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Economic and Financial Outlook
Growth Rebounds in Canada Despite Numerous Obstacles
August 20, 2026
Highlights
- Our forecasts are based on the tariff rates currently in effect, reflecting the state of Canada–US trade relations at the time of publication. Given the fluid nature of ongoing negotiations, we will update our assumptions as measures are officially confirmed and implementation dates are established.
- Oil prices continue to move in response to developments in the Persian Gulf, as hopes of a new agreement repeatedly fade and re-emerge. Ships making it through the Strait of Hormuz, along with rerouted shipments, represent just over half of pre-conflict traffic volumes. The market is also relying on aggressive drawdowns of increasingly depleted inventories and on weaker oil demand. Oil prices have been hovering around US$80 per barrel since mid-July and could decrease slightly by the end of the year. Uncertainty stemming from the conflict with Iran and a resurgence of inflation slowed real GDP growth in several economies this spring, including China, Japan and the United Kingdom. However, real GDP growth accelerated in the eurozone. Recent PMI readings do not point to an abrupt reversal in global economic growth.
- In the United States, real GDP slowed in the second quarter, rising by only 1.5% at an annualized rate. But this slowdown was primarily due to a decline in business inventories, combined with another strong increase in real imports. In contrast, domestic demand remained robust, supported by consumer spending and investment. That said, higher gasoline prices over the summer, further deterioration in consumer confidence, weaker job creation in June and July and disappointing retail sales last month all point to a less favourable outlook. Even so, real GDP is still expected to post solid growth over the summer. After exceeding 4% in May, headline inflation slowed to 3.4% in July and could decrease again very gradually over the fall.
- A lot has changed since we published our last official Canadian economic forecast in June. Following a second consecutive decline in real GDP in Q1 2026, data throughout Q2 have pointed to a sharp rebound in economic activity. We are now tracking an annualized advance in real GDP of 2.8% q/q, up from our earlier forecast of 1.5%. This happens to be slightly better than the Bank of Canada’s latest projection. We remain of the view that growth in Q3 will be solid as well, as increased federal income transfers in June and July likely boosted consumer spending. However, this may be offset by weaker-than-anticipated business investment, as renewed US tariff threats are just the latest reminder that trade tensions are still unresolved. At the same time, the federal government continues to make significant new spending and investment announcements, which should provide a tailwind to growth.
- In Quebec, revisions to historical data do not change the economic picture that has prevailed since June. Real GDP growth in the first quarter was driven by inventory accumulation, while indicators related to domestic demand remained subdued. Data from the early part of the second quarter suggest that Quebec’s economy expanded modestly. In the labour market, job creation remains limited. However, the decline in the working-age population is helping offset this weakness and limiting upward pressure on the unemployment rate, as fewer jobs are needed to keep the labour market stable. Recent fiscal measures should support household spending over the coming months. We’re anticipating real GDP growth of 0.4% in 2026, followed by 1.4% in 2027, as domestic demand strengthens. Uncertainty surrounding trade with the United States could, however, continue to weigh on investment.
Risks Inherent in Our Scenarios
The overall geopolitical situation remains complicated. The main risk to our scenarios is still the continued conflict with Iran and the possibility that it spreads to other countries. Energy prices could be even higher than our central assumption, and supply chains could be further disrupted. This could lead to markedly stronger inflation, dramatically lower consumer, business and investor confidence and subdued economic growth, if not a global recession. Outside the Middle East, tensions remain elevated. Diplomatic and economic relations between the United States and other advanced economies are fragile. The prospect of additional tariffs continues to fuel tensions, as evidenced by the measures recently proposed for some Canadian imports. Central banks may need to tighten monetary policy if inflation rises considerably due to spillover from higher energy prices, new tariffs or supply chain disruptions. The focus will also be on the talks around the framework of the Canada-United States-Mexico Agreement (CUSMA), as well as on the midterm elections, both of which could disrupt the economy. The erosion of institutional pillars in the United States may prompt some global investors to reduce their exposure to US assets at an accelerated or disorderly pace. A sharp correction in the stock market, which has benefited substantially from the AI boom, could shake confidence and trigger a wealth effect shock. More broadly, a tightening in financial conditions—through rising long-term yields, a repricing of risk assets or renewed dollar volatility—could amplify these dynamics and weaken the outlook for the global economy.
Financial Forecast
Given that the economy has shown more pronounced signs of recovery and trade uncertainty has dissipated at the margin, we have brought forward our forecast for the Bank of Canada's next rate hike to Q1 2027. In total, we still expect only a modest dose of policy tightening from Canadian central bankers. South of the border, core inflation metrics appear to be decelerating, supporting our forecast for the Fed to remain on hold until delivering a single rate cut later in 2027, when officials may move to reduce the size or duration of the central bank's balance sheet. We expect longer-term bond yields to fall modestly on further improvement in US inflation dynamics, but they should still remain elevated, with a significant amount of debt being issued globally.
North American equities have continued to rally on the back of record earnings, healthy economic activity across the US and Canada and a more accommodative monetary policy outlook from the Federal Reserve. Concerns around energy prices have largely been offset by strong earnings growth, and as such we have revised our year-end forecasts higher.
Softer inflation and labour market data in the US have reduced the likelihood of Fed rate hikes. We expect the US dollar to extend its recent weakness. As a result, the Canadian dollar should end 2026 around 1.38.
Forecast Tables
