Outlook

The ongoing trade conflict is fundamentally reshaping Canada’s economy and will have a lasting negative impact on economic activity. At the same time, the reconfiguration of global trade and domestic production is putting upward pressure on costs. Reflecting these two competing forces, inflation remains near the 2% target over the projection horizon.

The United States has turned to protectionism and has imposed broad tariffs on most of its major trading partners. US tariffs on Canada are assumed to remain in place for the foreseeable future. Although 90% of the value of Canadian goods exports enter the United States tariff-free, some sectors have faced significant increases in tariffs. These increases include levies of:

• 50% on steel and aluminum
• 25% on the value of the non-US content of motor vehicles that are compliant with the Canada-United States-Mexico Agreement (CUSMA); non-CUSMA-compliant motor vehicles are subject to a 25% tariff on the entire value of the vehicle

As a result, the average tariff rate on Canadian exports has risen from 0.1% at the start of 2025 to around 5.9% in October. In response, Canadian businesses are actively seeking new trade partners and adjusting their supply chains.

This Report provides a base-case projection. Uncertainty about the Canada-US trade relationship nonetheless remains elevated. Both the unpredictability of US tariffs and the upcoming review of CUSMA are contributing to this uncertainty.

US trade policy is disrupting the Canadian economy

The outlook is based on the tariffs in place by October 22, 2025. It is presented relative to January, which was the last Report with a base-case projection.

Tariffs and trade policy uncertainty have reduced foreign demand for Canadian exports and have triggered significant structural changes to the Canadian economy. While some exporters are expected to break into new international markets, others will struggle. The adjustment process will result in job losses in some sectors and hiring in others, with some workers transitioning into new roles that may not fully match their skills. Investment will slow, and some existing capital could be written off or diverted toward a less profitable use.

These structural changes are anticipated to cause Canada’s potential output to grow more slowly than expected in January. The structural adjustment and the weakness in demand are expected to lead to a period of slow growth in household incomes, which will weigh on household spending, particularly in 2026.

How exactly structural adjustment and weakness in demand play out over time is subject to considerable uncertainty and is important for the conduct of monetary policy. Over time, monetary policy can effectively mitigate the slowdown in demand and the disinflationary pressures arising from excess supply. However, monetary policy cannot offset the negative effect that structural adjustments—such as from sectoral reallocation and its effect on trend productivity—have on the growth of gross domestic product (GDP).

GDP growth is expected to gradually increase over the second half of 2025. Growth in 2026 and 2027 averages around 1.4%. However, US tariffs are anticipated to permanently reduce the level of Canadian GDP when compared with the January Report (Chart 19).

The reconfiguration of global trade and domestic production is expected to put upward pressure on costs for businesses. At the same time, tariffs will likely exert upward pressure on prices over the projection horizon. However, the impact on inflation from tariffs is now less pronounced than previously anticipated because most Canadian counter-tariffs have been removed.

Overall, inflation is projected to remain close to 2%. The effects of weaker demand on the economy are anticipated to mostly offset the inflationary pressures caused by tariffs.

Economic outlook

The trade conflict has put the Canadian economy on a lower path. Both potential output and demand conditions have been affected, with the level of GDP projected to be about 1.5% lower by the end of 2026 than in the January Report. About half of this downward revision reflects lower potential output, which mostly stems from the impact of the reallocation of capital and labour because of tariffs. The remaining half of the downward revision to GDP is due to weaker demand, most of which is directly related to the decline in exports. However, separating the effects of cyclical fluctuations from structural change in real time is imprecise.

GDP is expected to gradually pick up during the second half of 2025. Growth then averages about 1.4% over 2026 and 2027 (Chart 20). The recovery in GDP is projected to be slow because the reallocation of capital and labour in the economy and the weakness in the labour market weigh on household spending.

Growth in potential output is expected to stay subdued in 2026 before picking up in 2027. Population growth is assumed to remain muted, and the trade conflict is anticipated to hold back growth in trend labour productivity. Excess supply is expected to diminish gradually over the projection horizon.

