{"id":12807,"date":"2026-07-13T16:56:45","date_gmt":"2026-07-13T16:56:45","guid":{"rendered":"https:\/\/www.rbc.com\/en\/economics\/?p=12807"},"modified":"2026-07-13T17:48:34","modified_gmt":"2026-07-13T17:48:34","slug":"cyclical-rebound-in-canada-and-structural-strength-in-the-u-s","status":"publish","type":"post","link":"https:\/\/www.rbc.com\/en\/economics\/financial-markets-monthly\/cyclical-rebound-in-canada-and-structural-strength-in-the-u-s\/","title":{"rendered":"Cyclical rebound in Canada and structural strength in the U.S."},"content":{"rendered":"\n
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Highlights:<\/strong><\/h4>\n\n\n\n
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Canada\u2019s economy is on track to rebound in Q2,<\/strong> driven by resilient household spending, recovering business investment and expanding net trade. Growth is expected to continue over the second half of 2026 with CUSMA exemptions still protecting most Canadian exports from U.S. tariffs.<\/p>\n<\/div>\n<\/div>\n\n\n\n

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The Bank of Canada is expected to remain on hold in 2026.<\/strong><\/strong> Uncertainties around trade and energy prices are persisting but recent developments\u2014broadly easing energy price growth and firming economic growth\u2014have evolve broadly as expected, reaffirming the BoC\u2019s steady stance.<\/p>\n<\/div>\n<\/div>\n\n\n\n

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U.S. productivity growth has continued to surprise on the upside.<\/strong> We\u2019ve raised our assumptions for GDP growth through the forecast horizon to 2027, driven by higher trend productivity growth rather than expected job growth. We now expect the economy will expand 2.2% in both 2026 and 2027.<\/p>\n<\/div>\n<\/div>\n\n\n\n

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The Federal Reserve is still expected to hold rates steady through 2027.<\/strong> Recent labour market improvement and higher-than-expected inflation readings are tilting risks towards more interest rate hikes from the Fed, but not yet by enough to shift our base case view of a hold.<\/p>\n<\/div>\n<\/div>\n\n\n\n

Issue in focus:<\/strong><\/h4>\n\n\n\n
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CUSMA remains in effect despite a lack of formal extension on July 1. The deal won\u2019t mechanically expire until a decade from now, and negotiations to extend that deadline have begun.<\/p>\n\n\n\n


While an earlier termination is possible, it\u2019s not our base case assumption, and its economic impact has grown less dire as U.S. tariffs broadly continue to ease. Future negotiations may focus on the Rules of Origin requirements or U.S. trade policy alignment, although we expect little tangible changes near term.<\/p>\n<\/div>\n<\/div>\n\n\n\n

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

Minor changes to Canada\u2019s forecast outside of stronger Q2 GDP growth<\/strong><\/h4>\n\n\n\n

Canada\u2019s economy likely rebounded in Q2 after two quarters of stagnating activity. Consumer spending<\/a> has proven resilient over a period of high gasoline prices cutting into households\u2019 buying power. Business investment has strengthened, and net trade is set to add significantly to growth.<\/p>\n\n\n\n

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We’re now tracking stronger GDP growth in Q2 at 2.2% from 1.7% previously. Uncertainties around the CUSMA Joint Review (read below), and the Middle East conflict remain elevated. However, our longstanding assumptions about the CUSMA agreement and related exemptions being preserved, and a partial retracement of the spring global oil price surge have held up well.<\/p>\n\n\n\n

Overall, we see less risk of higher or lower interest rates in the near term, as growth picks up while oil-related inflation concerns ease. Canada\u2019s unemployment rate remains high despite recent improvements, suggesting interest rates at the lower end of the estimated \u201cneutral\u201d range are still appropriate.<\/p>\n\n\n\n

Raising labour productivity in the U.S. adds to GDP growth; Fed expected to stay put<\/strong><\/h4>\n\n\n\n

Persistently strong labour productivity gains in the U.S.\u2014averaging above an annualized 2 \u00bd % quarterly since the start of 2024\u2014have led us to revise our GDP and potential GDP growth estimates slightly higher over the forecast period to 2027, but that should have a neutral impact on our inflation outlook.<\/p>\n\n\n\n

As a starting point, however, U.S. inflation continues to run well above the Fed\u2019s 2% target even without the impact of energy prices, and the unemployment rate has remained historically low. That combination suggests the Fed will, at a minimum, need to maintain interest rates at current levels before more meaningful progress with inflation comes through to start the easing conversation again.<\/p>\n\n\n\n

Our forecast still assumes a steady Fed until the end of 2027. Risks, however, are that further (non-energy) inflation flare-ups, while the unemployment rate stays low, suggest monetary policy may not be restrictive enough to propel inflation back toward the 2% target, and prompt more rate hikes.<\/p>\n\n\n\n

Summary of changes in May:<\/h4>\n\n\n\n