Quarterly Canadian Outlook

Like Ontario, population growth has been slowing more sharply in B.C. than other provinces, seeing population declines over the past two quarters. Net outflows of non-permanent residents and interprovincial migrants have been key contributors with the former expected to continue as immigration levels recalibrate through 2027.

Slower population growth combined with personal income tax hikes introduced in Budget 2026-27 are expected to weigh on household spending. Retail sales growth has already eased to 1.6% year-over-year in Q1 2026, a marked slowdown from more than 6% last year. 

The export outlook is mixed. Nominal exports were essentially flat in 2025 as stronger shipments to China offset weaker lumber and aluminum product exports to the U.S. Tariffs are expected to remain a headwind, while softer homebuilding is unlikely to provide sufficient domestic demand to offset weaker U.S. lumber exports. B.C. softwood lumber production fell to its lowest level in at least 11 years in 2025. A ramp up in natural gas exports from LNG Canada’s Kitimat facility could provide some export support, buoyed by elevated prices and global demand.

Sluggish housing activity has contributed to challenges for construction. Residential construction investment has been trending lower since December 2025 as weaker demand and slumping prices take a toll. Higher public-sector investment is providing some offset, alongside development of major energy projects including Woodfibre LNG and Cedar LNG among others. However, broader business investment is likely to remain subdued amid ongoing trade uncertainty, and from the impact of a potentially far-reaching land title court decision last year.  

The energy sector remains a primary growth driver. Middle East conflicts have kept oil prices elevated, supporting robust production. Oil output continues to rise aided by the TMX pipeline expansion, which helped boost energy exports to non-U.S. markets by $4 billion or 65% year-over-year in 2025. Strong international demand, driven in part by global supply constraints, is expected to support TMX operating near full capacity. Planned optimizations of the TMX could unlock an additional 90,000 barrels a day by next year. Dredging work by the Vancouver Fraser Port Authority also seeks to increase tanker capacity at the Trans Mountain marine terminal in Burnaby.

Labour market conditions are finding better balance amid softening demographic growth. Alberta’s unemployment rate declined from its 8.2% peak last summer to 6.6% in May—supported by solid job growth. Population growth remains highest nationally at about 1.2% year-over-year as of Q4 2025, down from more than 4% in 2024, driven in part by still strong net inflows of interprovincial migrants. This should keep consumer spending on a solid track. Nominal retail sales growth in Alberta has outpaced all other provinces, rising 5.5% in Q1 2026 year-over-year above last year’s 3% gain.

Residential construction investment has moderated as demographic growth slows. Housing starts have declined to roughly 47,000 annualized units in Q1 2026 from a peak of about 65,000 in Q2 2025. Non-residential investment is partially offsetting this weakness, supported by increased spending in commercial, and government projects. Capital intentions at the start of the year pointed to a 5.9% nominal increase in investment, though higher sustained oil prices could spur additional energy-sector investment.

China’s revisions to agricultural tariffs on Canadian exports in March provide relief for exporters with the reduction in canola seed tariffs from 75.8% to 15% already prompting a notable rebound in shipments and canola prices. More broadly, Saskatchewan’s resource sector continues to benefit from favorable market conditions. Elevated oil prices will lend near-term support to its energy sector. Mining output remains robust with potash production up 8% year-to-date, and the McIlvenna Bay copper mine now in production amid near-record copper prices.

Agricultural production was a major driver of momentum last year, supported by record crop yields. While planting conditions have been less favourable in 2026, with weather-related challenges initially slowing seeding progress, the latest crop report suggests seeding has advanced to 93%, though still trailing the five and ten-year average of 97%. Farm cash receipts are up 1.9% in Q1 2026 from the same period last year, a modest gain given last year’s strong production. But, we expect improved Chinese market access, strong domestic demand for canola crushing, and increased demand for biofuel amid higher oil prices to provide further support going forward.

Construction is cooling as slower demographic growth eases pressure on residential investment. Home resales are down about 7% year-to-date contributing to softer housing starts, which tracked around 4,800 annualized units in Q1 2026, down from last year’s near 6,200-unit pace. Higher commercial and government spending is providing a partial offset with major projects like BHP’s $14 billion Jansen Potash mine continuing to support employment and growth. Capital spending intentions earlier this year suggested nominal investment would tick slightly lower down about 1% from near-record levels last year, but that would still rank at around the third highest private capital investment since at least 2006.

