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Economic and Financial Outlook
The Conflict in the Middle East Continues… but Major Economies Are Holding Up
April 23, 2026
Highlights
- As outlined in our recent Economic News External link., our baseline scenario now calls for a more persistent disruption in oil markets, with the West Texas Intermediate (WTI) price remaining above US$80 per barrel through the end of the year. The geopolitical situation is precarious, and the continued attempts to improve US–Iran relations have yet to yield any tangible resolution. At the time of writing, maritime traffic in the Persian Gulf is very limited, representing only 10% of the usual volume. The situation is likely to remain highly volatile in the short term, and reaching a lasting agreement between all of the parties involved appears complex.
- For now, major economies aren’t showing signs that the conflict in the Middle East and resulting surge in energy prices will disrupt economic growth. Manufacturing PMIs didn’t collapse in March and April, though services indexes and consumer confidence seem weaker. All the same, real GDP growth forecasts have been revised downward and inflation expectations have increased. In China, real GDP was relatively strong in the first quarter, up 1.3% (quarter-over-quarter, non-annualized).
- In the United States, real GDP growth was revised down further, to an annualized 0.5% for the last quarter of 2025. We’re expecting growth of around 2.5% in the first quarter of 2026, thanks to a post-shutdown boost in activity. Real GDP growth could then slow in the second quarter, as rising gasoline prices take a bite out of real disposable income despite the higher tax refunds going out this year. Job creation has been very uneven in recent months. This situation could persist, as uncertainty continues to weigh on businesses. Consumer confidence was shaken by the rising cost of living. Inflation hit its highest level since May 2024 this March, and it could climb further over the next two months, after which it will likely remain elevated. Core inflation is expected to remain relatively stable.
- Our outlook for the Canadian economy has been revised upwards from our prior projection. We expect the recent developments in the Middle East External link. to support oil prices staying higher for longer, likely boosting business investment and lifting net exports, particularly in the energy sector. At the same time, higher oil prices have pushed up our inflation outlook. Fiscal measures to support consumers—notably the temporary fuel tax cut and enhancements to the GST/HST credit—are expected to offset the drag on household consumption from the elevated price at the pump. Military spending and other public investments should provide added tailwinds over the medium term, offsetting the planned cuts to operating expenses and federal public sector payrolls announced in Budget 2025 External link.. That said, the upcoming Canada-United States-Mexico Agreement (CUSMA) joint review is a major downside risk.
- In Quebec, a split economic picture is emerging. While some drivers of growth remain robust, the labour market is softening. Data for the final quarter of 2025 shows that real GDP ultimately contracted due to a drop in inventories, though domestic demand held strong and international trade improved. And in the first quarter of this year, the labour market has moved in fits and starts, with sharp losses followed by partial recoveries. The continued weakness in full-time employment is impacting hours worked, which are down a cumulative 1.7%. This dynamic reflects Quebec’s shifting demographics: the working-age population is already in decline, meaning fewer new jobs are needed to stabilize the unemployment rate. On top of these structural limitations, the oil shock is weighing on the province and other downside risks persist. We’ve therefore downgraded Quebec’s growth outlook to 0.8%.
Risks Inherent in Our Scenarios
The global geopolitical situation has deteriorated, exacerbated by the war in Iran, which has spread throughout the entire Persian Gulf region. This conflict continues to pose the greatest risks to our scenarios. If it is prolonged or extends to other countries, energy prices could climb even higher than our baseline assumption and supply chains could be further disrupted. Consumer, business and investor confidence could collapse. This could lead to markedly stronger inflation and subdued economic growth, if not a global recession. Beyond the Middle East, tensions remain elevated. Diplomatic and economic relations between the United States and other advanced economies are fragile. The US administration is working on new ways to impose tariffs after the Supreme Court ruling, and the threat of new measures is keeping uncertainty high. Central banks may need to lower their key interest rates if the economy deteriorates more than expected. Conversely, monetary policy may need to be tightened if inflation spikes due to spillover from higher energy prices, new tariffs or supply chain disruptions. Later this year, the focus will also be on the CUSMA review and the midterm elections, both of which could disrupt the economy. The erosion of US institutional pillars may prompt some global investors to further reduce their exposure to the United States. A sharp correction in the stock market, which has benefited substantially from the AI boom, could shake confidence and trigger a wealth effect shock, while volatility in bond, currency and commodity prices could weaken the outlook for the global economy.
Financial Forecast
Market expectations for monetary policy tightening have waned over the past couple of weeks. In Canada, less than one rate hike is now priced in by year‑end, while US markets have begun to price in rate cuts toward the end of the year. We still believe that the Bank of Canada will remain on the sidelines through the rest of 2026 and expect that US policymakers will be able to resume easing late in the year.
The US dollar is acting as a barometer of global risk appetite, but for now it remains confined to a broad trading range. With risk sentiment likely to remain fragile, we have scaled back our outlook for Canadian dollar appreciation. Although some European and Asian central banks are gearing up for rate hikes to contain inflation, tighter monetary policy may not translate into stronger currencies should energy shortages force production shutdowns in those economies.
Equity markets are still digesting the energy shock amid elevated headline risk. As in fixed income markets, investor concerns differ by jurisdiction and exposure to energy costs. More recently, however, the S&P 500 has recovered and hit new highs. We continue to see the TSX outperforming the S&P 500 in 2026.
Forecast Tables
