Canada’s economy is expected to regain momentum over the next two years after weathering a slowdown linked to higher United States tariffs, according to a new outlook from the Organisation for Economic Co-operation and Development.
The OECD projects Canada’s gross domestic product (GDP) will expand by 1.2 per cent in 2026 and 1.7 per cent in 2027 as household spending, public infrastructure projects and defence investments help drive growth following a challenging 2025.
The report paints a picture of an economy that has remained resilient despite trade disruptions and growing global uncertainty. While higher U.S. tariffs weighed on economic activity last year, Canada avoided a deeper downturn through stronger use of trade provisions under the United States-Mexico-Canada Agreement, which reduced the impact of tariffs on Canadian exports.
“GDP growth is expected to strengthen over 2026 and 2027, reaching 1.2% and 1.7% respectively, as the economy recovers from the 2025 trade-related slowdown triggered by higher US tariffs.”
The OECD noted that Canada’s economy contracted by 0.2 per cent during the fourth quarter of 2025 after growing by 0.6 per cent in the previous quarter. A sharp reduction in business inventories largely drove the decline, although consumer spending, government investment and exports continued to support overall economic activity.
Recent indicators suggest conditions are beginning to improve. Monthly economic data point to renewed growth in the first quarter of 2026, while business investment has shown signs of stabilizing after several quarters of weakness.
Despite those improvements, labour market challenges remain. Canada’s unemployment rate climbed to 6.9 per cent in April 2026 as businesses continued to adjust to slower economic conditions.
Inflation has also moved higher in recent months, largely because of rising global energy prices linked to the ongoing conflict in the Middle East.
“Against the backdrop of the evolving conflict in the Middle East, Canada, as a net energy exporter, is expected to benefit from higher energy prices, supporting energy-sector investment, exports and national income.”
According to the OECD, Canada’s headline inflation rate rose from 2.4 per cent in March to 2.8 per cent in April 2026. Core inflation, which excludes some of the most volatile price movements, continued to ease and stood at 1.5 per cent in April.
As a major energy exporter, Canada is expected to benefit from higher oil and gas prices through increased export revenues, stronger investment in the energy sector and improved national income. However, the report warns that these gains could be partially offset by rising costs for consumers and businesses.
The OECD said higher fuel and energy costs could temporarily reduce household purchasing power and weaken consumer spending, particularly if geopolitical tensions persist.
Public spending is expected to play a significant role in supporting Canada’s economic recovery.
The OECD forecasts increased federal investments in defence projects and infrastructure development throughout 2026 and 2027. Government spending will also be supported by temporary measures, including the suspension of federal fuel excise taxes on gasoline, diesel and aviation fuel between April and September 2026.
The report also highlighted the federal government’s new Canada Groceries and Essentials Benefit, designed to help households manage rising costs through direct cash transfers and a one-time top-up payment.
While the OECD acknowledged these measures could support consumer spending, it suggested that fuel tax relief may be too broad and could be improved through more targeted assistance.
The report expects the Bank of Canada to keep its benchmark interest rate unchanged at 2.25 per cent in the near term.
The central bank has maintained that rate since October 2025. According to the OECD, policymakers are likely to look past temporary energy-related inflation pressures while focusing on continued economic slack and moderate underlying inflation.
“The Bank of Canada has kept its policy rate unchanged at 2.25% since October 2025, the lower bound of its estimated neutral range.”
The OECD said the current monetary policy stance appears appropriate given the balance between inflation risks and economic growth concerns.
Although the outlook points to recovery, the OECD warned that significant risks remain.
“Risks to the outlook are tilted to the downside, reflecting Canada’s exposure to adverse global shocks through trade and confidence channels.”
Among the largest concerns is uncertainty surrounding the scheduled review of the USMCA trade agreement on July 1, 2026. The organization said potential changes to the agreement or prolonged negotiations could undermine business confidence and discourage investment because of Canada’s heavy dependence on the U.S. market.
The OECD also cautioned that an extended conflict in the Middle East could lead to more volatile energy prices, tighter global financial conditions and increased uncertainty across international markets.
While higher energy prices may initially benefit Canada’s export sector, prolonged disruptions could eventually fuel inflation and weaken domestic demand.
Beyond short-term economic challenges, the OECD urged Canada to continue pursuing reforms aimed at strengthening long-term growth and productivity.
The organization highlighted ongoing efforts to reduce internal trade barriers between provinces, improve approval processes for major infrastructure projects and diversify international trade relationships.
It also called for greater recognition of professional qualifications across provincial boundaries, including foreign credentials, and recommended reducing restrictions on professional services within Canada.
The report further emphasized the need to increase competition in the telecommunications sector and expand access to high-speed broadband networks to support digital transformation and innovation.
According to the OECD, continued investment in infrastructure, trade diversification and productivity-enhancing reforms will be critical to improving Canada’s long-term economic performance as the country navigates a changing global trade environment.
About the Author
