Monthly Economic Letter

The Canadian economy is growing, but barely. With real GDP projected to rise by 1.7% in 2025—the slowest annual pace since the 2020 contraction—and our forecast of 1.0% for 2026, there is little room to maneuver. In this context, one player stands out: the Canadian consumer. Year in and year out, household spending accounts for about 60% of GDP and is the main driver of growth.

In 2025, household consumption alone contributed +1.4 percentage points to real GDP growth, while net exports subtracted −0.45 points and private investment remained virtually flat. 

Exports remain hampered by U.S. tariffs. Business investment remains in wait-and-see mode: uncertainty surrounding the USMCA review scheduled for early July, geopolitical tensions, and rising input costs—all reasons for SMEs to postpone their expansion plans. These challenges persist and intensify in 2026. Consumption is therefore not only the main contributor to growth—it is essentially the only one. Business revenue depends, more than ever, on households’ ability and willingness to spend.

More spending per person, but fewer people… what does that mean overall?

Per capita consumer spending is rebounding. After stagnating in recent years, real per capita consumption began to rebound in the second half of 2025, supported by cumulative cuts of 225 basis points in the key interest rate since June 2024.

However, slowing population growth means the pool of potential customers is shrinking. Fewer newcomers means fewer first-time purchases of furniture, appliances, and cars. Sales growth will therefore depend less on the volume of new customers and more on the value of each transaction.

Spending is rising… but the pace is slowing

According to the Bank of Canada’s Survey of Consumer Expectations, households expect their spending to rise by about 3.5% in 2026. Unfortunately, this increase in expectations is likely based largely on the price effect rather than a genuine desire to increase spending.

Inflation rose in March 2026 due to soaring energy prices linked to the conflict in the Middle East: gas prices jumped 57% between February and March, with the “ ” doubling the price at the pump in just a few weeks. Food prices also remain a major concern. Part of the expected growth in spending therefore reflects higher prices rather than a greater volume of goods and services purchased.

In general, however, purchasing power is benefiting from favorable conditions. Wages are growing by 3–4% year-over-year—well above inflation. The 2.25% policy rate is easing the burden of debt service. Moreover, contrary to widely held fears, the much-discussed wave of mortgage renewals appears to be managing better than many anticipated—with income growth absorbing much of the shock and longer amortization periods doing the rest.

And the savings rate (4.4% in Q4 2025) suggests there remains a cushion to support consumption in the short term. This cushion is thin, however—and it’s important to keep in mind that 41% of Canadians report being $200 or less from insolvency at the end of each month.  The ability to spend exists, but the margin for error is essentially zero.

Intentions for major purchases are adjusting

Despite the prevailing uncertainty, intentions to make major purchases—vehicles, renovations, major appliances—remain relatively strong. Transaction data confirms this: new vehicle sales rose by 0.7% in February, and used vehicle sales by 4.0%.

However, the conflict in the Middle East has likely dampened some of these intentions. This new source of stress for households is leading many to postpone or scale back these major purchases, primarily due to rising transportation and energy costs.

This situation naturally creates winners and losers. According to Moneris data, grocery sales continue to rise, particularly at big-box retailers, while spending on entertainment and air travel saw significant growth early in the year. However, about one in five people reportedly canceled or postponed their trips since the conflict in the Middle East, mainly due to rising travel costs. In fact, before the conflict, a BDC survey highlighted that domestic tourism was on the rise, with 92% of Canadian travelers planning at least one trip within the country in 2026.

Where the pain is felt most acutely is in traditional discretionary goods: clothing, household goods, building materials, and gardening supplies—the latter reflecting the persistent weakness in the residential sector.

Not all consumers are facing the same reality either, and this distinction is becoming increasingly significant in Canada. The gap in disposable income between the richest 40% and the poorest 40% is widening. Affluent households, buoyed by stock market gains, are driving high-end consumption. Conversely, households with modest incomes—which make up the customer base of many small and medium-sized businesses—are seeing their purchasing power grow, but at a much slower pace (+2.6% vs. +3.8%). Consumption is increasingly taking on a “K-shaped” pattern, and the sales recovery will not be uniform across sectors—or customer segments.

