Monetary Policy Report—April 2026—Appendix
US protectionism is expected to dampen labour productivity, while population growth remains subdued. Growth in Canadian potential output is expected to weaken in 2026. It then picks up in 2027 and 2028 as investment recovers and artificial intelligence improves productivity.
Despite a small downward revision to potential output growth over the projection horizon, the estimated level of Canadian potential output has been revised up.1 This is largely due to an upward revision to trend labour productivity over history.2 The estimate of the range of Canada’s neutral rate is unchanged.3
Canadian potential output
Potential output is the highest sustainable level of economic activity while keeping inflation at the 2% target.
Growth in potential output is expected to average 1.2% in 2026 before picking up modestly to 1.3% in 2027 and 1.5% in 2028 (Table A‑1 and Chart A‑1).
| Share of global GDP* (%) | 2025 | 2026 | 2027 | 2028 | |
|---|---|---|---|---|---|
| Canada | 1 | 2.3 (1.8) |
1.2 (1.3) |
1.3 (1.4) |
1.5 (1.7) |
| United States | 15 | 2.4 (2.4) |
2.3 (2.3) |
2.4 (2.2) |
2.4 (2.2) |
| Euro area | 12 | 1.1 (1.1) |
1.2 (1.0) |
1.2 (1.0) |
1.2 (1.0) |
| China | 19 | 4.5 (4.4) |
4.3 (4.2) |
4.3 (4.0) |
4.2 (3.9) |
| World | 100 | 3.2 (3.0) |
3.1 (3.0) |
3.1 (2.9) |
3.1 (2.9) |
* GDP shares are based on International Monetary Fund (IMF) estimates of the purchasing-power-parity valuation of country GDPs for 2024 from the IMF’s October 2025 World Economic Outlook.
Note: Numbers in parentheses are based on Scenario 1 in the April 2025 Report, which is treated as the control round. Scenario 1 incorporates the effects on investment from elevated trade policy uncertainty, tariff rates on steel and aluminum that are lower than current rates, and counter-tariffs. In contrast, Scenario 2 assumes that broad-based tariffs lead to substantially larger impacts on trend total factor productivity. Scenario 1 is the more suitable control scenario because the broad-based tariffs assumed in Scenario 2 did not materialize. For more details on the 2025 assessment, see S. Boulanger, R. Dastagir, D. de Munnik, E. Ekanayake, K. Mo, W. Muiruri, F. Noor, S. Obaid and L. Poirier, “Assessing global potential output growth: April 2025,” Staff Analytical Note No. 2025-15 (June 2025).
Source: Bank of Canada calculations, estimates and projections
Trend labour input is flat over the projection horizon, reflecting modest population growth and population aging. Population growth remains subdued due to low immigration targets and measures to reduce the number of non‑permanent residents. Population aging results in a modest decline in the trend labour force participation rate.
Growth in trend labour productivity averages about 1.4% over the projection horizon. This reflects both capital deepening and technological progress, including the adoption of artificial intelligence (AI). AI is expected to boost annual growth in potential output by 0.2 percentage points on average over the projection horizon.
US tariffs are anticipated to weigh on trend productivity growth. Examples include:
- Workers and capital move from industries affected by tariffs to other sectors that are less productive, and workers can take time to adapt to their new job.
- Investment drops significantly in tariff-affected sectors.
Some of these impacts are expected to diminish over time as workers gain new skills and businesses develop new markets and new products. Overall, tariffs are projected to reduce the level of Canadian potential output from where it might have been had tariffs not been imposed. While some sectors are expected to contract, others are anticipated to expand in the long run.
Trend labour productivity could be either higher or lower than projected. On the one hand, businesses could adapt to the new trade environment more effectively or adopt AI faster than expected. On the other hand, labour market scarring could be deeper than anticipated.
The current level of potential output is above the estimated range from the April 2025 Report (Table A‑2). Upward revisions to historical data for Canadian gross domestic product (GDP) and the capital stock, combined with an assumed positive impact from AI, suggest somewhat stronger trend labour productivity.
