Outlook

US trade restrictions have disrupted the Canadian economy, leading to structural adjustments that will take time to unfold. Economic growth is expected to remain modest. Excess supply roughly offsets upward cost pressures over the projection horizon, keeping inflation close to the 2% target.

Tariffs have led to a lasting reduction in US demand for Canadian goods, weighing on jobs, productivity and living standards in Canada. In response, the Canadian economy is restructuring (see In focus: How Canadian businesses are adapting to US tariffs).

This restructuring involves developing new markets and supply chains to diversify Canada’s trade and reduce reliance on the United States. It also means workers and capital gradually shift from industries most affected by tariffs toward other sectors and new opportunities.

This transition will be challenging for affected workers and businesses, and growth will be modest. As restructuring advances, productivity and economic growth are expected to recover gradually.

Overall, US tariffs have a persistent negative impact on the Canadian economy. By the end of 2026, gross domestic product (GDP) is projected to be about 1½% lower than in the January 2025 Report (Chart 11). Roughly half of the shortfall caused by US tariffs comes from reduced potential output, while the remainder reflects increased excess supply.

Economic outlook

US trade policy has weakened demand for Canadian exports and led to heightened uncertainty. As a result, some businesses have postponed expansion plans. This is hampering the economy’s ability to grow. To capture these dynamics, the projection assumes that potential output growth slows in 2026 and then recovers gradually into 2027.1

GDP growth remains modest at 1.1% in 2026 and 1.5% in 2027—enough to gradually absorb the excess supply created by US trade restrictions (Chart 12). Overall, the economic outlook remains broadly consistent with that in the October Report.

Trade is expected to adjust gradually

While US tariffs on Canada are limited to specific sectors, such as steel and aluminum, their impact on exports is being felt more broadly. Uncertainty about trade policy is prompting some US customers to delay orders. As well, many Canadian businesses are postponing expansions, and some are approaching new US contracts with caution. Additionally, establishing new trade relationships with customers and suppliers outside the United States will be a lengthy process.

While businesses continue to adapt to the new trade environment, the expansion in exports is projected to be modest (Chart 13).

Import growth is anticipated to rise over the projection horizon as domestic demand strengthens.

Growth in investment increases

Weak demand and trade policy uncertainty continue to weigh on investment plans for both exporting and non-exporting businesses. Growth in business investment is forecast to be soft over most of 2026. It is then projected to increase as uncertainty related to US trade policy decreases and export growth strengthens. Targeted federal government programs are also anticipated to support business investment.2

Government spending on infrastructure is projected to rise, mainly reflecting commitments in provincial budgets. Additional federal capital transfers will also bolster infrastructure investment.3

After a large buildup in early 2025, inventory accumulation is expected to slow. This will drag on economic growth in 2026.

In April, inflation settles just above 2% as the removal of the consumer carbon tax 12 months earlier ceases to have a downward effect on year-over-year inflation. Inflation then remains near 2% over the rest of the projection due to a mix of offsetting forces (Chart 16).

Tariff-related costs are expected to place upward pressure on inflation over the projection horizon. These include:

• higher costs for finished and intermediate goods imported into Canada as a result of US tariffs on its trading partners
• higher input costs as Canadian businesses diversify supply chains away from the United States
• higher shipping and logistics costs as imports are rerouted directly to Canada

Other sources of upward pressure on inflation remain, but their significance is diminishing. For example, Canada’s counter-tariffs on US goods are estimated to be largely embedded in domestic prices. Inflation in prices for shelter services has eased considerably, although rent inflation continues to be elevated. Rent inflation is projected to moderate as housing supply increases and demand growth slows due to weaker population growth.

Downward forces on inflation are also at play. US trade restrictions have led to excess supply due to softer demand. This excess supply is expected to weigh on unit labour costs and put downward pressure on inflation over the projection horizon.

Endnotes