- Nom du rédacteur
- 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
Bank of Canada to Get Back to Work
October 22, 2026
Highlights
- Although tensions persist, energy exports from the Middle East have rebounded, with the most recent data showing volumes at about 80% of pre-war levels. However, with tankers in short supply, oil prices are unlikely to stabilize anytime soon. We still expect crude oil prices to end the year at around US$80 per barrel. Global economic growth appears to have held up over the past few months, despite rising energy costs. Chinese real GDP picked up in the third quarter, supported by more robust domestic demand in September and ongoing strength in exports. In the eurozone, recent PMI readings suggest economic growth is fairly stable, but rising inflation and higher policy rates and bond yields could weigh more heavily on economic activity.
- As for the US, the annual update of the National Economic Accounts published in September made a slight upward revision to real GDP growth for the first half of 2026. Annualized growth of more than 3% is expected in the third quarter, driven by household spending, continued investment in artificial intelligence and rising business inventories. The US economy remains surprisingly resilient in an environment marked by higher fuel costs, interest rate hikes and another decline in consumer confidence. Meanwhile, the job market is still sending mixed signals. US inflation is expected to remain fairly high in the short term before starting to fall in the second quarter of 2027. The rising cost of living is one factor that could hurt President Trump’s Republicans in the November 3 midterm elections External link..
- Our outlook for the Canadian economy has seen modest upward revisions relative to our prior projection. In the near-term, we anticipate Q3 real GDP to advance by roughly 2.0% annualized, supported by slightly higher business investment. In addition, household consumption remains resilient and is likely to support growth in the coming quarters, as suggested in our latest research. Moreover, we expect the federal government’s “Productivity Mega Deduction” to boost economic activity over the medium term. We estimate that the measure will increase business investment by about 1% on average annually from 2027 to 2030 and real GDP by approximately 0.1%. However, the boost coming from higher business investment will probably be somewhat offset by increased imports. Still, trade tensions with the US remain a notable headwind while the conflict in the Middle East should keep energy prices elevated, likely pushing the BoC to hike rates in the upcoming October 2026 announcement.
- Quebec’s economy continues to chart an uneven course. Real GDP grew in the second quarter, with the composition of growth proving more encouraging External link. than in previous quarters. But that doesn’t mean the province’s economy is out of the woods. In recent months, the labour market has been on a downtrend that culminated in a sharp decline in employment in September External link.. However, this decline should be interpreted with caution, as it was exacerbated by unusual shifts in the education sector. It appears that the situation isn’t as bleak as the employment data initially suggest, but there are few signs of a genuine return to stronger growth. Our forecasts remain essentially unchanged, with real GDP growth now estimated at 0.4% in 2026. Against this backdrop, the election of a minority PQ government External link. does little to change the main short-term economic challenges. Weak economic conditions and budget constraints will limit the new government’s room to manoeuvre, especially as it works toward balancing the budget in 2028–2029.
- Ontario’s outlook has improved after revisions revealed more economic resilience than anticipated. Real GDP rebounded more strongly than Canada in Q2 2026, while Q1 growth was revised from contraction to flat, leading the province to outperform the rest of Canada over the first half of 2026. Household spending should continue to benefit from a relatively solid labour market, led by private services. The goods outlook is weaker. Auto production has rebounded, but Section 338 tariffs broaden Ontario’s exposure, while Canadian countermeasures raise costs for some industries. Housing starts returned to subdued levels in Q3. Policy support should provide a floor, but weak demand and challenging project economics will likely constrain the housing market recovery. Non-residential investment offers more durable, though concentrated, growth as nuclear and mining activity ramp up. Inflation remains a bright spot as lower food and energy weights and softer shelter costs should keep headline inflation below the national average.
Risks Inherent in Our Scenarios
The global geopolitical situation remains complicated. The main risk to our scenarios remains that the conflict with Iran becomes more prolonged or spreads more directly to other countries. Furthermore, the war between Ukraine and Russia could intensify pressures on the global supply of petroleum products. If this were to occur, energy prices could be even higher than our baseline forecast, and supply chains may be further disrupted. This could lead to markedly stronger inflation and a collapse in consumer and business confidence. Beyond the Middle East, geopolitical risks remain elevated. Diplomatic and economic relations between the US and other advanced economies are fragile. The prospect of additional tariffs continues to fuel tensions, as evidenced by the recent escalating trade war between the US and Canada. Central banks may need to accelerate their tightening cycles if inflation picks up considerably due to spillover from higher energy prices, new tariffs or further supply chain disruptions. Against this backdrop of heightened risks, the global economy could slow significantly, with some countries potentially falling into recession. The continued rise in bond yields also poses a risk, particularly for highly indebted economies, exacerbating financial, fiscal and political pressures, as can be seen notably in France. The focus is also now on the US midterm elections as well as on budget negotiations, which could disrupt the economy. The erosion of institutions in the US may prompt some global investors to further reduce their exposure to US assets in an accelerated or disorderly fashion. A sharp correction in the stock market, which has benefited substantially from the AI boom, could shake confidence and trigger a wealth effect shock.
Financial Forecast
We have pulled forward our forecast for BoC rate hikes, expecting a first increase at the end of this month and another one in January 2027. The BoC faces competing pressures, with energy prices remaining elevated while economic momentum is showing some signs of weakness, particularly in employment. We also revised our near-term Fed outlook to include one further hike by year-end to contain inflationary pressures, but our longer-term view remains unchanged, with easing likely required next year.
Canadian equities are regaining ground following the September selloff and continue to outperform the S&P 500 this year. That trend is expected to continue, although technology companies’ earnings over the next month will be an important driver of the outlook.
The Canadian dollar has weakened more than we had expected, and our previous forecast of 1.38 by year-end is out of date. We expect US‑Canada rate differentials to narrow next year and continue to expect a stronger Canadian dollar, but we have been forced to mark-to-market the starting point and are now projecting USDCAD to remain around 1.42 over the next few months.
Forecast Tables
