OECD Economic Outlook, Volume 2026 Issue 1

Canada

GDP growth is expected to strengthen over 2026 and 2027, reaching 1.2% and 1.7% respectively, as the economy recovers from the 2025 trade‑related slowdown triggered by higher US tariffs. Household consumption and government spending on defence and infrastructure will continue to underpin growth, while business investment should recover gradually. Given Canada’s position as a net energy exporter, exporters are set to benefit from higher energy prices linked to the Middle East conflict. Headline inflation is set to rise temporarily before easing back toward 2% over the projection horizon, while core inflation should remain closer to target, restrained by persistent economic slack.

Monetary policy has remained on hold at 2.25% since October 2025 and is expected to stay unchanged in the near term, as the Bank of Canada is set to look through temporary energy‑related price increases given the remaining economic slack. Fiscal policy is projected to ease further in 2026, with a broadly neutral stance assumed for 2027, which appears appropriate. Key policy priorities are advancing internal market reforms, improving trade diversification and infrastructure delivery, and accelerating digitalisation.

Growth has moderated in response to higher tariffs

Real GDP contracted by 0.2% in the fourth quarter of 2025 following a 0.6% increase in the third quarter. The decline was driven primarily by a sharp rundown in inventories, while private consumption, government investment and net exports contributed positively to activity. Business investment showed a small increase after several quarters of decline. Leading indicators, such as monthly GDP by industry, point to a rebound in growth in the first quarter of 2026. After a modest easing in late 2025, the unemployment rate has increased again in recent months, reaching 6.9% in April 2026. Headline inflation rose to 2.8% in April 2026, from 2.4% in March, driven by higher energy prices linked to the conflict in the Middle East. Core inflation continued to moderate, easing to 1.5% in April.

Canada 1

1. Year-on-year growth rates.

Source: OECD Economic Outlook 119 database.

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Canada: Demand, output and prices

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Canada 2

1. Refers to population aged 15 years and over.

2. As percentage of potential GDP.

Source: Statistics Canada; and OECD Economic Outlook 119 database.

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The Canadian economy slowed over the course of 2025 as higher US tariffs weighed on activity. However, the easing remained relatively mild, with some quarterly volatility, supported by the sharp increase in the share of goods exported under the United States-Mexico-Canada Agreement (USMCA), which helped reduce the effective tariff burden. Against the backdrop of the evolving conflict in the Middle East, Canada, as a net energy exporter, is expected to benefit from higher energy prices, supporting energy‑sector investment, exports and national income. These positive effects will, however, be partly offset by the adverse effects of higher energy prices on inflation and household consumption. The temporary suspension of the federal fuel excise tax on gasoline, diesel and aviation fuels between April and September 2026, intended to cushion these effects, appears relatively broad‑based and insufficiently targeted, and would benefit from a more tailored design. Household consumption should also receive a temporary boost from the new “Canada Groceries and Essentials Benefit” (a cash transfer to support households’ spending on essential goods, including a one‑off top‑up in 2026).

Monetary policy is set to remain on hold while fiscal policy provides support

The Bank of Canada has kept its policy rate unchanged at 2.25% since October 2025, the lower bound of its estimated neutral range. The rate is expected to remain at this level in the near term, reflecting two opposing forces on inflation: downward pressure from continued slack in the economy, and upward pressure from higher energy prices, whose temporary impact on headline inflation the Bank is likely to look through. Quantitative tightening in the form of net asset sales concluded in March 2025, and the Bank has since returned to standard balance‑sheet management.

The general government budget deficit narrowed from 2.1% of GDP in 2024 to 1.8% in 2025, reflecting the expiry of a one‑off compensation payment (related to the underfunding of First Nations Child and Family Services). In contrast, the underlying fiscal position deteriorated in 2025 due to targeted support for the sectors most affected by tariffs, broader tax cuts and higher defence spending. Further fiscal easing is expected in 2026, driven by additional defence spending and new infrastructure investment, as well as the temporary suspension of federal fuel excise taxes, slightly offset by savings on operational spending as laid out in the new spending review. A broadly neutral fiscal stance is assumed for 2027, in the absence of new policy measures.

Growth is expected to recover from the trade-induced slowdown

Growth is projected to rebound in the first quarter of 2026, with the recovery continuing throughout 2026 and 2027. Exports should continue to improve as the economy emerges from the slowdown induced by tariff increases. Business investment should gradually recover, while household consumption is set to remain robust, though expanding at a more moderate pace in line with slower population growth. In the near term, consumption growth is expected to be temporarily dampened in the second quarter 2026 by higher energy prices, before regaining strength thereafter amid rising real incomes. Housing investment is expected to expand moderately in 2026 and gain momentum in 2027, supported by targeted housing policy measures. Government investment should remain robust in 2026-2027, in line with planned increases in defence spending and infrastructure programmes. Labour‑market conditions are poised to improve from the second half of 2026, as headwinds gradually dissipate. Headline inflation is set to remain elevated in the near term, reflecting higher energy prices from the conflict in the Middle East and the fading impact of the earlier removal of the federal fuel charge, although this increase will be partly mitigated by the temporary suspension of the federal fuel excise tax. Inflation will gradually moderate thereafter. Core inflation should remain closer to 2%, with spillovers from higher energy and food prices remaining broadly contained.

Risks to the outlook are tilted to the downside, reflecting Canada’s exposure to adverse global shocks through trade and confidence channels. A prolonged conflict in the Middle East would affect activity primarily through higher and more volatile energy prices, tighter global financial conditions and heightened uncertainty. While Canada may benefit temporarily from higher energy prices as a net energy exporter, more severe supply disruptions and rising input costs across a broader range of goods would ultimately intensify inflationary pressures and weigh on domestic demand. Uncertainty around the USMCA joint review scheduled for 1 July 2026 represents a further downside risk, as potential revisions or contentious negotiations could dampen business confidence and investment given high exposure to the US market. Conversely, stronger and more sustained global demand for secure energy supply, together with domestic policy efforts to accelerate major energy projects, could be a longer-term upside risk.

Reforms should continue to deepen the internal market and reduce regulatory barriers

Canada has begun to implement substantial reforms aimed at diversifying trade, strengthening the internal market through the removal of Canadian Free Trade Agreement (CFTA) exemptions, and improving the approval and financing of national infrastructure projects. These reform efforts should continue. Further priorities include standardising the recognition of professional qualifications across provinces, including foreign credentials, and easing provincial restrictions on the free movement of professional services. Enhancing competition in the telecommunications sector and expanding access to high‑speed broadband would further support digitalisation. The ongoing shift in government outlays from operational spending toward higher investment, including in infrastructure, should continue to support long‑term potential and productivity growth.