The Labor Market: Resilient, but Fragile

Disposable income—and thus the ability to consume—ultimately depends on employment. The unemployment rate rose to 6.9% in April 2026, with 112,000 jobs lost since the start of the year, concentrated in full-time positions and the goods sector, which is most exposed to tariffs.

This is not (yet) a collapse: the layoff rate remains in line with pre-pandemic averages—it is more of a hiring freeze than a wave of layoffs. And on average, wages continue to grow faster than inflation, which supports the purchasing power of employed households. But with a debt-to-disposable-income ratio of about 176%, an additional shock could push a growing number of households from caution into retrenchment.

What does this mean for your business?

For businesses, just as for the economy, demand is present but cautious. Consumers aren’t pulling out of the market, so there’s no need to panic here; it’s simply that the margin for error is getting narrower.

Consumption should therefore continue to support the economy and your sales in 2026. But households are reallocating their spending. They’re protecting essentials and focusing their discretionary budget on experiences deemed “worth the cost.”

In a market where the customer base is shrinking and every dollar spent is scrutinized, waiting for demand to return is not a strategy. To maintain your margins, build customer loyalty, enhance your offering, and maximize value per customer through improved productivity.

The first quarter is expected to end on a positive note, but overall, 2026 is moving at a slow pace. BDC is maintaining its growth forecast of 1.0% for all of 2026, while the Bank of Canada is now projecting 1.2%. In both cases, this is significantly slower than the growth rate of recent years, as sources of growth are increasingly running out of steam.

Canada will therefore once again avoid a technical recession

The first quarter of 2026 ended on what appeared to be an encouraging note. Real GDP rose 0.2% in February—a fourth consecutive monthly increase—and annualized growth for the quarter points to around 1.7%, a welcome rebound following the 0.6% contraction in Q4 2025. 

The Q1 rebound is largely attributable to strength in manufacturing (+1.8% in February, the strongest monthly gain since January 2023), particularly in Ontario’s automotive sector, where vehicle production surged 20.4% following maintenance shutdowns. This is a positive signal for the industry, but a one-off event that reflects a technical recovery rather than structural momentum.

But this quarterly reading masks a more troubling reality. Year-over-year, GDP growth has slowed almost continuously over the past year, dropping from a pace of nearly 2.5% at the start of 2025 to just 0.8% in Q1 2026. Preliminary estimates for March point to stagnation (0.0%), as gains in wholesale trade and transportation were offset by declines in retail trade and the mining and oil extraction sector. The latter is expected to rebound as early as next month, however.

Inflation is picking up, and the conflict in the Middle East is a game-changer

After more than a year of relative calm around the 2% target, inflation appears to be making a comeback. The CPI climbed to 2.4% in March, up from 1.8% in February—a sharp shift directly linked to the closure of the Strait of Hormuz, with energy being the primary driver.

Gasoline prices have surged, and while the initial shock was relatively well absorbed by the market, each additional week without free passage through the strait clouds the longer-term inflation outlook. Every passing day intensifies the risk of price increases being passed along through various production chains—beyond just energy. Inflation for many products was already well under control in Canada before the conflict erupted, but food prices were already under pressure and will be among the first to feel the effects of rising energy costs. Food price , in fact, continued to accelerate to 4.4% in March. For consumers—and as we analyze in our main article—this combination of energy and food costs directly squeezes the budget available for other expenses.

For the Bank of Canada, whose role is to control inflation, important nuances must be considered. Core inflation remains contained. Excluding gasoline, the CPI actually slowed to 2.2% in March, down from 2.4% in February. This is therefore, for now, a concentrated price shock rather than a widespread surge.

However, the central bank will not allow this increase to turn into persistent inflation if further signs of the shock spreading become more apparent. The policy rate is expected to remain at its current level of 2.25% in June, but the prolonged closure of the Strait could force the governor’s hand to prevent inflation from spreading further.

The Deceptive Nature of Foreign Trade Trends

The trade balance posted a $1.8 billion surplus in March—the first since September 2025—following a $5.1 billion deficit in February. This is cause for celebration, but some caveats are in order (again!).

The renewed uncertainty at the start of the year is supporting markets that are important for Canadian exports, namely precious metals and petroleum products. Excluding these two categories, exports rose by only 1.1% in value—and fell by 0.3% in volume in February. Once again, this is not a structural recovery in economic indicators but rather a one-off boost in value benefiting certain localized markets.

