Canada’s economy has continued to show resilience through the first half of 2026 even as renewed trade tensions with the United States and elevated energy prices weigh on households and exporters, according to a new outlook from RBC.
The bank’s economists said they remain cautiously optimistic that the Canadian economy will improve on a per-person basis despite these headwinds. Gross domestic product growth rebounded in the second quarter after a slower winter, and labour market conditions have improved, with the unemployment rate falling to a two-year low over July and August. That rate is down nearly three-quarters of a percentage point from a year earlier.
RBC is forecasting overall growth of 1% for 2026, which it describes as low by historical standards but notably better once adjusted for demographic pressures, including a population decline in Canada for the first time on record.
Trade Tensions Escalate But Damage Stays Contained
Trade friction between Canada and the U.S. intensified over the summer after Washington imposed 50% tariffs on an additional slice of Canadian imports, covering roughly 5% of total imports, prompting retaliatory Canadian measures of a similar dollar value against U.S. goods.
RBC said these measures will hit targeted sectors hard but expects the broader economic impact to remain limited, aided by fiscal support. The bigger risk, the bank noted, is further escalation, with uncertainty over which products could be targeted next adding pressure on exporters and importers on both sides of the border.
So far, the impact has stayed contained to specific subsectors rather than spreading through the wider economy. RBC pointed out that the Canadian economy has proven more resilient to trade shocks over the past year and a half than initially feared, and business investment has shown signs of recovery, partly linked to the global buildout of AI data centers beginning to extend more meaningfully into Canada.
Households Absorb Higher Energy Costs
Rising energy prices, driven by conflict in the Middle East limiting oil flows through the Strait of Hormuz, are cutting into purchasing power, particularly for lower-income households. Even so, RBC noted the household saving rate rose in the second quarter, helped by a jump in government transfers and the largest increase in wage and salary growth in nearly two years, at 1.4%.
Employment growth rebounded after a weak start to the year, though hourly wage growth has slowed given the still-elevated unemployment rate. RBC’s tracking of card transaction data pointed to continued resilience in consumer spending over the summer, and housing markets showed further signs of stabilizing. Higher oil prices are also generating stronger revenues for oil-producing regions of the country.
On monetary policy, RBC said the Bank of Canada has expressed more concern about higher energy costs feeding into broader inflation than about trade risks, and views targeted government spending as a better tool than interest rate changes for addressing sector-specific trade impacts. RBC said there is currently little evidence of significant pass-through from higher energy prices into consumer prices beyond gasoline and energy-intensive items like airfares.
The bank said an improving economy and falling unemployment weaken the case for keeping the overnight rate at the low end of the Bank of Canada’s estimated neutral range of 2.25% to 3.25%. RBC continues to expect gradual interest rate hikes beginning in the first quarter of 2027, though it flagged growing odds that the first increase could arrive sooner.
Provincial Growth Diverges Sharply
RBC’s outlook shows all provinces on track for a third consecutive year of growth in 2026, supported by resilient household spending, improving labour markets and stimulative fiscal policy. However, the pace varies considerably across the country, with a 3.5 percentage-point gap between the fastest and slowest-growing provinces.
Newfoundland and Labrador leads with projected growth of 4%, followed by Alberta at 2.3%, Prince Edward Island at 2.2% and Saskatchewan at 1.9%. New Brunswick (1.4%), Nova Scotia (1.2%) and Manitoba (0.9%) follow behind. British Columbia (0.8%), Ontario (0.7%) and Quebec (0.5%) sit at the bottom of the ranking, constrained by tariff exposure and slowing population growth.
RBC made modest upward revisions to its forecasts for Ontario and Quebec compared with its June outlook, despite both provinces facing the brunt of new tariff measures, citing stronger-than-expected second-quarter performance in Ontario and better first-quarter growth in Quebec. The bank also slightly upgraded Newfoundland and Labrador and Alberta, pointing to sustained high commodity prices and expanded production capacity in some areas.
RBC noted that Ontario, Quebec and British Columbia are bearing the worst of the new tariff pressures, given their exposure through exports such as vehicles and steel.
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