Monetary Policy Report—July 2026—Canadian economy
Economic growth is expected to pick up over the projection horizon, rising above potential output growth. Inflation is elevated in the near term before returning to target as cost pressures fade and excess capacity is absorbed.
Growth of gross domestic product (GDP) has been weak and volatile but is forecast to increase to 1.8% in 2027 and 2028. This recovery is supported by a sustained resumption in export growth as foreign demand expands. Although the Canada‑United States‑Mexico Agreement is now subject to annual review and uncertainty remains, businesses are adjusting to the new trade environment.
Consumption and government spending are the other major sources of growth over the projection horizon. Residential investment expands modestly, and business investment supports growth.
Canada’s productive capacity is anticipated to grow slowly in 2026, held back by tariff‑related structural adjustments and subdued population growth. Potential output growth then strengthens, in part because business investment—including investment in artificial intelligence (AI)—expands.
With overall demand growing slightly faster than potential output, excess capacity is gradually absorbed.
Inflation is expected to slow in the second half of 2026 due to a decline in gasoline prices. However, additional cost pressures from the war in the Middle East continue to affect inflation (see In focus: War-related supply disruptions are passing through to consumer prices).
Inflation returns to around 2% in early 2027 and remains close to the target over the projection horizon. There is some volatility in year‑over‑year inflation due to base‑year effects. The inflation forecast is highly conditional on oil prices, which are sensitive to developments in the Middle East.
Economic outlook
GDP growth is expected to rise from 0.7% in 2026 to 1.8% in 2027 and 2028 (Chart 10). The pickup reflects a resumption in export growth as businesses adjust to the new trade environment, as well as a modest recovery in residential investment following a decline in 2026. Activity in the oil and gas sector also contributes to growth in the near term.
Economic growth outpaces potential output over the projection horizon, and excess supply is gradually absorbed.
Export growth is expected to strengthen
Growth in exports resumes over the projection horizon in line with foreign demand. However, exports remain on a lower path than before US tariffs were imposed.
Non‑commodity and non‑energy commodity exports are projected to recover as businesses continue to adjust to the new trade environment. Results from Bank of Canada surveys show that businesses’ outlooks for future export sales have improved despite continued trade‑related uncertainty. Rising US investment in AI is anticipated to boost demand for Canadian raw materials, metal products and electrical equipment. The recent depreciation of the Canadian dollar makes Canada’s exports more competitive, providing additional support.
Energy commodity exports also pick up in 2026 as elevated oil prices support conventional oil production. They are then projected to slow in 2027 as oil prices decline (Chart 11).
Import growth is expected to recover in 2026 as domestic demand expands and export growth continues to rebound.
Investment growth is lifted by the oil and gas sector
Growth in business investment is anticipated to strengthen in 2026, led mainly by activity in oil and gas (Chart 12). As oil prices decline over the projection horizon, growth in investment in oil and gas moderates.
Investment growth outside the oil and gas sector picks up in 2027 and 2028. Although the drag from trade tensions and uncertainty is assumed to fade gradually, investment remains on a lower path than it was before US tariffs were imposed.
Government spending supports economic activity
Government spending contributes significantly to growth over the projection horizon. Provincial infrastructure spending and federal programs are also expected to support business investment.
Consumption expands modestly
Consumption growth averages just above 1% over the projection horizon, partly reflecting subdued population growth (Chart 13).
Consumption growth per person slows from its strong pace in the second half of 2026. Higher gasoline prices leave households with less money to spend.1 Recent weakness in housing activity also weighs on consumer spending.
After stabilizing in 2027, consumption growth per person picks up in 2028 due to:
- wage growth that outpaces inflation because of productivity gains
- improved terms of trade as assumed oil prices remain above pre‑war levels
- elevated financial wealth
Growth in residential investment is subdued
Residential investment growth is expected to increase over the projection horizon. However, it is restrained by slow population growth, affordability challenges in some housing markets and a large stock of unsold small condominiums in Toronto and Vancouver. Households are also expected to remain cautious about home purchases given the uncertain economic environment.
Inflation outlook
Inflation is expected to ease from about 3% in the second quarter of 2026 to about 2½% over the second half of the year. This mainly reflects lower gasoline prices (Chart 14). Oil prices are assumed to decline in line with the oil futures curve as of July 9, 2026, and gasoline refinery margins narrow. Excluding the effects of energy, inflation is shaped by offsetting downward and upward pressures.
Downward pressures come from services inflation:
- Shelter price inflation is expected to ease further in the near term, reflecting a sluggish housing market and weak growth in rents.
- Inflation in services excluding shelter, travel and hospitality remains subdued as excess supply restrains growth in unit labour costs.
Upward pressures come primarily from food and other goods:
- Food inflation is expected to remain elevated, reflecting war‑related pressures on fuel, fertilizer and other agricultural input costs.
- Inflation in goods excluding food and energy is expected to rise as war‑related input costs gradually work their way through supply chains and feed into prices.
- Some services prices are boosted by higher energy and goods prices.
- The depreciation of the Canadian dollar raises import prices.
In 2027, inflation is projected to fall close to the 2% target because the direct effect of higher gasoline prices will have dissipated (Chart 15 and Chart 16). Other war‑related cost pressures continue to pass through to consumer prices. However, supply disruptions are assumed to be relatively short‑lived, and weak demand hinders the ability of businesses to pass cost increases on to consumers (see In focus: War‑related supply disruptions are passing through to consumer prices).
There is some volatility in year‑over‑year inflation in 2027 due to base‑year effects coming from the previous spike in gasoline prices and the changes to the federal fuel excise tax (see Chart 15).2
Inflation remains close to 2% in 2028. Over this period:
- Downward pressures from excess supply fade as the output gap narrows. Shelter inflation also becomes less subdued as population growth slowly recovers.
- Upward cost pressures from war‑related supply disruptions and the reorientation of supply chains away from the United States dissipate.
Endnotes
- 1. However, recent fiscal measures—such as the temporary suspension of the federal fuel excise tax—provide some offset.[←]
- 2. Base‑year effects occur because year‑over‑year inflation compares current prices with prices from 12 months earlier. If prices moved sharply a year ago because of a temporary event, annual inflation can rise or fall as that movement enters or drops out of the comparison, even if current monthly price changes are stable.[←]