In this quarter’s Counsel Views, RBC PH&N Investment Counsel’s Chief Investment Strategist Tasneem Azim-Khan once again delivers a two-part report that provides important insights into both the U.S.’s and Canada’s economies, markets and related key developments:
- Part I – It’s gonna be OK – focuses on the world’s largest economy, providing important updates and analysis of the U.S. by looking closely at where it stands today, but also where it is headed, tackling key issues that will impact global markets and in the months to come.
- Part II – A ‘Double-Double’ half full – turns the lens on Canada, diving into the seminal developments that are shaping – and will continue to shape – the economy and investment markets for the year ahead and beyond.
View the Part II executive summary below, or click here for the full article.
Part II: A ‘Double-Double’ half full
Overview: Canada's 2026 economic outlook remains sluggish with sub-1% growth forecast, but recent positive economic surprises and CUSMA trade agreement negotiations represent critical turning points for the country's economic trajectory.
Summary
Canada's economic landscape heading into 2026 reflects a prolonged period of challenges including trade uncertainties, elevated inflation, productivity weakness, immigration system imbalances, and housing market softness. Despite avoiding recession since COVID, many Canadians have experienced sustained economic indigestion. RBC Global Asset Management (RBC GAM) forecasts continued sluggish growth at just under 1% for 2026, marking modest deceleration from slightly above 1% growth penciled in for 2025. While acknowledging the growth outlook lacks robustness, the "glass half full" perspective anchors on conditions becoming "less bad."
Several important late-2025 economic datapoints provided upside surprises. November Canadian employment came in much firmer than expected, with unemployment falling 0.4% to 6.5% - the largest one-month decline since February 2022 (during pandemic recovery), and representing 0.5% improvement from September 2025's recent unemployment peak. Wage growth remained robust at 4% year-over-year for permanent workers. While monthly labor data can be volatile, November's unemployment drop aligned with recent job openings data, providing additional evidence of hiring demand recovery beginnings. Canadian Q3 GDP growth reached 2.6% year-over-year, another positive surprise, with data broadly indicating economic resilience beyond initial fears. Much of the bounce-back in net trade resulted from import pullbacks, though domestic demand and business investment represented weak spots. Residential investment increased for the second consecutive quarter, while household spending continued to prove resilient.
RBC Economics reported Canadian consumer spending broadly outperformed 2025 forecasts. Immigration reductions significantly slowed population growth, underpinning per capita spending increases of 2.4% annually in Q2 2025 - the fastest pace in three years. Q3 household balance sheets remained healthy, with net worth growing faster than Q2. Lower non-mortgage consumer debt payments coupled with strong financial market gains boosted household purchasing power and wealth. While home ownership costs remain elevated, they eased for the seventh straight quarter as of Q3 2025, with RBC's national aggregate affordability measure reaching approximately 53% - a healthy improvement from 2023's high above 63%. Though improvements aren't equally distributed across society segments, they augment overall Canadian consumer purchasing power and portend growing wealth effects within the economy.
These positive late-2025 economic surprises may or may not represent economic "green shoots" for Canada - certainty only emerges in hindsight. Economic recoveries often prove long and typically don't transpire linearly but rather in fits and starts. Monetary policy easing and fiscal stimulus injection represent important drivers potentially boosting Canada's 2026 growth outlook beyond present estimates. Canada has been relatively successful anchoring inflation closer to the Bank of Canada's 2% target after pandemic-driven inflation peaked just above 8% in 2022. Inflation reduction greenlighted the Bank of Canada’s (BoC) easing cycle in late 2024, totaling 1.75% of cuts and driving the overnight rate down to 2.25% by the end of 2025. BoC rate cuts have been substantial compared to other central banks globally.
With inflation closer to BoC target levels alongside labor market stabilization signs, the central bank appears unlikely to cut rates further in 2026. However, monetary policy operates with 9- to 18-month lags, suggesting recent interest rate cuts' stimulative impacts are yet fully transmitted economically. The recently unveiled Carney administration budget may add modest growth tailwinds for the year ahead through important initiatives fostering greater investment via accelerated depreciation, infrastructure and defense spending, and resource sector investments. RBC GAM estimates incremental 0.5% economic growth could be secured with proper measure execution.
