Outlook

The Canadian economy continues to adjust to US tariffs and trade uncertainty, with economic activity on a lower path than before tariffs were imposed. The war in the Middle East is also affecting the outlook. Inflation is projected to rise in the near term before easing toward 2% in early 2027, while economic growth remains modest.

US tariffs and uncertainty about the future of the Canada‑United States‑Mexico Agreement (CUSMA) are the main factors affecting the outlook for Canada. Current US tariffs are expected to remain in place and have a persistent negative effect on economic activity.

The impact that the war in the Middle East will have on inflation and economic activity depends on the duration and severity of the conflict. The war is expected to add to inflation in 2026, primarily through higher oil prices.

Higher oil prices have broadly offsetting effects on Canadian economic activity. On the one hand, as a net energy exporter, Canada will benefit. Export revenues will rise as more money flows into the country to pay for Canadian oil. Higher profitability can also lead oil producers to increase investment and hire more workers, with positive spillovers to supplier industries. The energy sector distributes some dividends to Canadian investors, and governments receive higher tax and royalty revenues.

On the other hand, higher oil prices reduce household purchasing power because higher gasoline prices mean households have less money to spend on everything else. Some households and businesses will do better than others. Overall, Canada is expected to fare better than many other countries due to its status as a net energy exporter.

The outlook for inflation and economic growth is highly uncertain. It depends on both the outcome of the CUSMA negotiations and the evolution of the war in the Middle East.

Potential output growth is expected to slow in 2026 as US tariffs drive a structural adjustment in the Canadian economy. It then picks up in 2027 as the economy continues to adapt to the new trade regime. Moreover, productivity gains are supported by businesses’ adoption of artificial intelligence technology. Population growth is anticipated to remain subdued but picks up slowly over the projection horizon (see Appendix: Potential output and the nominal neutral rate of interest).

Investment growth is expected to strengthen

As businesses continue to adapt to the new trade environment, investment is expected to recover. Respondents to a recent Business Outlook Survey pointed to improved investment intentions based on anticipated strength in domestic demand. Targeted federal government programs are also providing support.2 In addition, government spending on infrastructure is projected to rise.

On balance, the war in the Middle East is anticipated to mildly boost growth in investment in the oil sector. However, this is assumed to be largely temporary because oil prices are projected to fall back toward US$75 by mid‑2027.3

Consumption expands modestly

With population growth remaining subdued, consumption growth is forecast to average just above 1% over the projection horizon (Chart 17).

Growth in consumption per person will moderate through mid-2027. Higher gasoline prices from the conflict in the Middle East erode consumer purchasing power. However, recent federal measures (e.g., the Canada Groceries and Essentials Benefit and the temporary suspension of the fuel excise tax) provide near‑term support. Consumption growth later slows due to the impact of recent declines in house prices on housing wealth.

Throughout the projection, improved terms of trade from higher oil prices are expected to increase wealth, which supports consumption. Per‑person consumption is also supported by rising real wages, reflecting productivity gains.

Housing activity remains subdued

Residential investment is expected to be subdued over the projection horizon. Housing demand is forecast to grow modestly because of slow population growth and weak investor interest. Affordability challenges are also anticipated to continue to weigh on activity. In addition, a substantial inventory overhang of small condominiums in some major centres will restrain new construction.

Inflation is projected to ease slightly in May, partly due to the temporary suspension of the federal fuel excise tax.4 If oil prices decline as assumed in the base‑case projection, inflation is expected to slow to 2½% in June and then return to the 2% target in early 2027. Other factors provide additional downward pressure (Chart 19). These include:

• Inflation slows in prices for services excluding shelter and for goods excluding food and energy as excess supply keeps growth in unit labour costs contained. However, the restructuring of global trade and the rise in energy costs are expected to keep non‑labour cost pressures elevated.
• Rent inflation continues to moderate as housing supply increases while population growth remains modest.
• While food inflation is projected to ease slightly, high prices of fuel and fertilizer are expected to keep cost pressures elevated over 2026.

The rise in oil prices will boost costs for producers of other goods and services. However, businesses report that weak demand will likely limit their ability to pass through these higher costs. Most of the pass‑through will occur over 2026 and is expected to boost CPI inflation by 0.3 percentage points (Chart 20).

Inflation is then projected to remain around 2% over 2027 and 2028. Upward pressures on inflation include higher input costs as Canadian businesses shift their supply chains away from the United States and import more goods directly into Canada. Downward pressures come from excess supply caused by US tariffs that softened demand for Canadian exports.

Endnotes