{"id":11433,"date":"2026-06-15T16:08:49","date_gmt":"2026-06-15T16:08:49","guid":{"rendered":"https:\/\/www.rbc.com\/en\/economics\/?p=11433"},"modified":"2026-06-15T18:30:09","modified_gmt":"2026-06-15T18:30:09","slug":"the-economy-is-bruised-not-broken","status":"publish","type":"post","link":"https:\/\/www.rbc.com\/en\/economics\/canadian-analysis\/featured-analysis\/quarterly-canadian-outlook\/the-economy-is-bruised-not-broken\/","title":{"rendered":"The economy is bruised, not broken"},"content":{"rendered":"\n
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Canada’s economy has proven resilient through early 2026\u2014bending, not collapsing despite significant headwinds.<\/p>\n\n\n\n

A second consecutive gross domestic product decline in Q1 sparked recession concerns, but the underlying data tells a more encouraging story: Per-capita growth shows Canada is in an early-stage recovery<\/a> rather than a contraction.<\/p>\n<\/div><\/div>\n<\/div>\n<\/div>\n\n\n\n

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.<\/p>\n\n\n\n

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.<\/p>\n\n\n\n

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)\u2014a seemingly contradictory outcome that makes sense only when accounting for the contraction in the available workforce.<\/p>\n\n\n\n

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.<\/p>\n\n\n\n

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Oil price shock hasn\u2019t derailed consumer spending<\/h4>\n\n\n\n

Higher energy costs are a real headwind, particularly for lower-income households where transportation costs absorb a much larger share of disposable incomes.<\/p>\n\n\n\n

Yet currently, purchases at the gas pumps account for about 3.5% of household incomes overall \u2014up from 2.9% in Q4, but not historically high.<\/p>\n\n\n\n

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 broadly continued to spend<\/a>.<\/p>\n\n\n\n

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.<\/p>\n\n\n\n

Canada\u2019s terms of trade\u2014the ratio of export prices compared to import prices\u2014rose sharply in Q1 as oil prices increased.  As a result, real gross domestic income\u2014the amount of goods and services that can be purchased from domestic production\u2014jumped 2.7% annualized in Q1 despite the small decline in real GDP.<\/p>\n\n\n\n

The caveat is this revenue gain is not evenly distributed.  It is concentrated in oil producing regions while high gasoline price hit all households.<\/p>\n\n\n\n

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RBC Economics – Macro Q2 2026 – Auto fuel purchases share of Canadian household incomes<\/figcaption><\/figure>\n\n\n\n
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Labour markets are improving per worker<\/h4>\n\n\n\n

We know improving is not the same as strong\u2014Canada\u2019s unemployment rate is elevated, particularly for younger workers. <\/p>\n\n\n\n

But the direction of labour market data has been positive once accounting for the unprecedented slowing in population growth.<\/p>\n\n\n\n

We have noted before that Canada is facing an unusual structural challenge<\/a>: The labour force is shrinking due to immigration pullbacks, and a net population decline.<\/p>\n\n\n\n

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.<\/p>\n\n\n\n

Still, even with early signs of improvement, labour markets are weak. Looking ahead<\/a>, Canada will eventually face the opposite problem\u2014labour supply shortages driven by retiring workers, and not enough young people entering the market.<\/p>\n\n\n\n

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U.S. trade policy has stabilized<\/h4>\n\n\n\n

At the same time, the worst fears about escalating tariffs have still not materialized.<\/p>\n\n\n\n

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.<\/p>\n\n\n\n

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.<\/p>\n\n\n\n

Upcoming CUSMA extension negotiations will be watched closely, but shouldn\u2019t 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. <\/p>\n\n\n\n

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.<\/p>\n\n\n\n

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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.<\/p>\n\n\n\n

Policy backdrop remains supportive<\/h4>\n\n\n\n

We don\u2019t 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. <\/p>\n\n\n\n

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. <\/p>\n\n\n\n

Meanwhile, both federal and provincial governments are ramping up<\/a> deficit spending. While most growth benefits will likely appear in 2027 or beyond, the dollar amounts are substantial and will likely support growth this year.<\/p>\n\n\n\n

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.<\/p>\n\n\n\n

Provincial overview<\/h2>\n\n\n\n
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Economies diverging on growth<\/h4>\n\n\n\n

Tariffs, demographic shifts and commodity cycles are keeping Canada\u2019s provinces on different tracks. Energy and mining hubs are set to outperform again, while more tariff-exposed provinces\u2014like Ontario, Quebec, and British Columbia\u2014remain behind.<\/p>\n\n\n\n

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\u2014all four that are back online.<\/p>\n\n\n\n

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.<\/p>\n\n\n\n

Manitoba is set to be the slowest growing of the Prairies, expanding just 0.8%\u2014though it will also stay ahead of the national average despite facing steep U.S. tariff pressures.<\/p>\n\n\n\n

The story is more challenging in central Canada. Ontario and Quebec are projected to expand by just 0.4%\u2014at 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\u2014especially in Ontario where the population is on track to shrink in 2026.<\/p>\n\n\n\n

B.C. rounds out the slower-growing provinces at 0.6%, squeezed by demographic outflows and ongoing tariff headwinds on lumber and aluminum exports.<\/p>\n\n\n\n

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.<\/p>\n\n\n\n

Per capita GDP will see gains<\/h4>\n\n\n\n

While most economies are decelerating in 2026, the underlying picture isn\u2019t 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.<\/p>\n\n\n\n

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.<\/p>\n\n\n\n

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.<\/p>\n\n\n\n

British Columbia \u2013 Demographic headwinds constrain growth<\/h4>\n\n\n\n

British Columbia\u2019s 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%.<\/p>\n\n\n\n

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.<\/p>\n\n\n\n