OTTAWA, ON, July 9, 2026 /CNW/ - Trade uncertainty with the U.S. and the conflict in the Middle East continue to weigh on Canada's economy, according to new analysis from Signal49 Research which forecasts GDP to increase just 0.5 per cent in 2026.
"Canada's economy is in the storm before the calm as consumers face the impacts of various domestic and international factors that are driving up inflation," stated Pedro Antunes, Chief Economist at Signal49 Research. "While there are significant downside risks to our forecast this year, growth prospects for 2027 have the potential for major improvements as trade challenges ease. We expect Canada's GDP to increase 2.1 per cent next year."
The Canada–U.S.–Mexico Agreement is the major speedbump to Canada's economy in 2026. Signal49 Research's forecast hinges on the assumption that tariffs will likely be greatly reduced by the end of the year, in line with the U.S. midterm elections. Persistently high inflation in the U.S., being brought about by higher energy prices but also tariffs, could lead the administration to ease on many of its tariffs and instead target specific industries that it has historically put extra focus on, such as autos, auto parts, and steel.
The U.S. Federal Reserve is facing a difficult task. While the energy shock has also played a role, its tariffs are naturally pushing inflation up further in the U.S. than in Canada. Signal49 Research anticipates U.S. inflation will reach 3.6 per cent in 2026, which might move the Fed to increase rates rather than lower them. Canada's central bank is expected to keep its rate unchanged at 2.25 per cent throughout the forecast period, as sluggish domestic growth combined with an elevated unemployment rate are keeping inflationary pressures down on a broader basis.
Despite the technical recession and lagging consumer confidence, spending has remained active and is expected to continue through the rest of 2026. Higher gasoline prices, propelled by the conflict in the Middle East, have pushed up year-over-year growth of Canada's consumer price index. However, upward pressure on prices hasn't substantially spilled over into non-energy prices yet, reflecting softer demand conditions.
Slow population growth due to changes in immigration policy are impacting both the labour and housing markets. Despite modest job gains throughout the forecast period, the unemployment rate is set to fall, as weak labour force growth will weigh on labour supply. On the housing front, with finished but unoccupied housing peaking, builders are set to hold back on new units, especially in the face of slower population growth expected in the next few years. Starts in recent years have been propped up by rental apartment buildings, but those were decisions made before the updated immigration policy dampened demand for those units.
Business investment in Canada has been struggling, having declined for five consecutive quarters up to the first quarter of 2026. However, increased spending on machinery and equipment, mineral exploration, non-residential buildings, and software helped offset the decline but wasn't enough to prevent a negative reading. While the headline result appears weak, business confidence didn't erode further in the first quarter of the year, even with the ongoing tariff pressures and geopolitical tensions in the Middle East.
Despite their current deficits, the federal and provincial governments are focused on getting things built. Most provinces have an ambitious government investment plan, while the federal government is creating avenues to help boost private sector investment. Alongside increased defence spending, efforts to streamline approvals via the Major Projects Office are also aimed at accelerating project delivery. The federal government's broader plan of catalyzing $500 billion in investment is ambitious, and is expected to be a positive contributor to the economy going forward, with those benefits set to enable long-term growth.
About Signal49 Research
Signal49 Research is the country's leading independent research organization. For more than seven decades, Signal49 Research has been providing research that supports evidence-based decision making to solve Canada's toughest problems. Follow Signal49 Research on LinkedIn at the link here. For more information on our organization, please visit the link here.
SOURCE Signal49 Research
Media Contact: Signal49 Research, E-mail: [email protected], Tel: 613-526-3090 ext. 224
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