Canadian economy and inflation outlook
Members then turned their attention to recent economic developments and the outlook for growth and inflation in Canada. Since the October Report, the economy had evolved largely as anticipated. The Canadian economy continued to be affected by trade restrictions and heightened uncertainty. GDP growth was volatile throughout 2025 as US tariffs led to large swings in net exports and inventories. After a strong third quarter, members expected fourth-quarter GDP growth to be near zero before picking up again.
Members discussed the path ahead for Canada’s exports. Restructuring of supply chains could help mitigate the impact of tariffs, while new trade deals and stronger US demand could provide additional support. But the pace at which businesses will adapt to the evolving global trade environment was uncertain.
Domestic demand was expected to continue to be resilient. Consumer spending had held up even as many Canadians were worried about their jobs and financial situation. Per person consumption growth was expected to continue to rise modestly over the projection horizon, with support from past interest rate cuts, higher equity prices and rising disposable income. Housing activity was also expected to recover gradually, but growth would likely be uneven. The Toronto and Vancouver area housing markets had been subdued partly because of ongoing affordability challenges, which could restrain recovery in these areas.
Members discussed the outlook for business investment, which was weak not only in trade-related industries but across sectors. Investment was likely to remain soft over most of 2026. As uncertainty related to US trade policy dissipates, investment should pick up. While investment in AI could spur gains in productivity, evidence of this remained limited, and any impact on growth or potential output would take time to emerge.
Members also discussed fiscal policy. They agreed that provincial infrastructure spending and the measures outlined in the federal budget would support investment and overall growth going forward. While government spending was expected to contribute to GDP in 2026, the full impact on growth of these initiatives would take time to materialize.
Members talked at length about developments in the labour market. The unemployment rate was still elevated, although it had declined modestly to 6.8% in December after a recent high of 7.1% in August and September. The youth unemployment rate remained high at 13.3% in December but had declined from a peak of 14.6% in September. The increase in employment in recent months was mostly in the services sector. Employment in trade-related sectors remained weak but had levelled off following a large decline in the first half of 2025. While the decline in these sectors had not yet spilled over to other sectors, surveys showed that few businesses had plans to hire more workers in the coming months. Looking at a broad set of indicators, members agreed that the labour market continued to be soft.
Overall, Governing Council members agreed that their outlook for growth was broadly similar to their projections in the October Report. GDP was expected to grow modestly, by 1.1% in 2026 and 1.5% in 2027, reflecting continued effects of trade disruptions, uncertainty and slower population growth. They agreed that the economy remained in a state of excess supply, which they expected would be gradually absorbed over the projection horizon.
With respect to recent inflation dynamics, members agreed that CPI inflation was evolving as expected. Recent data had pushed up the headline number to 2.4%, largely due to base-year effects from last year’s GST/HST holiday and higher inflation in food prices. CPI excluding indirect taxes had eased to 2.5% in December. The Bank’s preferred measures of core inflation had also eased from 3% in October to around 2½% in December. Three- and six-month measures of CPI-median and CPI-trim were now close to or below 2%, which members noted was a sign of continued easing in core inflation. In addition, input and unit labour costs had eased, and results of the Bank’s Business Outlook Survey for the past quarter showed little evidence of capacity constraints or labour shortages. For the year as a whole, inflation averaged 2.1% in 2025, and it had been within the 1% to 3% band for two years. Still, members acknowledged that food price inflation and rent inflation were areas of concern for Canadians struggling with the cost of living. Short-term consumer inflation expectations remained somewhat elevated, even as longer-term expectations had softened.
The costs of reconfiguring trade routes and supply chains could put some upward pressure on inflation but was expected to be offset by downward pressure from excess supply. This would keep inflation close to the 2% target over the projection.
