Canada's 2026 Economic Outlook: How Job Markets Are Stabilizing Despite Growth Challenges

Canada’s economic outlook for 2026 has evolved broadly in line with cautious optimism from a quarter ago. While the economy isn't yet strong, it has remained more resilient than feared when U.S. tariff threats began escalating a year ago.

Key Economic Challenges

A spike in energy prices from conflict in the Middle East will boost revenues for Canada's oil producing regions, but threatens to add to household affordability concerns—particularly at the lower end of the income distribution.

Tariff uncertainty also remains a key risk to the outlook with potentially contentious negotiations to extend CUSMA this summer.

Add in the impact of sharp slowing in population growth to gross domestic product, plus, a more uncertain economic backdrop that keeps businesses cautious about making large new investments.

Positive Developments

Yet, on a per-person basis, GDP growth rose for the first time in three years in 2025. And, per-worker labour market conditions have begun to improve with the unemployment rate starting to drift lower in recent months.

We remain optimistic that per-capita GDP growth will rise again in 2026. Most Canadian exports remain duty-free via the CUSMA exemption to the new Section 122 tariffs that replace the broad tariffs from 2025 struck down by the U.S. Supreme Court.

Earlier Bank of Canada interest rate cuts also continue to ease concerns about household balance sheets, and planned government spending is beginning to ramp up.

Labour Markets Sending Positive Signals

Ultimately, the best cure for affordability challenges is stronger job markets. Canada's has shown further signs of improvement in recent months after broadly deteriorating (on a per-worker basis) for much of the prior three years.

The interpretation of labour market statistics is being complicated by the unprecedented slowdown in Canada's population growth. Employment growth is still expected to be historically slow in the year ahead, but largely due to a shrinking labour force sharply reducing the rate of job growth needed to keep the unemployment rate on a downward trajectory.

Importantly, the unemployment rate is less impacted by shifting population growth, and therefore, continues to provide a "cleaner" read on per-worker labour market conditions.

The main sources of labour force contraction in the year ahead are expected to be a net outflow of temporary residents and retiring workers. Both of these reduce employment and the labour force at the same time, but leave the unemployment rate essentially unchanged.

Unless the unemployment rate declines from discouraged workers leaving the labour force—this is trackable in the data and has not yet been the case—a lower unemployment rate means hiring demand is strong enough, relative to the size of the labour force, that a larger share of the population that wants a job is able to find one. That's good news for the Canadian workforce.

Stabilizing Trade Helps Support Improvement in Per-Worker Economy

Overall, GDP contracted in the last quarter of 2025, but underlying details showed the decline largely came from a drawdown in inventories by businesses.

Canadian businesses, consumers, and governments all spent more in Q4, and exports rose for a second straight quarter after a post U.S. tariff plunge in Q2 2025.

That improvement is not uniform across the economy though. Sectors targeted directly with U.S. tariffs over the last year have underperformed—steel product and forestry exports fell by 24% and 8%, respectively, in 2025 from a year earlier.

But, critically, most U.S. imports from Canada remain duty-free with an exemption for CUSMA compliant trade included in the new 10% Section 122 tariffs imposed by the U.S. administration to replace broad IEEPA tariffs.

Provincial Overview

We continue to see all provincial economies expanding this year despite the challenging global environment. Oil producing provinces are poised to outperform, while U.S. tariffs weigh more heavily on Ontario and Quebec's manufacturing sectors.

Canada's immigration policy shifts pose additional risks to Ontario and British Columbia, where non-permanent residents represent a larger share of the population.

Growth Headwinds Persist in Quebec, Ontario and B.C.

Soft manufacturing production is driving downward revisions to our 2026 growth forecasts for Ontario and Quebec. We now expect real GDP in both provinces to expand by 0.9%—down from 1.1%.

Both anchor Canada's manufacturing base and are most exposed to U.S. tariffs on steel, aluminum, copper, and lumber. Negative impact has been especially visible in Quebec, where manufacturing output has been on a downtrend for almost all of 2025.

Population growth contracted faster than anticipated in some provinces. Year-over-year population growth has already fallen negative in Ontario and B.C. as of Q4 2025.

Oil Price Shock Adds Upside to Oil Producing Provinces

Traffic disruptions in the Strait of Hormuz have prompted a near 30% increase to our oil price forecast for 2026 compared to our December assumptions, adding material upside to oil producing provinces of Alberta, Saskatchewan and Newfoundland and Labrador.

Alberta stands to see the largest net impact given the scale of its oil and gas production. Producers were already guiding 2026 output higher before the shock, and the province has surplus pipeline capacity on Trans Mountain and Enbridge's systems to move incremental barrels. As such, we've upgraded our 2026 real GDP projection for Alberta to 2.5% from 2.3%.

We see Saskatchewan and Newfoundland and Labrador also benefiting from the commodity upside. We've upgraded their 2026 real GDP projections to 2.3% and 1.8% respectively.

Chinese Tariff Relief Offers Upside to Nova Scotia, Prairies

Canada's partial trade truce with China offers some relief to heavily impacted regions.

For Nova Scotia, the agreement provides the most direct near-term benefit. Exports of farm, fishing, and intermediate food products to China fell roughly 30% in 2025, accounting for the majority of the region's $90 million decline in these categories year-over-year.

With tariffs now suspended on critical lobster and crab products, we expect a partial recovery of those lost export volumes over the remainder of 2026. This improvement has prompted us to upgrade Nova Scotia's 2026 real GDP projection to 1.6% from 1.5%.

Though China is an even more significant trading partner for some Prairie provinces—representing roughly 10% of total exports for Saskatchewan and 8% for Manitoba—the remaining levy on canola seed may still encourage Chinese buyers to substitute to tariff-free competitors.