On the import side, the bill remains high. Despite the ongoing enthusiasm for supporting Canadian purchases, the cumulative deficit since the start of the year points to a concerning trend, as net exports are expected to contribute negatively to growth in Q1. A more significant slowdown in imports coupled with a recovery in exports will be needed to turn the situation around.

The share of exports destined for the United States fell to 66.7% in March, a historic low and likely a sign that diversification is accelerating but also that U.S. sector-specific tariffs continue to weigh on the economy. Since April 6, new tariffs have been imposed on steel, aluminum, and copper products based on their total value—expanding the number of companies and industries affected.

The labor market, still going strong

The start of the year was difficult for employment, and the situation does not seem to be improving. After losses of 25,000 in January and 84,000 in February—the worst month since the pandemic—March offered a slight respite (+14,000), followed by another modest decline in April (−18,000). In total, Canada has lost approximately 112,000 net jobs since January, concentrated in full-time positions (−111,000).

The unemployment rate rose to 6.9% in April, and the employment rate (60.5%) returned to its recent low. The picture is not uniformly bleak. It is more a slowdown in hiring than a wave of layoffs; the private-sector job vacancy rate has been stable for five quarters; and, most importantly, wages are holding steady.

But this divergence between a contracting labor market and rising wages cannot last indefinitely. If the hiring freeze persists, consumer confidence—and their willingness to spend—will eventually suffer.

The Impact on Your Business

• The energy crisis is spreading a little more each day that the Strait of Hormuz remains closed. Renegotiate your supplier contracts and include price adjustment clauses before your margins take the hit.
• U.S. prices are rising and won’t be falling anytime soon. Explore other opportunities, especially if your supply chains are directly or indirectly tied to metal products. 
• While hiring is on hold, wages are still rising. Make sure to include your current employees in your productivity investment plan. Focusing on retention and training costs less than replacing employees—and better positions you for a recovery. 

British Columbia

The B.C. economy continues to face headwinds in early 2026, though there are signs that conditions may be stabilizing. Employment losses persisted through April and consumer spending has softened further, even as interest rate relief continues to filter through to households. We still expect provincial growth to land near 1% this year, but the outlook remains clouded by trade uncertainty, ongoing supply chain disruptions, and lingering weakness in housing markets on both sides of the border.

Employment declined again in April, leaving total employment in the province down roughly 40,000 jobs since the start of the year. While the pace of job losses moderated compared with February and March, labour market conditions remain fragile. Recent declines have been concentrated in private sector services, while construction and manufacturing posted modest gains, supported by ongoing major project activity. The unemployment rate edged up to 6.8% in April, its highest level outside of the pandemic era, underscoring the cooling in labour demand.

Consumer activity is also losing momentum. Retail sales in B.C. fell by 0.4% in February, following a flat start to the year, and remain well below the pace observed in the second half of 2025. Higher borrowing costs over the past two years continue to weigh on discretionary spending, and softer job growth is reinforcing a more cautious posture among households.

There are, however, some offsets to the weaker near term picture. Major capital investments—particularly in LNG, utilities, and public infrastructure—are supporting activity in construction, transportation, and industrial services. That said, the forestry sector remains under significant strain, with mill closures, low lumber prices, and U.S. trade barriers continuing to drag on output and employment. Altogether, 2026 is shaping up as a year of adjustment for the B.C. economy, with downside risks still outweighing upside surprises in the near term.

Alberta

Alberta remains the province best positioned for growth in 2026. The growth forecast is driven by soaring oil prices and better-than-expected economic results in late 2025. Growth is expected to exceed 2.0% in the region in 2026, more than double the projected national rate.

The conflict in the Middle East is a major driver for Alberta. WTI neared US$110 per barrel in early May—well above the levels projected in the February provincial budget. This premium is expected to translate into a significant increase in government and corporate revenues. Oil production remains at high levels, averaging 4.2 million barrels per day in Q1 2026, up 3.3% year-over-year.

