Recent forecasts for the Canadian economy show stronger performance than recent headline data on GDP growth and employment levels suggest. Canada is poised for an economic rebound in the second half of this year that gains further strength in 2027.
“The foundation is more solid than it looks and the Canadian engine of growth is revving up,” said Frances Donald, chief economist at the Royal Bank of Canada, in summarizing the latest quarterly Canadian outlook by RBC Economics, released June 15.
That sentiment is echoed, albeit in muted form, in the most recent quarterly forecast by TD Economics, published June 18.
An “undeniably disappointing start to the year coupled with 95,000 jobs lost between January and March fuelled chatter that Canada was flirting with a recession,” the TD report says.
“Fortunately, a closer look suggests that while the economy is far from robust, it also isn’t quite in dire straits.”
In May, the economy added a net 88,000 jobs, erasing most of the job losses in previous months. The unemployment rate fell to 6.6 per cent compared with 6.9 per cent in April. TD forecasts a further decline this year to 6.4 per cent.
Despite the oil shock, inflation is relatively tame. Inflation climbed to an annualized 3.2 per cent in May, Statistics Canada reported on Monday.
Food inflation was 4.3 per cent, again outpacing the general inflation rate.
TD forecasts an average 2.4 per cent inflation rate for the year, falling to just 2.1 per cent in 2027.
Inflation is running hotter in the U.S., which reported May inflation of 4.2 per cent.
The lower Canadian rate enables the Bank of Canada to continue supporting the economy by keeping interest rates unchanged for the rest of the year rather than raising borrowing costs to to fight inflation.
TD is forecasting substantial real GDP growth of 1.3 per cent this year, a recovery from last year’s anemic 0.7 per cent, and a 1.8 per cent economic expansion in 2027.
And despite U.S. trade tensions, Canadian export volumes are currently about three per cent higher than in 2024 prior to U.S. tariffs.
RBC Economics regards the upcoming negotiations on a renewed Canada-U.S.-Mexico Agreement, under which most Canadian exports enter the U.S. duty-free, as worrisome but not overly so.
“The (CUSMA) extension under consideration is the expiry date of the deal a decade from now in 2036,” RBC says, “so current trade rules remain in effect if the deal is not extended.” My Star colleague Adam Radwanski has detailed why the spectre of a trade collapse is unrealistic.
In the meantime, the U.S. trade regime has eased somewhat.
So-called sectoral U.S. tariffs on imported Canadian steel, autos, aluminum and wood products remain punishing. But the share of U.S. imports subject to tariffs has dropped to about one-third of the total from a June 2025 peak of 45 per cent.
RBC characterizes the economy as being in early-stage recovery. But “we know that improving is not the same as strong — Canada’s unemployment rate is elevated, particularly for young workers,” RBC says.
The recovery is also geographically uneven.
Exposed as they are to a manufacturing sector whose current output is 3.5 per cent below 2024 levels, Ontario and Quebec are each expected by RBC to post weak annual economic growth of just 0.6 per cent this year.
By contrast, the Maritime provinces are all expected to outpace the national average in GDP expansion, supported by government spending and an agri-food rebound.
And Alberta and Saskatchewan, with projected GDP growth of two per cent and 1.8 per cent this year, respectively, are benefiting from strong energy and agricultural prices.
So is Newfoundland and Labrador, the RBC forecast’s fastest-growing provincial economy this year, expanding by four per cent from higher oil prices.
The overall Canadian economy will get a boost this year and especially next as both federal and provincial governments ramp up deficit spending on energy and infrastructure projects.
An abrupt decline in government spending largely accounted for the 0.1 per cent negative GDP growth in this year’s first quarter.
Household spending has held up well, rising by 1.5 per cent in the first quarter. In April, retail sales rose for the fourth consecutive month, with rising gasoline and fuel prices a factor.
Among the most encouraging signs of restored economic health is that per capita GDP, a leading indicator of living standards, is growing again after a rare decline in 2022-23 of 2.5 per cent due to a surge in population.
Labour markets are still weak, says RBC. But “Canada will eventually face the opposite problem — labour supply shortages” driven by retiring workers and lower immigration levels.
Those daunting demographic trends will make for a tighter labour market just as Canada embarks on a historic rebuilding drive. Meeting that moment is among the biggest economic challenges on the near horizon.
