since Trump’s election. This has compounded the impact of fiscal largesse elsewhere, steepening yield curves in other countries too. Given the circumstances, a continuation of this trend can’t be ruled out for 2026, although Canada is expected to fare better than most. That said, central banks—including the Bank of Canada—are now largely on the sidelines, supported by relatively low and stable inflation but also pushed aside by renewed fiscal dominance.

All told, the global economy should brace itself for another rough ride in 2026. For more information on our forecast, see our December 2025 Economic and Financial Outlook External link..