That said, the price increase is not translating into a traditional boom. Producers are maintaining financial discipline, keeping real capital expenditures stable in the absence of clarity on how long the price hike will last. Drilling activity confirms this: the number of active rigs in Alberta stood at about 125 in April, and the CAOEC reports that only 41% of the drilling fleet was in operation at the end of April—a lower rate than last year. The Trans Mountain pipeline expansion is, however, paying off, as oil exports to Asia reached a record high of over $9 billion in 2025.
The labor market, however, lost momentum in April. Employment remained essentially stable (+1,000), but the unemployment rate jumped to 7.0%—up 0.5 percentage points—due to an influx of new job seekers into the labor force (+16,300). Since the start of the year, the province has nonetheless created about 25,900 jobs, concentrated in January.

Average weekly wages are rising faster than the national average and well above inflation. However, retail sales fell by 1.9% in February following January’s sharp increase, a sign that this strength remains volatile and that Albertans are concerned about the current environment, even though it is favorable for their economy.

Saskatchewan

As a resource-driven province, Saskatchewan’s economy is well-positioned to grow above the national average in 2026. The province’s real GDP could reach 2% growth, placing it among the country’s top-performing provinces, just behind Alberta.

The ongoing closure of the Strait of Hormuz is supporting oil and gas-producing regions like Saskatchewan as well as numerous mining markets. The mining sector continues to drive the economy. In 2025, total mineral sales reached $12.8 billion (+19%), driven by potash ($9.3 billion, +18%) and uranium ($3.2 billion, +24%, a record). The momentum continued into the start of the year: in February 2026, potash sales rose by 12% and uranium sales by 8% year-over-year, while potash production surged by 19%. The planned commissioning of BHP’s Jansen mine in 2026, combined with the start of construction on NexGen’s Rook I uranium mine this summer—the largest under development in Canada—is expected to support the province’s growth in the medium term.

The conflict in the Middle East is benefiting potash and oil exporters (prices are well above the conservative budget assumptions of US$59.75 per barrel for WTI), but it is driving up nitrogen fertilizer costs for agricultural producers—the price of urea has surged to about $1,200/ton, up from $780 last summer. According to the CFA, however, a critical mass of farmers already had well-stocked inventories before the conflict broke out. The downside for Saskatchewan, therefore, lies more in the manufacturing sector. Manufacturing sales have fallen by 6.6% since the start of the year, and exports to the United States dropped by 22% in January—a reminder that U.S. tariffs are also weighing on this resource-based economy.

The labor market, however, lost momentum in April. After adding 5,800 jobs in March, Saskatchewan lost 4,000 jobs in April, and the unemployment rate rose to 5.6% (+0.6 percentage points). The province nevertheless remains second among the provinces for the lowest unemployment rate, well below the national average of 6.9%. The labor force and full-time employment reached historic highs for the month of April, two indicators that support consumer spending.

The Canada-China agricultural trade agreement is bearing fruit. Since March 1, China has reduced its tariffs on canola seeds to approximately 15% and completely suspended tariffs on canola meal until the end of 2026. Tariffs on dry peas have also been lifted. Canola oil, however, remains subject to a 100% tariff, which limits the impact of this progress for processors.

Manitoba

Manitoba’s economy is expected to grow moderately by about 1.2% in 2026, slightly above the national average, according to the provincial budget forecast.

The latest budget announcement includes several measures designed to ease the burden on household budgets and support spending. For example, the province will eliminate the 7% provincial sales tax on all grocery items sold in grocery stores starting July 1—including prepared meals, soft drinks, and snacks, which were previously taxed.

Manitoba’s labor market continues its positive momentum. After a sluggish start to the year, employment rebounded in March with the creation of approximately 11,000 jobs. In April, despite a slight decline, the unemployment rate dropped to 5.0%—a notable decrease of 0.6 percentage points—placing Manitoba among the leaders.

Manufacturing shipments remain under pressure. Manufacturing sales have fallen by 5.5% since the start of the year (as of February), reflecting the slowdown linked to the imposition of tariffs, primarily on agricultural products. The agri-food industry accounts for nearly one-third of the province’s total manufacturing sales. However, the situation for canola—a pillar of the industry—is improving. Since March 1, Chinese tariffs on canola seeds have been reduced to about 15%, and the 100% tariffs on canola meal have been completely lifted. Canola oil, however, remains subject to a 100% tariff, which limits the impact of this progress.