Exporters adapt to tariffs gradually

Exports are anticipated to decline in the second half of 2025 due to tariffs and a slowing in US demand growth. Although tariffs are mainly applied to specific sectors, such as steel and aluminum, even exporters outside these sectors face challenges. Some businesses report that their US customers are reluctant to place new orders due to ongoing trade tensions.

Export growth resumes in 2026, supported by foreign demand, but from a substantially lower level. Businesses are also anticipated to make progress toward diversifying exports outside of the United States, although how quickly this proceeds remains highly uncertain. Overall, non-commodity exports remain below their 2024 levels over the projection horizon because of US tariffs (Chart 21).

Imports are projected to decline through the end of 2025 partly because of weaker growth in domestic demand. In addition, businesses are expected to import fewer manufacturing inputs because tariffs limit their opportunities to export products. As economic conditions improve and businesses adjust to Canada’s remaining counter-tariffs, imports start to grow in 2026 and 2027.

Growth in household spending slows

Consumer spending growth is projected to average approximately 1½% over 2026 and 2027, which is notably slower than the 2.8% in 2025 (Chart 22).

Population growth is a key factor behind this expected slowdown, driven by government policies designed to reduce the inflow of newcomers. Population growth is assumed to slow to average 0.5% over 2026 and 2027. This pace is much slower than the 1.5% in 2025 or the 3.3% in 2024.

Consumption per person is forecast to expand at a modest pace of approximately 1% on average over 2026 and 2027. Elevated unemployment caused by the trade conflict is expected to restrain disposable income per person. The magnitude of this impact depends heavily on the extent to which the trade conflict affects the rest of the economy. Growth in consumption per person is supported by accommodative financial conditions.

Government spending is assumed to grow

The projection for government spending is based on information from published provincial budgets and new federal fiscal measures that have been tabled at the time of writing. Government spending is assumed to grow at a moderate pace in 2026 and 2027. However, the path of federal government spending will be clearer after the budget is released on November 4.

Inflation outlook

Inflation is projected to decline from 2.4% in September and settle around 2% in early 2026. It remains there throughout the projection horizon (Chart 24).

Inflation at 2% reflects opposing forces. On the upside, tariffs and the restructuring of global trade and domestic production are raising costs and supporting inflation. On the downside, excess supply dampens inflation.

Inflation in prices for goods

The continued effects of tariffs and the increased cost of imports are expected to put upward pressure on inflation.

While most Canadian counter-tariffs were lifted on September 1, counter-tariffs on steel, aluminum and motor vehicles remain in effect. Tariffs introduced since the start of the trade conflict are now projected to raise the level of the consumer price index (CPI) by roughly 0.4%. This represents a downward revision from the July Report, which had estimated the impact on the level of the CPI to be roughly 0.8%.

US tariffs and the costs associated with the reconfiguration of global trade are anticipated to raise the cost of imports from the United States and goods produced in other countries. For example:

• US tariffs on goods from China will likely increase the cost of electronics imported into Canada because many of these items are shipped through warehouses in the United States. While importing directly from China would bypass these tariffs, doing so would still be expensive for Canadian businesses.
• US tariffs on Brazilian coffee beans are affecting the price of roasted coffee—a commodity Canada primarily sources from the United States.

Ongoing excess supply and fading past cost pressures, including for food, will put downward pressure on inflation. Overall, inflation in goods excluding energy is expected to ease modestly over the projection. In addition, the removal of the carbon tax will stop having a downward effect on inflation by the second quarter of 2026.

Inflation in prices for services

Inflation in prices for services excluding shelter is expected to ease over the projection horizon because of the impact of excess supply.

Inflation in shelter services prices—which is currently elevated—is expected to moderate. Inflation in rent eases because the supply of rental housing is expected to increase and because slower population growth will continue to hold back demand growth.