The year 2025 was a remarkable one for the economy due to the amount of uncertainty amid tariffs and other headwinds, and for the relative strength of the Canadian economy despite it all.
So, what does 2026 have in store?
Scotiabank’s Chief Economist Jean François Perrault offers his view of the year ahead on the economy in Canada and the U.S., and where interest rates and the loonie could be headed.
One theme from 2025, however, carries on to the current year.
“We’re thinking of 2026 in an environment where there is still a tremendous amount of uncertainty to come,” he said in a recent Scotiabank virtual event for clients called Focus 2026.
Canada: Modest economic growth supported by fiscal spending
Canadian economic growth is expected to slow modestly in 2026 relative to 2025, to 1.5% this year compared to 1.7% last year, according to Scotiabank Economics. More effective fiscal policy support in Canada has contributed to this relative stability in growth rates amid ongoing uncertainty and tariffs.
Canadian governments, both federal and provincial, are taking action with policy tools aimed at strengthening the economy as the country adjusts to a new trading relationship with the U.S.
“It's clear the fiscal policy Canada will be more supportive of activity going forward than it has been for a period of time, particularly in the capital spending side,” said Perrault. “And that leaves us a little bit optimistic, even though we expect growth in Canada will be weaker than it will be in the U.S. in 2026.”
United States: ‘Two-speed economy’ to see slower growth
The U.S. economy remains surprisingly strong, given the trade and policy uncertainties. But it’s a tale of a “two-speed economy,” Perrault says. The tech sector, with support from artificial intelligence, is going strong but the industrial side of the U.S. economy is struggling, he added. In 2026, U.S. growth is expected to slow to 1.6% from 1.9% in 2025, according to Scotiabank Economics.
“The challenge is that there’s very much a two-speed economy going on at present…. The industrial side of the economy is going to drag a little bit more on the tech side of the economy as we go forward next year. So our call is for a bit of a weaker U.S. than others out there, still growth just a slowdown of growth as opposed to acceleration of growth.”
Interest rates: U.S. Federal Reserve the lone central bank expected to cut
The Bank of Canada is likely finished with cutting interest rates, given that inflation risks remain. Scotiabank Economics expects the central bank to raise its key policy rate by half a percentage point in the second half of 2026, a move that would reverse the recent rate cuts. But it may happen earlier if Canada’s economy responds more quickly to the government’s transformation agenda than expected, Perrault says.
South of the border, the U.S. Federal Reserve is expected to lower its target rate to 3% in the first half of 2026, the only major advanced economy expected to do so.
“We think most big banks are done, certainly done cutting. The Fed, on the other hand, is not,” Perrault said. “From an advanced country perspective, the Fed is the only game in town in terms of cutting rates. And of course, you know what the Fed does matters tremendously for the global outlook and markets in particular.”
Dollar: Loonie expected to strengthen as Bank of Canada, Fed diverge
The combination of the Bank of Canada hitting pause on interest rate cuts while the Federal Reserve is expected to reduce its key policy rate this year should strengthen the Canadian dollar. Scotiabank Economics is expecting the loonie to reach US$0.75 by the end of this year.
Read more about Scotiabank Economics’ forecasts in its latest report: All About Historical Revisions: Scotiabank’s Forecast Tables
