TD Economics says Canada is still in the mix for 2026 growth
Canada's economy is on track for a stronger second half of 2026, even after posting a second consecutive contraction in real GDP during the first quarter, TD Economics says in its latest Canadian Quarterly Economic Forecast titled "Still in the Game."
The bank said the Q1 contraction, at -0.1% quarter-on-quarter annualized, was driven largely by an abrupt pullback in government spending, a trend it does not expect to continue through the year. Combined with 95,000 jobs lost between January and March, the soft start to the year fuelled talk that Canada could be flirting with recession. TD Economics said a closer look suggests the economy, while far from robust, is not in dire straits.
Household consumption rose 1.5% quarter-on-quarter in the first quarter despite the contraction, and early data for the second quarter point to a return to growth, with a flash estimate showing monthly GDP up 0.4% month-on-month in April. The labour market also delivered an upside surprise in May, with a net gain of 88,000 jobs reversing much of the losses recorded earlier in the year. The unemployment rate fell to 6.6%, a larger drop than expected, though TD Economics said it remains above a level consistent with a balanced labour market.
Real GDP growth is forecast to accelerate from 2025's 0.7% pace on a Q4/Q4 basis to 1.3% in 2026 and 1.8% in 2027. The unemployment rate is expected to edge down only modestly to 6.4% by the fourth quarter of 2026.
TD Economics said its outlook depends on continued improvement in the trade picture, noting that upcoming CUSMA trade talks represent a risk event, though a deal involving reduced Section 232 tariffs in exchange for concessions on US trade irritants could present some upside risk to the forecast.
On inflation, the bank said Canada's underlying price trends remain well behaved, with the Bank of Canada's preferred core measures running at a below-target 1.5% annualized over the past six months. That should allow the central bank to hold rates steady for the rest of the year. Markets have scaled back expectations for 2026 rate increase from three to just one since late March. TD Economics expects the Canadian dollar to firm up in the coming months as interest rate differentials with the US gradually narrow.
Globally, the bank said the Iran-US peace deal has pushed oil prices down from war-era highs but not back to pre-conflict levels, with four months of supply disruption expected to take time to normalize. TD Economics now sees global growth expanding around 3% in both 2026 and 2027, modestly below its March forecast, citing higher energy prices and the prospect of renewed central bank tightening abroad, including from the European Central Bank, Bank of Japan, and Reserve Bank of Australia.
