The economy is bruised, not broken - Canadian Franchise Association
To be clear, the economy is not strong yet. Unemployment is still too high. Population declines will continue to limit the underlying growth rate that can be generated. Sectors directly targeted by U. S. tariffs continue to underperform, and high fuel costs are cutting into household purchasing power. But, headline growth numbers mask an important shift: . . .
To be clear, the economy is not strong yet. Unemployment is still too high. Population declines will continue to limit the underlying growth rate that can be generated. Sectors directly targeted by U. S. tariffs continue to underperform, and high fuel costs are cutting into household purchasing power. But, headline growth numbers mask an important shift: Slowing population growth is depressing aggregate GDP while measures that reflect how households experience the economy show signs of improvement. On a per-person basis, the economy is still growing. The unemployment rate also edged lower (6. 6% in May from 6. 8% at end of 2025)—a seemingly contradictory outcome that makes sense only when accounting for the contraction in the available workforce. We remain cautiously optimistic that enough support remains in place to sustain gradual improvement in those per-person and per-worker economic indicators this year with further tailwinds building into 2027. Oil price shock hasn’t derailed consumer spendingHigher energy costs are a real headwind, particularly for lower-income households where transportation costs absorb a much larger share of disposable incomes. Yet currently, purchases at the gas pumps account for about 3. 5% of household incomes overall —up from 2. 9% in Q4, but not historically high. The longer the energy price shock lasts, and the higher oil prices go, the larger the threat to consumer spending. But, for now, households have broadlycontinued to spend. Canada is also a net oil exporter, and rising oil prices significantly increase revenues flowing into pockets of the economy, and boost the purchasing power of Canadian exports. Canada’s terms of trade—the ratio of export prices compared to import prices—rose sharply in Q1 as oil prices increased. As a result, real gross domestic income—the amount of goods and services that can be purchased from domestic production—jumped 2. 7% annualized in Q1 despite the small decline in real GDP. The caveat is this revenue gain is not evenly distributed. It is concentrated in oil producing regions while high gasoline price hit all households. Labour markets are improving per workerWe know improving is not the same as strong—Canada’s unemployment rate is elevated, particularly for younger workers. But the direction of labour market data has been positive once accounting for the unprecedented slowing in population growth. We have noted before that Canada is facing anunusual structural challenge: The labour force is shrinking due to immigration pullbacks, and a net population decline. In this context, modest employment declines, that could normally generate recession concerns, are today still consistent with improving per-worker conditions. Importantly, the unemployment rate has drifted lower this year despite averaging small monthly job losses. Still, even with early signs of improvement, labour markets are weak. Looking ahead, Canada will eventually face the opposite problem—labour supply shortages driven by retiring workers, and not enough young people entering the market. U. S. trade policy has stabilizedAt the same time, the worst fears about escalating tariffs have still not materialized. Product-specific tariffs on steel, vehicles, and wood products continue to bite. Manufacturing production remains 3. 5% below 2024 with sharp declines in steel and wood products. But, the vast majority of Canadian exports remain exempt from U. S. tariffs under CUSMA compliance rules, and that exemption is maintained in newly proposed Section 301 tariffs set to replace current Section 122 tariffs in July. Upcoming CUSMA extension negotiations will be watched closely, but shouldn’t actually change tariff rates here and now. The extension under consideration is the expiry date of the deal a decade from now in 2036, so current trade rules remain in effect if the deal is not extended. But more reason for encouragement is the direction of U. S. tariffs have moved lower rather than higher. The list of exempted products from broader U. S. tariffs globally has grown to cover almost half of U. S. imports. Overall (including CUSMA and other exemptions), the share of U. S. imports subject to tariffs has declined from a peak of 45% in June 2025 to just over one-third of imports in April 2026. Plus, average tariff revenues collected by the U. S. administration have continued to edge lower. Policy backdrop remains supportiveWe don’t expect the Bank of Canada to hike interest rates in response to the oil price shock. The BoC is closely watching whether higher oil prices feed into either broader inflation pressures (outside of the mechanical jump in gasoline prices) or longer-run inflation expectations. But, the odds of this happening have, if anything, eased in recent months. Core inflation measures have moved lower. Much of the disproportionately large surges in jet fuel and fertilizer prices following the closure of the Strait of Hormuz have also unwound. Meanwhile, both federal and provincial governments areramping updeficit spending. While most growth benefits will likely appear in 2027 or beyond, the dollar amounts are substantial and will likely support growth this year. We look for the BoC to pivot to gradual rate hikes in 2027, but that view is contingent on seeing significant improvement in the economic backdrop. Economies diverging on growthTariffs, demographic shifts and commodity cycles are keeping Canada’s provinces on different tracks. Energy and mining hubs are set to outperform again, while more tariff-exposed provinces—like Ontario, Quebec, and British Columbia—remain behind. Newfoundland and Labrador stands alone as Canada’s only accelerating growth province in 2026, topping our ranking with a 4% expansion. Growth will be powered by elevated oil prices and newly available production capacity at mines and offshore oil vessels—all four that are back online. Alberta (2%) will see similar benefits with higher energy prices and robust international demand for oil supported by the recently expanded Trans Mountain pipeline. Saskatchewan (1. 8%) is bolstered by additional momentum from tariff relief from China on canola. Manitoba is set to be the slowest growing of the Prairies, expanding just 0. 