Caution is still warranted, however. Manitoba’s international exports have fallen by 33.4% since the start of the year, and exports to the United States by 43%—a sign that U.S. tariffs are weighing heavily on the province. High energy prices could also drive up transportation costs—a key sector for the Manitoba economy, which relies heavily on domestic trade.

Ontario

The economy is showing encouraging signs after a slow start. The latest employment data indicate an improvement in Ontario’s economic situation. In April, employment rose by 42,500 jobs. Following job losses in March and weak growth since the start of the year, this increase is encouraging. This is particularly true when comparing Ontario’s results with the rest of Canada. Since the start of the year, the rest of Canada has lost 112,000 jobs, while Ontario has created 39,900. The impact of tariffs continues to weigh on the economy. In addition, slowing population growth has been dampening consumer spending in recent months. Employment in the retail sector is slowing. But Ontario has fared better than the rest of Canada since the start of 2026.

Quebec

Quebecers continued to buy homes in 2025 despite an economic slowdown: home sales in Quebec rose by 7.7% last year, while the opposite trend was observed across Canada. Lower debt levels and a strong job market in 2025 supported real estate activity. Now that the job market is cooling off, we will closely monitor developments to see if this trend continues in 2026.

The job market in Quebec continued to show signs of slowing down. After a more encouraging increase in March, the number of jobs fell by 43,000 in April, pushing the unemployment rate up to 6.2%. This is the highest unemployment rate seen since 2022.

Exports regained some momentum in February and even more so in March, with a 19% increase, reflecting a positive performance in the first quarter. However, trade levels remain below pre-tariff levels, and we do not anticipate a full recovery this year.

We still forecast modest growth of 0.7% for the province in 2026, held back by weaker external demand, persistent uncertainty, and slower population growth.

Nova Scotia

The effects of U.S. and Chinese tariffs continued to weigh on trade: exports declined with all major trading partners in 2025. And the first quarter remained weak compared to the fourth quarter of 2025.  

Employment weakened in the first quarter of 2026, with a loss of nearly 3,000 jobs, and continued to decline in April, reflecting the pressure that trade tensions are placing on the economy. 

However, resilient consumer spending and government spending are expected to support growth this year: the province remains on track to post growth of about 1.2% in 2026.

New Brunswick

Exports rebounded in the first quarter thanks to a dramatic 58% increase in March. However, unresolved tensions and disputes between Canada and the United States are expected to continue weighing on trade throughout the year.

The labor market resumed its decline in April, pushing the unemployment rate up by 0.2 percentage points to 7.2%.

Although employment growth has stalled, overall employment levels remain satisfactory. And the unemployment rate is relatively low. In contrast, consumers have continued to support the economy. Retail sales have risen steadily since November of last year.  

The province’s economy is projected to grow by 0.9% in 2026, lagging behind its counterparts in the Atlantic region. 

Prince Edward Island

Trade has remained under pressure in the province, with exports to the United States declining since the start of the year. An improvement in trade relations with the United States and China will provide much-needed relief to certain sectors of the economy.

The job market lost a few jobs in March and again in April, but levels remained higher during the first four months of the year. The unemployment rate rose slightly to 8.0%. Retail sales continued to rise in the first two months of the year, a sign that households are confident and ready to spend more throughout the year.

Despite ongoing pressure on trade, the province remains on track to grow by 1.2% in 2026, outpacing Canada’s projected growth. 

Newfoundland and Labrador

GDP is expected to grow by another 1.1% this year, slightly exceeding the national average, thanks to a resilient labor market and successful diversification efforts.

The labor market saw a slight decline in employment in April, but the overall situation remains positive. Employment has risen by 1.2% since the start of the year, a faster pace than in Canada. The healthy labor market is expected to support robust consumer spending this year.

Exports rose by 32% in the first quarter of the year, driven primarily by increased trade with European countries such as France, Germany, and Spain. Trade with the United States and China declined in the first quarter, reflecting the ongoing impact of tariffs.

Oil producers continue to benefit from the price surge caused by the conflict with Iran. While negotiations between the United States and Iran continue and a ceasefire has taken effect, upward pressure on prices will persist until a formal agreement is reached and the war ends.