- The overall macro narrative is essentially unchanged from our previous forecast round, as ongoing and expected impacts of U.S. trade and economic policies continue to constrain the outlook.
- There are minimal changes to the U.S. forecast this round, reflecting the absence of material new data since our last publication due to the government shutdown. We continue to expect the U.S. economy to weaken as emerging signs of softness in the goods sector and labour markets persist into next year.
- The Canadian forecast now incorporates the latest historical revisions, which lift the level of activity and point to an economy in slightly better shape than we had previously assumed. These revisions leave the broad growth profile intact but suggest somewhat less slack, reinforcing our existing policy rate call for the Bank of Canada.
In the United States, new data releases since our last forecast were limited and broadly consistent with our prior assessment. As a result, U.S. growth, inflation and policy rate projections are largely unchanged. Growth is expected to slow from 1.9% in 2025 to 1.6% in 2026, with consumption nearly stalling and business investment moderating. Imports will decline sharply due to tariffs and weak demand, cushioning GDP from a steeper drop. Inflation should hover around 2.5% in early 2026, reflecting tariff effects and service price pressures. The Federal Reserve is likely to continue cutting rates as it looks through these price pressures and responds to broader political pressure, lowering the federal funds rate to 3.0% by mid-2026, below the model’s predicted rate of 3.5%.
In Canada, the most important new piece of information since the last forecast round has been the historical revisions. While these do not change the projected growth path over the forecast horizon, they leave the economy starting from a stronger position. We assess that the revision to the level of GDP mostly reflects higher potential output, as a large part of the change came from higher business investment. Still, these revisions imply less excess capacity, adding to the evidence that the economy is in a better cyclical position than we previously thought (chart 1). This is fully consistent with our view that the Bank of Canada is done with rate cuts and that the next move will be a hike.
Canada’s outlook remains consistent with a modest, uneven expansion. We expect GDP growth to slow modestly from 1.7% in 2025 to 1.5% in 2026 but improve to 1.8% in 2027. The recovery is mainly supported by fading trade war effects on export growth and government policies aimed at supporting growth, particularly business investment. As we have noted before, Canadian governments are focused on deploying policy tools to strengthen the economic outlook and boost investment.
Although historical revisions have reduced the amount of excess capacity, the economy still operates with excess supply. We expect the recovery to help close this gap by early 2027. Weak demand will gradually bring inflation closer to the Bank of Canada’s target, but this process will take time. Underlying inflation remains elevated and has been slow to adjust despite weak growth and excess supply—a sluggishness we expect to persist as the recovery unfolds.
We continue to believe that slow inflation moderation and persistent upside risks, combined with an economy operating close to capacity, are likely to prompt the Bank of Canada to raise rates in the second half of 2026, bringing the policy rate to the mid-point of the Bank of Canada’s range for the neutral rate. For a more complete review of drivers and risks, please consult our previous outlook.
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