Forecasts point to a slow‑burn recovery – if trade tensions stay contained
Canada’s economy looks set for only a cautious pickup over the next two years, with Scotiabank warning that a stronger US backdrop would help – but that Canada–United States–Mexico Agreement (CUSMA) renegotiations and US policy uncertainty remains make‑or‑break for growth and rates.
Canada’s recovery stays fragile, not roaring
Scotiabank said its base case sees Canadian real GDP growth “stay roughly flat in 2026—averaging 1.5%—though this annual average is pulled down by household spending in 2025Q4, masking a gradual strengthening in most quarters.”
“Growth should accelerate to 2% in 2027, supported in particular by the fading effect of trade tensions on growth and past effects of policy rate cuts,” the bank added.
The lender said Canada’s outlook has “improved incrementally, partly thanks to the economic resilience south of the border.” S
tronger US demand and reduced global trade uncertainty are expected to “provide a welcome boost to Canada’s export‑oriented sectors and business sentiment,” even as domestic structural drags – including “weak productivity growth and low population growth” – kept overall expansion “moderate by historical standards.”
Bank of Canada seen on hold – until the trade dust settled
On policy, Scotiabank said it maintains the view that the Bank of Canada would “stay on hold in the near‑term,” arguing the central bank is “unlikely to move until CUSMA renegotiations are settled and the policy backdrop clears.”
“Consistent with our previous guidance, we expect the next move will be a rate hike in the second half of 2026, bringing the policy rate closer to its neutral stance,” the forecast said, noting that earlier cuts in 2025 have acted as “insurance against a sharper slowdown.”
The central bank left rates unchanged and said it views the current policy rate as ‘at about the right level’ to keep inflation concerns in check, a signal that “interest rate cuts in early 2026 could be off the table.”
CUSMA review looms as a key risk for housing and credit
Scotiabank stressed that CUSMA remains “a significant wildcard” and said its base case assumed “an orderly renegotiation with only minor changes that should have minimal impact on the economic outlook.”
It warned that failure to reach an agreement would “sharply raise the low effective tariff rate that Canada has benefited from so far,” with clear implications for exporters and the broader risk environment.
That concern echoes recent report from Conference Board of Canada saying that “looming trade renegotiations and softer growth projections have put the housing and mortgage sectors on alert,” with the 2026 CUSMA review treated as “a critical swing factor” for demand and pricing.
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