8%—though it will also stay ahead of the national average despite facing steep U. S. tariff pressures. The story is more challenging in central Canada. Ontario and Quebec are projected to expand by just 0. 4%—at the bottom of our growth ranking. U. S. tariffs had the greatest impact on manufacturing and investment in both provinces, while accelerating population declines compound the challenge—especially in Ontario where the population is on track to shrink in 2026. B. C. rounds out the slower-growing provinces at 0. 6%, squeezed by demographic outflows and ongoing tariff headwinds on lumber and aluminum exports. Atlantic Canada shows more resilience. Prince Edward Island (1. 7%), New Brunswick (1. 4%), and Nova Scotia (1. 3%) all outpace the national average, supported by government spending, and an agri-food recovery. Still, moderating construction and softer housing markets will slow growth. Per capita GDP will see gainsWhile most economies are decelerating in 2026, the underlying picture isn’t quite as soft as headline numbers suggest. Slowing population growth will lift per-capita GDP in most provinces, narrowing the performance spread between the fastest and slowest growing regions. Modest real GDP gains paired with population contractions will dramatically cut the relative weakness in Ontario and B. C. when measured per capita. Per person growth in these provinces is projected to improve and move closer to the national average, which could make economic conditions feel less strained than headline numbers suggest. Quebec, however, will struggle in its position among the slowest-growing provinces even on a per capita basis as neither population nor growth dynamics provide meaningful support. British Columbia – Demographic headwinds constrain growthBritish Columbia’s economy showed greater resilience than expected in 2025 with stronger-than-anticipated real estate and non-residential construction, along with a material increase in pipeline transportation pushing real GDP growth to 2%. However, momentum is expected to moderate in 2026 to an estimated 0. 6% as demographic headwinds, slumping real estate construction, and trade-related challenges weigh on the economy. Alberta– Energy sector strength underpins outlookAlberta’s economy posted solid performance last year, advancing 2. 7% supported by strong oil and agricultural production, and construction. Higher global energy prices, resilient oil production, and robust demand for takeaway oil capacity should keep the economy on a solid footing this year, though headwinds from slowing demographic growth are weighing on residential construction. We project the economy to moderate to 2% growth this year, but that still keeps it at the front of the pack. Saskatchewan – Chinese tariff relief and mining output bolster growthSaskatchewan’s economy advanced 2. 2% in 2025, ranking among the country’s top performers, driven by record agricultural production and robust mining. We expect the pace to moderate slightly to 1. 8% in 2026, though the province should remain among the country’s fastest-growing economies, underpinned by rising mining output and Chinese tariff relief. Manitoba – Manufacturing faces growing trade headwindsManitoba’s economy expanded by a modest 1. 3% in 2025 as strong agricultural production and construction helped offset pressure on manufacturing. The province continues to face significant headwinds from U. S. trade measures. Tariffs on heavy trucks, buses and patented pharmaceuticals, along with the expanded scope of existing tariffs on metal derivatives are expected to weigh on manufacturing, contributing to a moderation in overall growth to 0. 8% in 2026. Ontario – Slowdown deepens as trade tensions persistSegments of Ontario’s economy remain fragile. Trade tensions with the U. S. continue to weigh on manufacturing and investment with particularly acute pressures in the southcentral and southwestern regions. Real estate remains a drag on growth, whileconsumer spending—though resilient so far—faces headwinds from slowing population growth, and eroding purchasing power from higher gas prices. We expect Ontario’s real GDP growth to moderate to 0. 4% in 2026 from 1. 3% in 2025, marking the slowest year for growth on record outside of a severe recession1. Quebec – Scraping byThe new year started on a positive note for Quebec with manufacturing activity bouncing from a five-year low, and consumers showing persistent resilience. It’s a relief after a rough ride for the economy this past year. Heavy trade turbulence and pullbacks in private sector capital investment caused it to contract twice—in Q2 and Q4—pushing annual growth to a nation-low 0. 8% in 2025. Still, the outlook remains muted. Thick trade war fog will keep businesses guarded, and declining population is poised to sap some of the momentum in consumer-focused sectors. We project the economy to grow by just 0. 4% in 2026. New Brunswick – Growth to moderate amid construction and utilities normalizingNew Brunswick’s growth is expected to slow to 1. 4% in 2026 from 2% in 2025—keeping it in the middle of our provincial growth ranking. Construction, manufacturing, real estate, and healthcare will drive growth, though some sectors will offer more modest contributions than last year. Nova Scotia – Government spending keeping the economy afloatNova Scotia’s economy is expected to moderate in 2026 after another solid year. Real GDP growth is forecast to slow to 1. 3% in 2026 from 2. 3% in 2025 as real estate headwinds, and softening construction investment outweigh continued strength in public sector spending. Still, this will keep Nova Scotia in the middle of our provincial growth ranking, and ahead of the national average this year. Prince Edward Island – Construction pullback offset by agricultural recovery, consumer strengthPrince Edward Island’s growth is expected to slow to 1. 7% in 2026 from 2. 8% in 2025—still near the top of our provincial rankings, but reflecting waning tailwinds from a softening construction sector. We see rebound in the agri-food sector, and robust consumer spending preventing a sharper slowdown. Newfoundland & Labrador – Commodity boom leaves households behindWe’re upgrading our 2026 real GDP forecast for Newfoundland and Labrador to 4% from 1. 8%, driven by elevated commodity prices and robust production across oil and mining sectors. But, headline growth shouldn’t be mistaken for broad-based strength. The commodity boom is narrowly concentrated, leaving households largely on the sidelines. Source:RBC Economics