‘Addressing Canada’s structural economic weaknesses will not be quick or easy, but the seeds of its transition will become more apparent in 2026,’ says RBC chief economist Frances Donald in a new report. / RBC PHOTO

Canada avoided a widely anticipated recession in 2025 despite escalating trade tensions with the U.S., but the economy heading into 2026 will remain uneven, with sharp regional divides, persistent affordability pressures and uncertainty around trade and investment, according to RBC Economics.

“The country has become fragmented into trade-hit and trade-insulated regions,” RBC chief economist Frances Donald and assistant chief economists Robert Hogue, Nathan Janzen and Cynthia Leach wrote in Beyond the forecast: Six themes for Canada’s economy in 2026. While businesses are hopeful about diversifying trade and boosting productivity, those shifts are unlikely to provide meaningful relief this year, the economists said.

In addition to avoiding recession, Canada actually added jobs and household balance sheets improved. RBC now expects the economy to continue stabilizing in 2026. In addition, GDP per capita likely increased in 2025 for the first time in three years. Still, the bank cautioned that the headline resilience doesn’t reflect how many Canadians feel.

“There are many Canadians who will feel the concept of resilience is a poor description of the economies they experience,” the economists wrote.

A major reason the economy held up was that nearly 90% of Canadian exports to the U.S. remained tariff-free under the Canada–U.S.–Mexico Agreement (CUSMA). That protection will come under closer scrutiny in 2026 as talks begin on extending the deal beyond its 2036 expiry. Even without a full renegotiation, uncertainty will persist, RBC said, noting that tariffs are already in place on products such as steel, aluminum, lumber and vehicles.

Changing labour market dynamics

Changes to immigration policy are also reshaping the outlook. After Ottawa reduced in-migration in late 2024, Canada saw its largest quarterly population decline in decades in 2025. RBC expects population growth to be flat in 2026, easing pressure on housing and services but also reducing the need for job creation. At the same time, labour supply will increasingly be constrained by aging demographics as the largest cohort of baby boomers reaches retirement age.

RBC said economic performance is becoming more regionally divided, with Ontario and Quebec most exposed to U.S. trade risks, resource-rich provinces such as Alberta and Saskatchewan performing more strongly, and infrastructure, defence and tourism activity boosting growth unevenly across the country.

Even as inflation slows, affordability remains a central challenge. Persistently high home prices and uneven job prospects will continue to strain households, the bank said. Looking ahead, RBC expects inflation to stay just above 2%, interest rates to remain lower and house price growth to slow, particularly in Ontario and British Columbia.

Don’t look for dramatic turnaround

The bank said 2026 will mark the early stages of a longer adjustment rather than a dramatic turnaround. Private investment remains weak compared with the United States, and major infrastructure and defence projects are unlikely to materially lift growth next year, even as they lay the groundwork for longer-term gains.

Other economists broadly agreed that the outlook for 2026 remains modest, with downside risks tied largely to trade and investment.

Deloitte Canada recently lowered its forecast for 2026 GDP growth to 1.5%, down from 1.7%. Chief economist Dawn Desjardins said the year is likely to begin slowly but could improve as it progresses.

“Overall growth is probably going to be a bit slower than in 2025,” Desjardins told the Financial Post. “But when we’re thinking about the setup for 2027, if we’re correct about this momentum building in 2026, the second half, I think it sets up nicely for 2027.”

Business investment is one of Deloitte’s biggest question marks. Much will depend on whether companies gain confidence in the federal government’s plans—under Prime Minister Mark Carney—to incentivize billions of dollars in pro-growth investment, as well as the outcome of this year’s CUSMA review, which faces renewed pressure from the Trump administration.