Canada’s Economy Set to Slow in 2026: Trade Uncertainty & Cooling Labour Market

The latest TD Economics report (dated December 11, 2025) projects that Canada’s real GDP will grow by 1.7% in 2025 compared to approximately 1.3% in 2026 on an annual average basis. On a Q4-to-Q4 basis, growth moves from about 1.8% in 2025 toward 0.9% in 2026, reflecting worsening momentum. ([economics.td.com](https://economics.td.com/ca-forecast-tables

Labour Market & Inflation
Canada’s unemployment rate, after rising steadily since mid-2023, improved to 6.5% in November 2025, down from 7.2% in the summer, thanks largely to gains in part-time employment—particularly in health and social services. ([reuters.com](https://www.reuters.com/sustainability/sustainable-finance-reporting/canadas-unemployment-rate-shrinks-lowest-16-months-part-time-jobs-increase-2025-12-05/ The labour force is expected to see minimal growth due to changes in immigration policy, which will limit upward pressure on unemployment even as economic growth slows. ([economics.td.com](https://economics.td.com/ca-quarterly-economic-forecast CPI inflation is expected to stay in the 2.0–2.2% range through 2026, with tempered pressures from trade disruptions and softened demand. ([economics.td.com](https://economics.td.com/ca-forecast-tables The Bank of Canada is forecast to maintain its overnight rate at 2.25% for the foreseeable future under these conditions. ([economics.td.com](https://economics.td.com/ca-quarterly-economic-forecast

Spending and Investment Patterns
Business investment remains weak, with durable goods and equipment investment contracting or flat through much of 2025—with some modest improvement expected later. ([economics.td.com](https://economics.td.com/ca-forecast-tables Residential investment and rental construction were relatively resilient in mid-2025, but signs of cooling emerged by October. ([economics.td.com](https://economics.td.com/ca-quarterly-economic-forecast Government spending, both current and capital, represents a growing stabilizer in the outlook. ([economics.td.com](https://economics.td.com/ca-quarterly-economic-forecast

Trade Policy & Tariff Risks
Canada’s outlook is clouded by uncertainty over trade exposure—especially related to the 2026 review of the Canada-U.S.-Mexico Agreement (CUSMA). The CUSMA exemption currently shields many Canadian exports from blanket U.S. tariffs, but that protection is seen as vulnerable and could be reversed or narrowed. ([advisor.ca](https://www.advisor.ca/economy/policy/a-tariff-exemption-was-canadas-salvation-in-2025-its-absolutely-at-risk-in-2026/ Canadian firms report high levels of concern about the loss of the U.S. de minimis duty-free exemption, tariff exposure, and investment pauses tied to this uncertainty. ([kpmg.com](https://kpmg.com/ca/en/home/media/press-releases/2025/10/canadian-businesses-brace-for-cusma-negotiations.html

Strategic Implications
For investors and policymakers, muted growth and steady inflation suggest limited monetary policy flexibility—little room for aggressive rate cuts. ([economics.td.com](https://economics.td.com/ca-forecast-tables Sectors tied to construction or government procurement may outperform, whereas tradable-goods exporters—especially in automotive, steel, aluminum—face risk depending on how tariff reviews unfold. The large dependence of Canadian exports on U.S. market access (over 75%) magnifies sensitivity to U.S. policy changes. ([apnews.com](https://apnews.com/article/4f54f7022cc2dc4b84b1fad6fce57ab4 Businesses will need to manage chain-of-origin compliance, supply-chain localization, and invest defensively. The possible loss of CUSMA exemptions poses a “nuclear option” for some exporters. ([advisor.ca](https://www.advisor.ca/economy/policy/a-tariff-exemption-was-canadas-salvation-in-2025-its-absolutely-at-risk-in-2026/

Open Questions

• How binding will the U.S. demand for concessions in the 2026 CUSMA review be, and will Canada acquiesce sectors-by-sector to maintain exemptions?
• To what extent will government spending programs—especially infrastructure and clean tech—be executed efficiently, and how much private capital will they crowd in?
• How fragile is consumer spending given rising uncertainty and squeezed incomes, and what happens if labour market softens faster than expected?
• Are there risks of policy missteps—tariff escalation, subsidy wars, or unexpected inflation shocks—that could fan downside risk beyond the base case?