The interplay of monetary easing, fiscal stimulus, rebased immigration policy, and future trade negotiation outcomes represents key determinants of Canadian economic growth paths this year. While recent developments across these components appear positive overall, patience will be required for economic benefits playing out over potentially multi-year time horizons.
CUSMA 2.0
The Canada-U.S.-Mexico (trade) Agreement (CUSMA) preservation stands as economically critical for Canada's future narrative. The U.S. formally began discussions regarding CUSMA's future in fall 2025, anticipating July 1, 2026, formal review dates. Renewal or replacement negotiations are expected over several months. While the agreement doesn't automatically expire until 2036, this review carries heightened weight given the Trump administration's exacting tariff agenda. More concerning, any of the three-party countries could withdraw with six months' notice. Alternative options include extending the agreement another 16 years, or triggering annual reviews until 2036 expiry.
When the U.S. imposed blanket 25% tariffs on Canadian and Mexican goods in early 2025 - later increased to 35% for Canada in August - CUSMA served as crucial exporter shielding. According to RBC Economics, approximately 90% of U.S. imports from Canada were tariff-free in Q2 2025 due to CUSMA exemptions. This agreement resulted in average effective Canadian tariff rates in low-to-mid-single-digit ranges, well below average U.S. tariff rates on all imports. CUSMA reconfirmation and continuation would enhance Canada's competitive U.S. trading partner position relative to other countries.
Current stakes feel particularly high considering persistently soft economic data, elevated unemployment, and anemic GDP growth. History offers ambiguous guidance for outcomes. Trump administration tariff negotiation approaches suggest that we should expect tense, potentially volatile months ahead with heightened economic uncertainty. The administration may leverage Canada's U.S. trade reliance favorably as they have previously done. However, general tariff directions have been "better than feared," providing some encouragement.
The Trump administration's bellicose trade stance toward Canada has catalyzed national introspection and much-needed discussion around Canada's disproportionate economic reliance on its southern trading partner. Even if the current U.S. administration dials down trade rhetoric and reinstates CUSMA, arguments for greater domestic dependence and non-U.S. trading partner build-out should gain Canadian traction.
Canada's Federal Budget 2025 outlined comprehensive economic diversification strategies, introducing goals to double non-U.S. exports over the next decade, generating $300 billion more in such trade through several initiatives. The Trade Diversification Corridors Funds is a $5 billion investment over seven years in transportation infrastructure improving global market access. The Strategic Response Fund pledges $5 billion over six years, helping business in trade-impacted sectors adapt and diversify. Additional initiatives include major transportation projects to unlock new trade gateways, and a $2 billion pledge for strategic critical mineral investments.
CUSMA's fate also carries significant consequences for several trade-sensitive U.S. sectors. RBC Economics estimates average effective U.S. tariff rates faced by importers currently sit close to 15% - sizeable jumps from under 3% last year and the highest since the 1930s. In Trump's global trade playbook, CUSMA stands out as safeguarding all parties with relatively lower tariff bills. At least 95% of U.S. goods exported to Canada in 2024 had zero tariffs thanks to the agreement. Canada was the top export market for 32 U.S. states in 2024, with Canada and Mexico together buying nearly five times more made-in-America products than any other country.
Highlights
- Canadian unemployment fell 0.4% to 6.5% in November 2025 - largest monthly decline since February 2022
- Q3 GDP growth reached 2.6% year-over-year, exceeding expectations
- Bank of Canada cut rates by 1.75% total, bringing overnight rate to 2.25%
- 90% of U.S. imports from Canada were tariff-free under CUSMA in Q2 2025
- Canada's Budget 2025 targets doubling non-U.S. exports over next decade
- Trade Diversification Corridors Fund allocated $5 billion over seven years
- Canada was top export market for 32 U.S. states in 2024
- Home ownership affordability improved to ~53% from 2023 high above 63%
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