Manitoba experienced notable nominal export losses last year as marginal gains to countries like Japan and Mexico couldn’t offset weaker U.S. demand. Some relief may come from an improved trade outlook with China, where tariff relief on canola seeds and peas provide near-term support to agriculture and food manufacturing. While early weather-related challenges slowed seeding progress, current reports suggest seeding is at 93%, near the five-year average of 95%. 

Residential investment remains a key source of resilience, increasing 35% year-to-date, though cracks could be emerging. Housing starts have moderated from last year, but remain above the five-year average. Strength may become harder to sustain, however, as weaker home resales, down 11% year-to-date and slowing population growth temper housing demand.

The province’s $3.7 billion capital investment plan for fiscal 2026–27, similar to last year, should provide support to non-residential construction and employment. However, trade-related uncertainty is weighing on business investment, which has been softening. Capital intentions at the start of the year pointed to a 2.5% decrease in investment, marking the first decline in five years.

The labour market remains a bright spot with the unemployment rate at 5.5% in May—the lowest among all provinces. Moderating population growth has allowed labour force growth to better align with job creation. Improved labour conditions combined with the removal of provincial sales tax on grocery store food announced in Budget 2026 should provide some underlying support to household spending, preventing a sharper pullback.

It’s still a tricky time for business investment. Another auto manufacturer recently shelved plans for a $15 billion complex, underscoring broader hesitation among private investors. Government investment—which provided substantial support in late 2024—didn’t sustain momentum into the first quarter of the year either.

Toronto is the exception, where FIFA World Cup preparations have been bolstering non-residential construction investment, making it one of few Ontario CMAs to report growth in this category. Once construction activity subsides, the tournament should also provide a meaningful boost to hospitality and tourism.

Manufacturing remains a sore spot. Winter retooling resulted in the shutdown of several auto plants, suppressing output and job creation. Tentative signs of stabilization have emerged, however as the industry recently stopped bleeding jobs—likely tied to auto plant reopenings as well as government support, and some U.S. tariff rule adjustments. Revised tariff measures now exempt products with less than 15% metal content among additional tariff cuts.

Exports provide some support, driven primarily by surging gold demand. Shipments to new trading partners—like the United Kingdom and European Union—have risen dramatically, but largely reflect gold storage location shifts and price movements, rather than a fundamental redirection of provincial output. Nonetheless, prices are projected to remain elevated through 2026, which should keep a floor under nominal exports this year.

Consumer spending has supported growth to date, with Q1 retail sales tracking near the national average. But warning signs are emerging. Delinquency rates on mortgage and non-mortgage loans have reached the highest levels in the country, pointing to intensifying household financial stress. Contracting population growth adds additional risk to the province’s consumer spending outlook.

Many provincial manufacturers are struggling in the current trade environment. The sector shrank 4% in 2025.

But increases in food products, primary metals and aerospace industries have helped stabilize the situation early in 2026.

Whether this will translate to a broader sectoral recovery this year remains to be seen, though. We expect manufacturers of wood products, furniture and metal fabricated products among others will continue facing adversity until tariffs are significantly reduced or eliminated.

While some indicators of confidence have improved, the private sector is still holding back investment. Non-residential construction spending fell 15% from a year ago in Q1.

The public sector is the main driver of capital investment. There are large transportation infrastructure, hospital, and electricity production and transmission projects on the go.

Meanwhile, consumers aren’t letting up. Retail sales in Q1 rose 3.5% from a year ago, and sales at restaurants and other food services were up 2.6%.

But, the foundation is starting to show some cracks. Our tracking of RBC cardholder spending in the province into April points to a more modest 1.9% increase, suggesting real household expenditures may be edging lower.

Some softening could be emanating from a deteriorating job market where numbers have disappointed. Employment fell by 87,000 in the first four months of 2026, and the jobless rate increased by almost a full percentage point to 6.2%.

A shrinking population is also likely becoming a drag. The sharp reduction in immigration is tempering growth in consumer demand. We expect this to continue as immigration policy recalibrates through 2027.

The construction sector delivered strong gains through Q1 this year, lead by residential investment—up 19% year-to-date. This put the industry on a good footing, but we don’t expect the momentum to be sustained. Home price growth is expected to moderate further this year, alongside slowing population growth, which will weigh on housing demand, and put a damper on new residential construction.

Since residential construction accounts for roughly three quarters of all construction investment in the province, the sector will face headwinds. That said, housing starts are not expected to weaken enough to subtract from overall growth. Government capital spending—to increase 21% over last year—will provide some offset as well.

Manufacturing is expected to turn positive after detracting from growth in 2025. Food manufacturing, dominated by potatoes and seafood, accounts for roughly 20% the sector, and stands to benefit from restored tariff-free trade with China.  

