ECONOMIC OUTLOOK

Persistent volatility dampens growth prospects

Real Gross Domestic Product (GDP) declined by 0.2% on the quarter in Q4 2025, ending the year on a low note after growth varied throughout 2025. On an annual basis, GDP increased by 1.7%, marking the slowest pace of growth since 2020 (Figure 1). Weaker exports, particularly to the US due to ongoing tariffs, was a notable drag on economic activity.

Labour market conditions have softened in parallel to GDP, with signs of slack increasingly evident. Employment growth tempered to 1.4% in 2025 as firms grew increasingly cautious with hiring amid ongoing uncertainty. Early 2026 data reinforced this trend, as the economy shed 84,000 jobs in February and 25,000 in January, bringing cumulative losses to over 100,000 since the start of the year. Consequently, the unemployment rate rose to 6.7% in February, reflecting the mounting headwinds facing the workforce as demand cools.

Source: Various forecasting institutions and Turner & Townsend

Inflation remains stable and continues to rest comfortably within the Bank of Canada’s (BoC’s) target range of 1.0%-3.0%. Price growth eased to 1.8% in February 2026, coming down from 2.3% in January. This stability may be temporary, as geopolitical tensions could place upward pressure on consumer prices.

The BoC held its headline interest rate at 2.25% in March 2026, citing the benign inflationary backdrop and an underwhelming economy as notable drivers behind the decision. Focus, however, will need to be kept on the complex trade relationship with the US and ongoing supply chain turbulence – which may alter policy rhetoric should deeper structural issues emerge.

Despite a complex political and economic environment, the Canadian economy is forecast to achieve modest GDP growth of 1.1%, 1.8% and 2.8% in 2026, 2027 and 2028, respectively. Conjecture between federal intent and provincial realities will become more prominent as 2026 unfolds as well. Several recently released provincial budgets aim to tackle deficits this year, while the federal government reinforces an investment led approach to growth.

To ensure optimal viewing of Figure 2, it is highly recommended to view this page on a desktop or laptop screen rather than a mobile or tablet device. The larger screen size provides superior clarity and detail, facilitating a better understanding of the presented information.