PUBLISHED June 28, 2026
Growth Set to Strengthen as the Tariff Shock Fades
According to the OECD’s June 2026 Economic Outlook, 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. The recovery follows a difficult stretch: Canada was the only G7 country to experience a contraction in the fourth quarter of 2025, and the decline that quarter was driven primarily by a sharp rundown in inventories, even as private consumption, government investment and net exports all contributed positively.
A Net Energy Exporter’s Silver Lining
Given Canada’s position as a net energy exporter, exporters are set to benefit from higher energy prices linked to the Middle East conflict — a striking contrast to most of Canada’s European and Asian trading partners, for whom the same conflict represents a pure cost shock. This dynamic helps explain why Canada’s economic story in 2026 looks meaningfully different from, say, Germany’s or Japan’s: the same geopolitical event that is squeezing energy-importing economies is simultaneously padding the revenues of Canadian oil and gas producers and, by extension, government coffers.
Inflation Climbs on Energy, But Core Prices Stay Contained
Headline inflation rose to 2.8% in April 2026, up from 2.4% in March, driven by higher energy prices linked to the conflict in the Middle East. Core inflation, by contrast, continued to moderate, easing to 1.5% in April. 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 — a combination that gives the Bank of Canada room to treat the energy-driven inflation spike as transitory rather than something requiring an aggressive policy response.
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 in the economy. The rate reflects 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 rather than react to with tighter policy.
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 in the economy. The rate reflects 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 rather than react to with tighter policy.
After a modest easing in late 2025, the unemployment rate has increased again in recent months, reaching 6.9% in April 2026. Leading indicators, such as monthly GDP by industry, point to a rebound in growth in the first quarter of 2026, suggesting the labour market softening may prove temporary rather than the start of a deeper deterioration — though the renewed uptick after a brief improvement illustrates just how fragile the recovery in employment conditions remains.
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 measures aimed at cushioning the tariff impact on households and businesses.
Canada’s macroeconomic framework is robust, supported by strong public finances and a well-capitalised banking sector. However, the economy faces significant headwinds from tariffs with the United States, and high household mortgage debt remains another vulnerability, with high debt service costs weighing on household finances. Housing affordability has been declining over recent years, and the OECD recommends strengthening policies to boost housing supply, such as allowing higher-density housing and expediting the permitting process, with additional support focused on social and affordable housing — a structural reform agenda that exists independently of the current trade and energy shocks but that the OECD argues becomes more urgent precisely because households have less fiscal cushion to absorb both pressures at once.
After a modest easing in late 2025, the unemployment rate has increased again in recent months, reaching 6.9% in April 2026. Leading indicators, such as monthly GDP by industry, point to a rebound in growth in the first quarter of 2026, suggesting the labour market softening may prove temporary rather than the start of a deeper deterioration — though the renewed uptick after a brief improvement illustrates just how fragile the recovery in employment conditions remains.
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 measures aimed at cushioning the tariff impact on households and businesses.
Canada’s macroeconomic framework is robust, supported by strong public finances and a well-capitalised banking sector. However, the economy faces significant headwinds from tariffs with the United States, and high household mortgage debt remains another vulnerability, with high debt service costs weighing on household finances. Housing affordability has been declining over recent years, and the OECD recommends strengthening policies to boost housing supply, such as allowing higher-density housing and expediting the permitting process, with additional support focused on social and affordable housing — a structural reform agenda that exists independently of the current trade and energy shocks but that the OECD argues becomes more urgent precisely because households have less fiscal cushion to absorb both pressures at once.
