Flat growth and trade turmoil reinforce expectations for a long policy pause
Canada’s economy looked to have stalled heading into year‑end, and that has forecasters leaning harder toward a Bank of Canada rate freeze that could stretch through 2026.
Industry‑based GDP was flat in November after a 0.3% decline in October, with Statistics Canada’s flash estimate pointing to a modest 0.1% gain in December and a 0.5% annualized contraction for the fourth quarter.
Much of the drag came from goods‑producing industries, particularly manufacturing and agriculture, even as services rebounded from earlier labour disruptions.
“Canada's economy hit the brakes in Q4 and may have slipped into reverse,” Tony Stillo, director of Canada economics at Oxford Economics, said.
“November GDP was flat after a 0.3% m/m drop in October, and StatCan's flash estimate for a mediocre 0.1% m/m uptick in December leaves Q4 GDP growth on an industry basis tracking slightly in the red.”
He added that “we don’t think it will change the Governing Council's view that interest rates are at an appropriate level.”
Stillo said recent data are “a tad weaker than StatCan's early call for a 0.1% m/m advance and our expectations,” with rebounds in retail, education, and transportation “not enough to offset large declines in manufacturing and wholesale trade, which were partially impacted by a global semiconductor shortage.”
He warned that “US tariffs, elevated trade policy uncertainty, and a shrinking population will keep GDP growth sluggish until the latter half of 2026” – a claim on population trends that other demographers have challenged and that will bear watching as immigration policy evolves.
Economists see little case for hikes or cuts
RBC Economics described November as “muted,” noting that “real GDP growth came in flat, slightly lower than both our pre‑release expectation and Statistics Canada's advance estimate for a 0.1% increase.”
Output in services “bounced back” from education and postal strikes, but goods “remained under pressure” amid a “large drop in auto production in November reportedly due to temporary chip shortages.”
RBC’s Nathan Janzen and Abbey Xu said preliminary figures pointed to a 0.5% annualized decline in fourth‑quarter GDP, below both their 0.5% growth forecast and the Bank of Canada’s flat projection.
They emphasized that monthly GDP estimates “are highly revision prone” but said they “do not expect further interest rate reductions from the Bank of Canada” and that “a near‑term pivot to interest rate increases won't be needed.”
In their view, “this subdued growth backdrop supports keeping the policy rate on hold through 2026” as officials weigh fragile output against inflation still running slightly above target.
Trade uncertainty keeps the Bank on the sidelines
Oxford Economics projected that “the Bank will likely remain on hold for all of 2026, before adjusting rates back to a neutral level of 2.75% in early 2027 assuming the economy improves after successful renegotiation of the USMCA,” and said that if the trade pact “falls apart entirely” the Bank would push rates “deeper into stimulative territory for an extended period.”
In December, governor Tiff Macklem said the 2.25% policy rate was “at about the right level” to support modest growth while keeping inflation near target, reinforcing the case for patience rather than fresh easing.
Scotiabank recently said that Canada’s growth “stays roughly flat in 2026” in its base case and that the Bank is “unlikely to move until CUSMA renegotiations are settled and the policy backdrop clears,” with the next move expected to be a hike in the second half of 2026.
Make sure to get all the latest news to your inbox on Canada’s mortgage and housing markets by signing up for our free daily newsletter here.
