Overview

Before the outbreak of the war in the Middle East, the Canadian economy was evolving as expected. Since the war began, oil prices have risen, pushing inflation up, and the outlook has become more uncertain.

Economic growth in Canada has been broadly consistent with the outlook in the January Report. Consumer and government spending are supporting gross domestic product (GDP), while US tariffs and related trade uncertainty are weighing on exports and investment. Inflation had been slowing as expected before the oil price shock occurred.

The war in the Middle East is already affecting the economy. The immediate impact has been higher gasoline prices, pushing up consumer price index inflation to 2.4% in March.

The outlook is highly conditional on key assumptions, including that tariffs remain unchanged and that oil prices gradually decline from US$90 in the second quarter of 2026 to US$75 per barrel by mid‑2027 (see the Tariff and other assumptions section).

Summary of economic conditions

The Canadian economy is adjusting to structural changes. US tariffs have upended trade and put economic activity on a lower path. Some businesses are responding by seeking new markets, producing new products and altering their supply chains—but these changes come at a cost. Uncertainty about the review of the Canada‑United States‑Mexico Agreement is weighing on economic activity. Businesses’ adoption of artificial intelligence is starting to boost productivity.

Growth in GDP is estimated to be about 1.5% in the first quarter of 2026. Consumption and government spending are key sources of strength, while exports and business investment remain weak, continuing the pattern seen in 2025. A slowdown in the housing market is also weighing on growth.

The outlook for growth is similar to that in the January Report. Recent data have been broadly in line with the previous forecast. Higher global oil prices are expected to have little impact on overall growth but will affect its composition. As Canada is a net exporter of oil, its national income will be boosted. At the same time, many consumers and businesses will be squeezed by higher costs. Overall, Canada will fare better than many countries.

The economy is expected to grow 1.2% in 2026. Growth is projected to rise to 1.6% in 2027 and to 1.7% in 2028, slightly above potential output growth, as exports and business investment gradually pick up. Excess supply is slowly absorbed over the projection horizon.

Inflation has been close to 2% for over a year. It slowed in February to 1.8%, easing in all major categories other than energy. In March, it climbed to 2.4% as gasoline prices soared due to higher global oil prices. Inflation is expected to peak in April at about 3% and then return to the 2% target in early 2027, assuming that global oil prices decline as expected. In 2027 and 2028, slack in the economy weighs on prices and largely offsets higher costs, keeping inflation close to the 2% target.

The outlook depends crucially on the outcome of trade negotiations with the United States and the duration and severity of the war in the Middle East, as well as how the economy responds to these developments. For example, if the United States imposes new trade restrictions on Canada, GDP growth would be weaker and inflationary pressures lower. But if the war in the Middle East continues and global energy prices rise further or stay high for longer, price pressures could broaden and become more persistent.