Top economists on Bay Street express cautious optimism for 2026

As Canada approaches 2026, the economic landscape is evolving, revealing a mix of cautious optimism and underlying challenges. With major banks weighing in on what’s ahead, understanding these insights can help businesses and individuals navigate the complexities of the upcoming years. Let’s delve into the current economic climate and what it means for the future.

Cautious optimism about the Canadian economy in 2026

The Canadian economy is entering 2026 on a sturdier footing than expected. Leading economists from Bay Street have highlighted that both the federal government and provincial administrations are finally taking proactive steps to enhance the business environment across the nation. This renewed focus on growth comes amidst a backdrop of previous uncertainty and challenges.

Despite these positive developments, certain regions, particularly Southwestern Ontario, are feeling the sting of U.S. tariffs more acutely than others. This uneven impact raises questions about the overall health of the economy as it strives to recover from past shocks.

At a recent event organized by the Economic Club of Canada, chief economists from the six largest banks in the country conveyed a cautiously optimistic sentiment. They predict moderate economic growth, stable interest rates, and an encouraging outlook for stock markets, despite underlying concerns about a potential bubble driven by technological advancements.

Current economic indicators for Canada

While economic forecasts are generally optimistic, they are tempered by the realities of the current landscape. A year ago, many experts anticipated that the protectionist policies of U.S. President Donald Trump would push Canada into a recession. However, the situation turned out to be less dire than expected.

• Broad tariff exemptions for Canadian exports helped cushion the blow.
• Resilient household spending was supported by a buoyant stock market.
• Government interventions, including interest rate cuts, contributed to a growth trajectory.

These factors collectively steered the economy towards an estimated growth rate of around 1% last year. Nevertheless, the impact of U.S. economic policy continues to influence Canada’s financial stability.

Shifts in economic policy

The uncertainty stemming from U.S. trade policy has prompted a significant shift in Canada’s economic approach. Prime Minister Mark Carney, alongside provincial leaders, is now advocating for a more business-friendly stance. This includes deregulation, infrastructure investments, and tax incentives aimed at fostering a favorable investment climate.

Stéfane Marion, chief economist at National Bank of Canada, emphasized the importance of this shift, suggesting that external pressures have catalyzed a pivotal change in Canadian economic policy, marking a generational re-evaluation.

Regional disparities in growth

Amidst the broader economic recovery, regional disparities are becoming increasingly evident. Frances Donald, chief economist at Royal Bank of Canada, pointed out that while some areas, like Alberta, are experiencing growth rates that significantly exceed the national average, others continue to struggle due to external trade pressures, particularly in manufacturing sectors.

• Ontario and Quebec are hard-hit by tariffs on steel, aluminum, and automobiles.
• In contrast, Alberta's economy is rebounding robustly, illustrating the uneven recovery across provinces.
• Some regions still face significant economic pain that will take time to resolve.

This highlights a critical challenge for policymakers, who must address these disparities to ensure a more balanced national recovery.

Investment and productivity challenges

Despite the positive trends, experts caution that the federal government’s current measures may not be sufficient to stimulate significant business investment or tackle long-standing productivity issues. Beata Caranci, chief economist at Toronto-Dominion Bank, noted that while measures have been taken to unwind previous less effective policies, a deeper re-examination of corporate and personal tax structures is essential for accelerating growth.

• Current tax rules may deter small businesses from expanding.
• There is a need for a comprehensive review of the economic framework to encourage investment.
• Addressing productivity will be crucial for sustainable economic growth.

The outlook for interest rates

Looking to 2026, economists largely agree that further interest rate cuts from the Bank of Canada are unlikely. Some analysts believe that rate increases may begin in the latter half of the year to combat persistent inflation, which has remained above the target rate of 2%.

Douglas Porter, chief economist at Bank of Montreal, conveyed a sense of stability, citing that while inflation indicators are somewhat sticky, the current economic conditions—particularly weak oil prices—should help keep inflation manageable.

The housing market’s trajectory

The Canadian housing market, which has experienced its share of turbulence, could glean some benefits from interest rate stability. However, Avery Shenfeld, chief economist at Canadian Imperial Bank of Commerce, expresses skepticism about a quick rebound in housing activity. He points out factors such as:

• An oversupply of existing and planned housing units.
• Downward pressure on condominium prices.
• Nationally, housing is expected to remain a drag on overall economic performance.

These factors indicate that while some regions might see increased activity, the overarching trend may continue to reflect caution.

Trade agreements and their significance

As Canada, the U.S., and Mexico prepare to negotiate the renewal of the continental free trade agreement, USMCA, the outcomes of these discussions are poised to significantly impact the Canadian economy. Experts note that the range of possibilities varies from minimal adjustments to potential U.S. withdrawal from the agreement.

Jean-François Perrault, chief economist at Bank of Nova Scotia, expressed confidence that while discussions might involve contentious rhetoric, the practical implications of tariffs suggest a mutual understanding of the importance of maintaining trade relations. He cautioned, however, against complacency, urging Canada to capitalize on this unique political moment to bolster internal markets effectively.

This highlights the need for a proactive approach to trade negotiations, ensuring that Canada remains competitive and resilient in the face of evolving global dynamics.