Healthcare employment is off to a solid start, supported by 2026’s budget allocation of an additional $710 million (5% increase) over last year, which includes funding toward capacity expansion that should bolster growth.

Energy sector activity, however, faces headwinds. Saint John, Canada’s largest oil refinery and a major U.S. supplier, has been negatively impacted by Middle East supply disruptions. The refinery traditionally relies on crude from the Persian Gulf, but geopolitical conflict has choked off those supplies. Sourcing alternatives—including Newfoundland and Labrador’s offshore reserves—remain constrained and costly, creating operational challenges for the energy sector.

The utilities sector is also expected to make a smaller contribution to growth after providing an outsized boost in 2025. Much of last year’s strength reflected volatility in electricity generation, including a rebound in early 2025 after maintenance-related disruptions in Point Lepreau in 2024. Slower population growth and normalizing production this year, however, point to more modest gains for the year ahead.

Government spending is slated to do a lot of heavy lifting for the economy again. The government released another outsized capital plan, nearly 50% larger than last year’s, keeping an otherwise weakening construction industry afloat.

Federal defense spending adds some upside as well. Nova Scotia’s concentration of naval activity, shipbuilding capacity, and defense-related services positions it to benefit meaningfully from Canada’s increased focus on military procurement and defense capabilities.  

Still, construction is unlikely to contribute to real GDP growth as much this year. Residential investment—which partly drove the industry’s strength last year—has been on a downtrend since mid-2025. A soft outlook for housing starts suggests weakness will persist, meaning the construction sector won’t provide the same support to growth in 2026.

Real estate will be another drag on growth in 2026. Home prices are on track to fall—a sharp reversal from 4.5% growth in 2025. This shift may lead to real estate subtracting from growth, compounding the slowdown from softer construction.

However, we’re seeing early signs of relief in the fishing industry as Chinese tariff pressures ease. Provincial exports of farm, fishing, and intermediate food products were still down from a year ago in Q1, but this likely reflects export softness before China suspended Canadian seafood tariffs on March 1. More encouragingly, employment in the industry appears to be rebounding alongside food manufacturing sales. We expect the sector to be on better footing in 2026.

Construction activity has softened significantly since the second half of 2025 and is expected to continue declining in 2026. Housing starts are projected to weaken as population growth moderates and home price gains ease.

Unlike other Atlantic provinces, P.E.I.’s government will provide minimal offset as capital expenditures remain flat in 2026. This, alongside slow homebuilding, leaves the construction sector at risk of shrinking after accounting for half of the province’s real GDP growth in 2025.

Public spending will also provide less support for growth. The latest budget plans for modest 2% expenditure growth in 2026-27—essentially flat after accounting for inflation. This marks a sharp deceleration from the robust 13.2% expenditure increase in the previous year (the largest of any province) that funded public service expansions—particularly in healthcare that drove outsized growth in the sector in 2025.

Agri-food could be a good news story. The sector is poised for a rebound about severe drought in 2025 brought P.E.I. potato production down to a 25-year low. With weather conditions normalizing and trade relations with China improving, the industry should see a recovery this year.

Consumer spending is anticipated to be a significant source of growth as well. Retail sales have been the strongest in the country, buoyed by above-average population growth and strong wage gains linked to a tight labour market.

Oil production momentum has accelerated sharply as idled offshore vessels were brought back into full operation. Year-to-date production is up 29% compared to the prior year with monthly output reaching post 2020 peaks. This expanded capacity is coinciding with elevated global oil prices, amplifying the growth contribution of the newly available supply.

The mining sector is delivering similar strength. Record gold prices have hit just as the recently completed Valentine Gold mine is ramping up and expected to reach full capacity in Q2 this year. The confluence of production expansion and high prices is setting the natural resources complex up for a record year.

That said, employment gains remain largely divorced from the commodity story. The natural resource sector is capital-intensive, meaning the direct impact on jobs from extraction doesn’t commensurate with the increase in output.

With growth coming almost entirely from natural resources, our outlook for the household sector remains relatively unchanged. That is, we expect it to be neutral to growth rather than a driver. Residential investment showed promise in April, but slowing population growth and sluggish employment gains should pull housing starts lower as the year progresses. With major resource projects now complete, non-residential construction offers little support to growth.

1. Canada’s economy experienced two slightly negative quarters of real GDP growth in Q4 2025 and Q1 2026. Ontario’s Q1 GDP data has not yet been released. As such, the full extent of the provincial weakness remains uncertain. ↩︎