| 2025 | 2026 | 2027 | 2028 | |
|---|---|---|---|---|
| Annual growth | 2.3 (1.8) |
1.2 (1.3) |
1.3 (1.4) |
1.5 (1.7) |
| Trend labour input growth | 1.3 (0.7) |
-0.3 (0.2) |
0.0 (0.2) |
0.1 (0.6) |
| Trend labour productivity growth | 1.0 (1.2) |
1.5 (1.2) |
1.3 (1.2) |
1.5 (1.1) |
| Revisions to the level of potential output (percent) | 1.4 | 1.3 | 1.2 | 1.0 |
Note: Numbers in parentheses are based on Scenario 1 in the April 2025 Report, which is treated as the control round. Scenario 1 incorporates the effects on investment from elevated trade policy uncertainty, tariff rates on steel and aluminum that are lower than the current rates, and counter-tariffs. In contrast, Scenario 2 assumes that broad-based tariffs lead to substantially larger impacts on trend total factor productivity. Scenario 1 is the more suitable control scenario because the broad-based tariffs assumed in Scenario 2 did not materialize. For more details on the 2025 assessment, see S. Abraham, D. Brouillette, A. Chernoff, C. Hajzler, S. Houle, M. Kim and T. Taskin, “Potential output in Canada: 2025 assessment,” Bank of Canada Staff Analytical Note No. 2025-14 (June 2025).
Source: Bank of Canada calculations, estimates and projections
Global potential output
Growth in global potential output is expected to remain broadly stable over the projection horizon at just above 3% (Chart A‑2). AI boosts productivity in advanced and developing economies, while the boom in AI investment provides additional support for growth in the United States. Population aging in major economies and high US tariffs remain important global headwinds.
Global potential output growth has been revised up by about 0.2 percentage points per year over 2026–28 relative to Scenario 1 in the April 2025 Report (Table A‑1). This is because the larger boost from AI more than offsets the drag from tariffs.
- In the United States, growth in potential output is steady at about 2.4%. AI-related capital deepening and broader adoption of the technology provide a lift. This is partially offset by a slowdown in trend labour input from stricter immigration policies and an aging population. Higher US import tariffs are also anticipated to slightly slow productivity growth.
- In China, potential output growth is expected to ease gradually over the projection horizon. Trend productivity improves gradually, supported by AI adoption. Trend labour input continues to shrink as the population ages.
- In the euro area, growth in potential output is expected to remain close to 1.2% over the projection horizon. Expanding use of AI leads to increases in productivity growth. As in other major economies, the aging population partially offsets these gains.
The outlook for global potential output is subject to upside and downside risks. For example:
- Geopolitical conflicts, including the war in the Middle East, could lead to increased scarcity of energy and other production inputs.
- Potential output growth could rise if countries decide to invest more in the energy or defence sectors.
Neutral rate
The neutral rate is the rate at which the policy interest rate would settle in the long run once output is sustainably at its potential and inflation is at target, after the effects of all cyclical shocks have faded.
Given that Canada is a small open economy, its neutral rate is affected by the global neutral rate. The Bank of Canada uses the US neutral rate as a proxy for the global neutral rate. The US neutral rate is estimated to be within a range from 2.5% to 3.5%, somewhat higher than the 2.25% to 3.25% range presented in the April 2025 Report. The main reason for the upward revision is the boost to US productivity from AI investment and adoption. Gains are partially offset by a downward revision to population growth.
The Canadian nominal neutral rate is estimated to be within the range of 2.25% to 3.25%, unchanged from that in the April 2025 Report. Developments since the April 2025 Report are judged to be broadly offsetting.
- Upward pressures arise from two areas. First are spillovers associated with a higher US neutral rate. The second is a modest increase in growth in trend labour productivity due to upward revisions to the historical data of Canadian GDP and capital stock, as well as the assumed positive impact of AI adoption.
- Downward pressures stem from slower‑than‑expected population growth in the long term.
Risks to Canada’s neutral rate are judged to be broadly balanced. On the upside, US tariffs could reduce overall demand for Canadian assets in US capital markets, necessitating a higher neutral rate to attract alternative investors. On the downside, heightened trade uncertainty could increase precautionary savings among Canadian households and businesses, exerting downward pressure on the Canadian neutral rate.
Endnotes
- 1. For more details, see A. Chernoff, C. Hajzler, S. Houle, G. Ruggero, O. Senyuta, K. Sohal, W. Steingress and T. Taskin, “Potential output in Canada: 2026 assessment,” Bank of Canada Staff Analytical Paper (forthcoming).[←]
- 2. Actual gross domestic product was also revised up.[←]
- 3. For more details, see F. Alves, W. Beaudoin, H. Desgagnés, W. Dong, J. D. Schneider, A. Toktamyssov, E. Trostin and H. Twieling, “Assessing the US and Canadian neutral rates: 2026 update,” Bank of Canada Staff Analytical Paper (forthcoming).[←]