Canada heads into 2026 with real gross domestic product expected to edge up just one per cent, according to the latest projection from the Business Development Bank of Canada.
Inflation should average two per cent, squarely within the Bank of Canada’s target range, while wages rise three per cent. Those headline numbers look manageable, yet they mask a growing list of hurdles that could unsettle business plans and provincial finances in the year ahead.
Trade friction clouds modest GDP forecast
The biggest external threat remains trade uncertainty with the United States. Former U.S. president Donald Trump told reporters on Dec. 4 that the Canada-United States-Mexico Agreement is up for review in 2026 and, “It expires in about a year, and we’ll either let it expire, or we’ll maybe work out another deal,” a remark first reported by Global News.
A lapse or renegotiation of the pact would come as Canadian exporters are already contending with U.S. tariffs that drove 2025 steel shipments down 25 per cent and trimmed automotive exports by five per cent, BDC data show.
Tariff anxiety is one reason BDC’s economists see capital spending cooling, even as household consumption remains the main engine of growth. Interest rates sit at a one-year low, cushioning mortgage payments and credit costs. Still, the Canadian dollar stays weak, raising input costs for firms that import U.S.-dollar goods. Businesses caught between higher costs and soft demand will have “no choice but to increase productivity” in order to protect margins, BDC warns.
Provinces brace for weaker finances
Fiscal cracks are now visible at the sub-national level. Fitch Ratings shifted its outlook on Canadian provinces to “deteriorating” this month, citing slower growth and rising service costs.
“Economic and fiscal challenges continue to tilt slightly negative for provinces, despite resilience thus far,” Fitch senior director Douglas Offerman said. Fitch expects the combined provincial deficit to widen to 1.4 per cent of GDP this fiscal year, compared with 0.1 per cent two years earlier.
Ontario and Quebec, heavily exposed to manufacturing exports, face the twin hit of tariffs and a housing correction, while Alberta must cope with softer energy prices. Slower immigration growth adds another layer of pressure by curbing labour supply and dampening housing demand. Lower borrowing rates will ease interest costs, yet Fitch cautions that large infrastructure pushes could lift debt if economic momentum falters.
A single bright spot is government and utility spending on energy transition and defence projects. Planned nuclear, port and liquefied natural gas builds in Ontario, Quebec and British Columbia promise to lift construction activity and create supply-chain openings for domestic firms. Those benefits, however, arrive gradually and do little for 2026’s immediate arithmetic.
The upshot is a year where steady consumer spending keeps recession risk low, but headline expansion remains tepid. Tariff decisions in Washington, progress on the CUSMA review and the pace of provincial belt-tightening will determine whether growth beats, or misses, its slim one per cent mark.
