Uncertainty and geopolitics are expected to be key to shaping 2026, according to the Business Development Bank of Canada’s monthly economic newsletter for December 2025 entitled "The economy in 2026: Make or break time for Canada?"
The bank predicted that economic growth in the country next year would decelerate compared to 2025. It pointed to the slowing of growth in the Eurozone, China, and the US and indicated that Canada would follow the same trend, being an open economy and a major natural resources producer.
Tensions between US and China would also continue to impact Canada, with more tariffs anticipated to be on the horizon. The uncertain relationship between Canada and these two major trading partners is expected to hinder export growth in the next year. Moreover, the Canada-United States-Mexico Agreement also reaches the end of its contract year in 2026.
Sectors affected by the tumultuous trade situations began to adjust as this year comes to a close, and aspects of the economy maintained stability. In export-dependent sectors, 26,200 were generated in 2025, and 192,000 were created across the economy.
Sectors that were less sensitive to global trade recorded 1.5 percent growth, while those sensitive to trade reported just 0.2 percent growth.
The BDC forecasted that real GDP growth in 2026 would be 1 percent, down from 2025’s predicted 1.2 percent. Overall, it anticipated Canada’s economy to stay resilient and record modest growth, with domestic spending being key.
Key growth factors
The BDC projected that consumer spending would be vital to stabilizing the economy next year. It noted that inflation was near 2 percent, within the Bank of Canada’s target range. Household demand for goods and services impacted domestic business investment, and ~60 percent GDP was attributed to household consumption.
Nonetheless, consumers face significant debt levels and prices despite a robust job market, exacerbated by low population growth and consumer confidence that limits domestic demand’s growth contribution. While consumers were expected to spend on essentials, discretionary purchases and real estate investment would struggle.
Growth in the residential housing market is set to remain weak in 2026. Canadian business investment is also hindered by a modest sales outlook for businesses next year. Small and medium-sized businesses are concentrating on targeted investments that boost operational efficiency instead of growth; the BDC recommended focusing on technology, automation, and AI-powered process modernization.
The BDC’s forecasted unemployment rate in 2026 is 6.8 percent, while its projected key interest rate is 2.25 percent.