More of The Same in 2026

The global economy is about to enter 2026 still grappling with forces that were in motion well before the latest US political cycle. Geopolitical fragmentation did not begin with the return of Donald Trump to the White House. In fact, it was very much a theme in his first term. But as we approach the one-year mark of his second term, the decisiveness of the break in the post‑Cold War global trade order is remarkable.

Over the past year, the world has witnessed notable doctrinal pivots. The United States is now pursuing its most protectionist strategy in roughly a century. Germany has begun rearming and has temporarily relaxed the fiscal discipline that once defined its policymaking. Other countries are adapting in turn, beefing up their military capabilities and reassessing their industrial policies, trade partnerships and energy strategies. Resilience and security considerations increasingly outweigh the traditional virtues of openness. Where openness remains, it is more selective and shaped by a global landscape in which trust is more difficult to secure.

Financial markets have so far managed to defy the gravity of this transition. AI‑related enthusiasm has provided a powerful counterweight to the gloom surrounding the shift from free trade to managed trade. But that enthusiasm also raises the risk of correction, especially as valuations stretch and fundamentals become harder to read. The global AI infrastructure boom has capital flowing at levels few anticipated, but it increasingly bumps up against hard constraints, whether in the form of potential overcapacity or binding limitations in power generation and transmission. These constraints could ultimately compromise expected returns, although trying to time a day of reckoning is a fool’s errand.

Meanwhile, the United States heads into a mid‑term election year with economic concerns remaining at the top of voters’ minds. Early indicators, from fall 2025 electoral results to national polling, suggest that the typical mid‑term headwinds for an incumbent administration may be more pronounced than usual. The broader economic backdrop is not one of imminent recession when looking at aggregate data, but the composition of growth will continue to evolve.

Middle‑ and lower‑income households remain under pressure from still‑elevated living costs and a weakening labour market. In contrast, the contribution of high‑income households is increasingly important to headline activity. A market correction is a meaningful risk in this context given the concentration of financial wealth, though spending patterns among top earners depend more on their stock of wealth than on short‑term changes in its valuation.

We see US job creation remaining soft but not collapsing. The softness is in part supply‑driven, with the administration’s tightening approach to immigration reducing the growth in the labour force. As a result, we expect a relatively limited upward response in the unemployment rate in 2026. Some sectors dependent on low‑cost foreign labour may see nominal wage acceleration, though this should not be mistaken for strength; it instead reflects cost–push frictions that will likely generate additional inflationary pressures.

Adding to those pressures, tariff pass‑through should continue to nudge US inflation higher than it would otherwise be. We believe this will complicate the job of the Federal Reserve. Our baseline assumes only an incrementally dovish stance from the incoming Fed Chair. It will be difficult to see the Fed entirely turning a blind eye to tariff‑related inflation, particularly in light of the level of dissent witnessed at FOMC meetings this year, but also given the threat of an adverse reaction in bond markets should it take an overly dovish bias.

For Canada, the defining issue of 2026 is the CUSMA joint review. Although the process was originally conceived as nearly a formality, it is increasingly taking on the look and feel of a renegotiation. The range of potential outcomes is broad, shaped by questions about the sectoral concessions each country may be willing to make, whether the United States seeks to fragment the agreement into bilateral deals and the possibility of a looser side arrangement similar to those the US signed with Japan, the EU and the UK. Even if CUSMA is salvaged, uncertainty remains about whether Canada will secure long‑term continuity or be faced with a year‑to‑year renewal cycle. In the end, it is these details that will determine whether exporting businesses obtain the clarity they need to plan, invest and hire.

Canada may have been spared the worst of the tariff escalation, but recent events have nonetheless pushed fiscal policy into a more supportive stance. Beyond modest pocketbook measures and liquidity supports for affected businesses, the largest new commitments relate to defence spending. Initiatives aimed at stimulating private investment are being positioned as making Canada one of the more competitive jurisdictions from a tax perspective. Even so, these measures will take time to gain traction in an environment where uncertainty continues to weigh on risk‑taking. We do not expect a spirited rebound in private capital spending in 2026, though some stabilization appears possible.

Canadian population growth is set to keep moderating, guided by the current targets. The execution risks are significant, with many permits expiring for non‑permanent residents in 2026 and questions remaining on a range of issues, including transition pathways, exit compliance and headcount tracking. Still, we assume slower population growth will allow the national unemployment rate to edge down modestly, although this decline warrants the same caution as that in the US in that it reflects demographic policy developments more than true economic strength.

The Bank of Canada will be attentive to these distinctions. We expect it to remain on hold through 2026. While the unemployment rate may drift lower, growth is likely to stay weak and uncertainty unusually elevated. But with limited excess capacity, sticky underlying inflation,and fiscal measures gradually filtering through the economy, the bar for a move towards accommodative policy is high.

This being said, the Bank will be navigating 2026 without the benefit of a clear map. Beyond the obvious CUSMA fault line, economic conditions are increasingly fragmented and heterogeneous across the country, whether between trade‑exposed and domestically oriented sectors, manufacturing‑heavy provinces and energy producers, industries benefiting from government support and those facing soft demand, etc.

In closing, Canadian Energy Minister Tim Hodgson recently remarked that “we cannot look back in nostalgia” when it comes to economic transformation. The same applies to the theme of uncertainty. The year 2026 will reinforce what increasingly appears to be a decisive shift away from a regime of relative stability, trust and predictability toward one marked by greater uncertainty, unpredictability and at times even disorder. This means the outlook we present today will remain subject to revision, and that decisionmakers will be required to act with an uncomfortably low level of confidence about near‑term developments. Even so, several structural themes remain firmly in place. Adopting a longer‑term vision will thus remain essential for navigating the shifts now underway.