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Highlights:
Oil prices continue to rise above prior assumptions, but U.S. and Canadian growth outlooks are little changed as consumers spend through the initial increase in fuel costs.
We continue to expect higher energy costs will have a neutral impact on North American economies, which are net energy exporters. Still, there are significant distributional impacts.
Labour market trends in North America diverged in April with Canada showing persistent slack while the U.S. demonstrated resilience—keeping both the Bank of Canada and the U.S. Federal Reserve on the sidelines.
Issue in focus:
Amid gloomy labour market reports in Canada this year, we continue to focus on healthier underlying details, resilient domestic demand, and structural constraints on labour supply to support our forecast for a gradually lower unemployment rate this year.
Forecast changes:
Higher oil prices aren’t dampening household demand yet
We’re watching consumption data closely for signs on whether higher energy costs from Middle East tensions are crowding out other spending in household budgets. So far, evidence in North America is limited. In Canada, consumers spent an average 18% more at gas stations over March and April compared to February, according to RBC’s cardholder transactions. Importantly, spending on non-energy items continued to rise, suggesting little demand destruction to date. This is consistent with our assumption that households are drawing on savings or taking on additional debt to cushion the immediate impact of rising fuel costs.
Similar trends are playing out in the U.S., where a 21% surge in energy product prices between February and March did little to phase households. Overall, real spending (adjusted for inflation) edged up 0.2% in March and retail sales excluding gasoline stations were up another 0.3% in April (and 1.0% above February levels.). As spending holds up amid higher prices, the U.S. household savings rate dropped to 3.6% in March—lowest since 2022.
To be sure, headline spending resilience masks underlying weakness, especially among low-income groups where savings buffers are much smaller, and energy purchases take up a larger chunk of disposable incomes. Moreover, the path for oil prices remains highly uncertain. The longer they stay elevated, the bigger the risk of weakness creeping up the income scale. We continue to assume as a base case forecast that oil prices will track broadly in line with the current forward curve, which shows prices declining in the second half of the year (although not to levels expected before the conflict). But, we will continue to watch for signs of softening demand.
North American labour market data diverges
Canada’s labour market surprised on the downside in April—hiring demand remained soft with jobs edging lower, and the unemployment rate jumped to 6.9% from 6.7% in March. Still, details were less concerning with permanent layoffs continuing to decline.
Our near-term unemployment rate forecast is marked higher. However, due to hidden resilience, we retain the profile of a gradual lowering to 6.3% in Q4, along with our cautiously optimistic outlook for Canada’s labour market (see Issue in Focus below).
Still, recent soft labour market trends should reinforce the BoC’s view that an overnight rate at the lower end of the neutral range remains appropriate, arguing against a near-term pivot to rate hikes. We retain our forecast of no BoC moves this year with rate hikes not expected until 2027.
In the U.S., the Fed is likely encouraged by accelerating job growth in March and April that flags stabilizing business hiring. Their stance is likely shifting further towards neutral from an earlier easing bias, consistent with our expectation the Fed will hold rates in 2026.
A summary of all the changes we made in May:
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Resilience in U.S. consumer spending led us to revise our U.S. Q2 gross domestic product forecast slightly higher from 1.5% to 2.4% q/q annualized. Forecasts for other indicators including the unemployment rate and core U.S. Consumer Price Index were little changed. Headline CPI is still expected to peak at 3.7% in Q2 alongside energy prices before easing more gradually over the remainder of 2026.
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Canada’s unemployment rate was edged higher to 6.7% in Q2, 6.5% Q3 and left unchanged at 6.3% in Q4. We continue to look through near-term volatility, and expect healthy underlying details including persistently declining layoffs, and rising business hiring intentions to support recovery later this year.
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Near-term Canadian GDP growth and inflation forecasts were tweaked slightly to match monthly production statistics, and reflect persistently soft underlying price pressure in early 2026. Neither, however, reflect a change in our view of the broader economy (still cautiously optimistic) or core inflation trends (expected to remain near the 2% target).
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Our BoC and U.S. Fed forecasts for 2026 are unchanged with both holding interest rates steady at current levels through end of year. We still expect the BoC to shift to modest rate hikes in 2027 (‘normalizing’ interest rates alongside an improving per-person economy) but no longer expect the Fed to cut rates in 2027 with the fed funds target range now assumed to hold constant next year as well. Convictions around the 2027 forecasts are lower, contingent on the energy market, broader trade and output gaps in both economies evolving largely as expected in our base case forecasts.
2.25%
0 bps in Apr/26
0 bps
Jun/26
The BoC held the overnight rate at 2.25% in April, and said it will continue to look through the immediate effect of higher oil prices on inflation. Excess supply in the economy still makes the current policy setting “appropriate,” contingent on the economy evolving in line with their forecast, which is also consistent with our own. We expect no change in 2026 before hikes in 2027.
3.5-3.75%
0 bps in Apr/26
0 bps
Jun/26
The Fed held the Fed Funds rate steady in April as expected, but amid growing dissent—one on the decision itself, and three against the easing bias implicit in the statement. Fed chair Jerome Powell made clear of his intention to stay on as a governor after his term as Chair ends. The transition from a majority cutting bias to a narrower one leaves us comfortable with our expectation the Fed will continue to hold steady in 2026.
3.75%
0 bps in Apr/26
0 bps
Jun/26
In April, the Bank of England’s Monetary Policy Committee (MPC) voted 8-1 in favour of holding the Bank Rate at 3.75%. The MPC softened language relative to March when it came to inflationary risks from the conflict in the Middle East, but retained its tightening bias. We now expect at least one rate hike this year as more likely, starting in July.
2.0%
0 bps in Apr/26
+25 bps
Jun/26
The European Central Bank held rates unchanged at 2% in April, but introduced a hiking bias. President Christine Lagarde said the ECB knows where it’s heading, and despite April’s hold, potential rate hikes were discussed in depth. We have updated our forecast now to expect three 25 basis point hikes in June, September and December, bringing the policy rate to 2.75%.
4.35%
+25 bps in May/26
+25 bps
June/26
The Reserve Bank of Australia hiked rates by 25bps in May in an 8-1 vote (one dissenter voted for a pause) with dovish communication. In 2026, the RBA has lifted rates by 75bps to address home-grown, above-target inflation ahead of the Middle East conflict, and not the second-round effects of higher energy prices now. We expect another 25 bps rate hike in June to bring the cash rate to a 4.6% terminal.
Issue in focus:
The hidden resilience in Canada’s labour market
Headline labour market data in Canada looks gloomy in 2026, but beneath that lies more encouraging details: Fewer permanent layoffs and stable hidden unemployment point to easing in cyclical weakness and underlying resilience.
Sectors exposed to U.S. demand are still seeing job losses, but those haven’t spread to the broader economy. More recently, hiring intentions among firms have picked up, though translating those plans into actual job growth will take time.
Structurally, Canada’s aging population is tightening its grip on labour supply as immigration slows, and retirements accelerate. We outline key hidden trends that support our cautiously optimistic view of Canada’s labour market recovery this year.
About the author:
Claire Fan is a senior economist at RBC. She focuses on macroeconomic analysis and is responsible for projecting key indicators including GDP, employment and inflation for Canada and the US.
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