- Jimmy Jean • Randall Bartlett • Benoit P. Durocher • Royce Mendes • Mirza Shaheryar Baig • Marc-Antoine Dumont
Tiago Figueiredo • Francis Généreux • Sonny Scarfone • Oskar Stone • Hendrix Vachon • LJ Valencia
Economic and Financial Outlook
A Resilient Start to 2026, but Market Jitters Point to a Rocky Summer
May 21, 2026
Highlights
- The global economy remains on edge, as the conflict in Iran and its repercussions for oil supply persist. Oil prices continue to hover around US$100 per barrel and are expected to remain elevated over the coming months. That said, the global economy is showing some resilience. Real GDP picked up in Germany, the United Kingdom and Japan in the first quarter of 2026. PMIs for most major economies are holding steady at levels consistent with continued growth in the second quarter. That said, inflation is up across the board and the ongoing war continues to put supply chains at risk, which means economic growth may be fragile.
- In the United States, real GDP also accelerated in the first quarter of 2026, with growth supported by a rebound in federal government spending and strong business investment, particularly in artificial intelligence development and deployment. That said, the persistent rise in gasoline prices is a destabilizing factor and is offsetting the positive effects of the tax cuts adopted last year. Headline inflation hit 3.8% in April, its highest level since May 2023, and could soon top 4% before easing again. Real GDP growth is expected to be slightly weaker in the second quarter. Unlike last year, the labour market is currently a source of stability, with solid gains in recent months and relatively low unemployment claims, a situation that is expected to continue.
- Our outlook for the Canadian economy hasn’t materially changed relative to our prior projection. Recent developments in the Middle East will keep oil prices elevated External link., probably lifting business investment and net exports, especially in the energy sector. At the same time, our inflation outlook remains high relative to the pre-conflict level External link.. Fiscal transfers to support consumers, such as the temporary fuel tax cut and expansion of the GST/HST credit set to roll out on June 5, 2026, are likely to offset drag on household consumption stemming from higher energy prices. Added spending and investments from the federal Spring Economic Update 2026 External link. are expected to provide a modest tailwind over the medium term. Still, the upcoming Canada‑United States-Mexico Agreement (CUSMA) joint review External link. is a notable headwind, which should keep the Bank of Canada on hold in the near term.
- A run of softer data over the past month has led us to cut our 2026 real GDP growth forecast for Quebec from 0.8% to 0.6%. In January, well before the conflict in the Middle East began, real GDP had stalled External link. at 0.7% lower than it was 12 months earlier. Since then, the oil shock has weighed on real household spending, and high-frequency data point to more guarded consumer behaviour. April’s employment figures confirm that Quebec’s labour market is in a slump. The province had the steepest decline in the country, with full-time jobs External link. posting the greatest losses. And the province’s higher exposure to sector-specific tariffs is further weakening its position, particularly after the most recent tariffs that were introduced on metal products External link.. Finally, the uncertainty tied to this summer’s CUSMA review, combined with the decline in working-age population, will continue to weigh on Quebec’s outlook.
Risks Inherent in Our Scenarios
The global geopolitical situation remains fraught, 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, which could lead to markedly stronger inflation 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. After the Supreme Court ruling, the Trump administration is working on ways to impose new tariffs, and the threat of these 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 pricing for both the US and Canadian central banks has shifted over the past month. Participants no longer see the Federal Reserve’s next move as a rate cut. A similar trend is evident in Bank of Canada expectations, with many market participants expecting rate hikes in 2026 amid inflation concerns driven by energy prices. We had already anticipated a longer-than-consensus period of high oil prices, so our outlook for both the Bank of Canada and Federal Reserve remains largely unchanged. That said, the recent rise in term premia, which has tightened financial conditions, reflects a growing discomfort with sovereign debt.
The US dollar continues to function as a proxy for global risk appetite, although it remains range-bound for now. With risk sentiment likely to stay fragile, we have maintained a more muted outlook for Canadian dollar appreciation.
Equity markets, particularly in the United States, are trying to look past energy-related concerns. Both the S&P 500 and NASDAQ have reached new all-time highs in recent weeks, driven largely by strength in semiconductor stocks. As a result, we have upgraded our outlook for US stocks.
Forecast Tables
