{"id":11722,"date":"2026-06-10T19:05:04","date_gmt":"2026-06-10T19:05:04","guid":{"rendered":"https:\/\/www.rbc.com\/en\/economics\/?p=11722"},"modified":"2026-06-10T19:05:06","modified_gmt":"2026-06-10T19:05:06","slug":"soft-gdp-growth-in-canada-but-no-forecast-overhaul","status":"publish","type":"post","link":"https:\/\/www.rbc.com\/en\/economics\/financial-markets-monthly\/soft-gdp-growth-in-canada-but-no-forecast-overhaul\/","title":{"rendered":"Soft GDP growth in Canada but no forecast overhaul"},"content":{"rendered":"\n
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Highlights:<\/strong><\/h4>\n\n\n\n
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Canada\u2019s gross domestic product contracted in Q1,<\/strong> but indicators for excess economic slack including the unemployment rate remain consistent with our prior tracking. We have left our growth outlook unchanged, while passing through weakness to lower potential GDP estimates.<\/p>\n<\/div>\n<\/div>\n\n\n\n

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CUSMA exemptions remain intact<\/strong> in the proposed U.S. Section 301 tariffs to replace the current Section 122 measures that are set to expire in July. A decision to extend (or not) the CUSMA expiry date beyond 2036 is fast approaching, but we expect no change in tariff rates as an immediate result of that decision.<\/p>\n<\/div>\n<\/div>\n\n\n\n

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The Bank of Canada and U.S. Federal Reserve\u2019s current policy rates remain appropriate<\/strong>. We\u2019re tracking moderate excess supply in Canada versus excess demand in the U.S. Both central banks are expected to hold through 2026 with modest BoC rate increases after, while the Fed remains on the sidelines.<\/p>\n<\/div>\n<\/div>\n\n\n\n

Issue in focus:<\/strong><\/h4>\n\n\n\n
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Canada\u2019s soft GDP data in recent quarters coincided with population declines. After accounting for that, per-capita GDP has continued to grow since contracting over 2023\/24. We compare per-capita measures in Canada to previous downturns, and find the economy remains consistent with an early-stage recovery instead of a sharp, synchronized contraction typical of a recession.<\/p>\n<\/div>\n<\/div>\n\n\n\n

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Forecast changes:<\/h3>\n\n\n\n

A second contraction in real GDP in Q1 in Canada has not<\/em> led us to revise our growth outlook. Per-capita growth continued to expand (see Issue in Focus below)<\/a>, and the unemployment rate (incorporating the positive labour market data in May) tracks in line with our previous quarterly base case forecasts.<\/p>\n\n\n\n

For us and the BoC, the unemployment rate is not only a measure of labour market health, but also an important gauge of the economy\u2019s output gap. In May, it remains elevated at 6.6%, which suggests moderate slack in the economy, but not in significant excess to our previous expectations.<\/p>\n\n\n\n

In the forecast update this month, we mostly passed through the downside GDP surprise to our estimates of potential GDP growth, while keeping the size of the output gap unchanged\u2014still moderately negative, but similar and consistent with the -0.5% to -1.5% range estimated by the BoC in April.<\/p>\n\n\n\n

CUSMA exemptions yet again maintained in new Section 301 investigations<\/h4>\n\n\n\n

CUSMA exemptions were again preserved, amid recent U.S. Section 301 investigations for new measures to replace existing Section 122 measures at the end of July. The Annex<\/a> also included a long list of separately exempted products adding up to about half of total U.S. goods imports in 2025 (virtually identical to exempted products as a share of total imports from current Section 122 tariffs).<\/p>\n\n\n\n

These developments are broadly consistent with our assumption that U.S. tariffs will continue to moderate. In May, the U.S. Department of the Treasury reported US$23.5 billion of custom duties\u2014lowest in a year although still well above the average US$8.2 billion collected monthly in 2024.<\/p>\n\n\n\n

Importantly, as the pre-scheduled CUSMA review is set to get underway, a non-renewal outcome does not mean automatic expiration of the agreement, but rather that negotiations will likely follow all while the agreement remains in place until 2036. We continue to assume CUSMA agreement and related exemptions will remain status quo, through what is likely to be a lengthy review\/negotiation period.<\/p>\n\n\n\n

BoC and Fed still on hold but risks to steady path are rising<\/h4>\n\n\n\n

In Canada, persistent excess slack after the economy grew consecutively below its potential is weighing on core inflation trends. In the U.S., the unemployment rate is persisting at decade-low levels, suggesting excess demand in the economy consistent with sticky core inflation readings above the Fed\u2019s 2% target.<\/p>\n\n\n\n

Current central bank key policy rates\u2014BoC at the lower end of the neutral range and Fed at the upper\u2014already reflects this divergence. Risks, however, are the interest rate gap between the two countries could further widen if recent data trends persist, but we’re not there yet.<\/p>\n\n\n\n

For now, we continue to expect holds from both central banks before the BoC begins to raise rates in the first half of 2027. The runway to rate hikes could lengthen if the Canadian economy takes meaningfully longer to improve than our base case forecast. And the Fed could hike rates if sticky core inflation in the U.S. starts to accelerate, while the labour market holds onto strength.<\/p>\n\n\n\n

Summary of changes we made to our forecasts in June:<\/h4>\n\n\n\n