Other economic indicators

Momentum built up again

After a sharp slowdown in late 2025, the U.S. economy regained strong momentum in early 2026. Real GDP grew at an annualized rate of 2.0% in the first quarter of 2026, supported by business investment, exports, and a rebound in government spending following the weakness tied to the partial federal government shutdown in late 2025. Forecasts for the second quarter also remain solid for now.

On the productivity front, the picture is mixed. Labour productivity rose 0.8% in Q1 2026 (2.9% year over year), suggesting a gradual normalization after the volatility seen in prior quarters. Unit labour cost pressures eased compared to late 2025, rising 2.3% in the first quarter after a sharp increase the previous quarter. However, inflation is picking up again. Producer prices surged 6.0% year over year in April—their highest level since December 2022—while consumer prices rose 3.8%, driven primarily by energy costs.

The labour market is holding up, but clearly losing steam. The economy added 115,000 jobs in April, while the unemployment rate held steady at 4.3%. However, underlying indicators point to a slowdown: the participation rate has edged lower over the course of the year, job gains are increasingly concentrated in a few sectors, and real wages are now declining. In short, the labour market is no longer a powerful engine of growth in the United States.

The Strait of Hormuz closure keeps prices elevated

Following U.S.-Israeli strikes against Iran on February 28, Iran's closure of the Strait of Hormuz days later—a chokepoint for roughly one-fifth of the world's oil supply—triggered a sharp spike in prices. Despite a fragile ceasefire reached in early April and ongoing negotiations between the main parties to the conflict, the Strait of Hormuz remains virtually closed, keeping prices elevated.
On the supply side, the shock has been significant and prolonged. Disruptions to Gulf exports led to a sharp drop in available supply, while OPEC+ maintained a cautious stance. The group reaffirmed its flexible production management strategy, retaining the ability to adjust output based on market conditions rather than committing to a rapid normalization of supply.

At the same time, global fundamentals remain more balanced than the initial price spike suggested. Non-OPEC supply, particularly from North America, continues to act as a buffer, and global demand growth has shown early signs of slowing in response to higher prices and tighter financial conditions.

The market is not facing a permanent shortage, but rather a persistent geopolitical risk premium combined with significant cumulative supply losses. As a result, crude prices are expected to remain elevated and volatile, with Brent and WTI fluctuating around US$100–110, without sustainably holding above US$120 unless disruptions intensify.

The Canadian dollar is still flying low

In 2026, the Canadian dollar's trajectory has continued to defy its traditional link with oil. After reaching a high near US$0.74 in late January, the loonie initially pulled back in early spring, touching an annual low of around US$0.72 in early April before partially recovering to trade around US$0.73 in May—despite the sharp rise in crude prices.

Even as WTI surpassed US$100 amid geopolitical tensions, the Canadian dollar barely reacted. The historical relationship between oil and the loonie has weakened considerably over time—particularly during supply-driven shocks like this one, where the currency responds far less than it does to demand-driven price increases. The Canadian dollar now behaves more like a cyclical currency than a commodity-linked one.

In the near term, the Canadian dollar is unlikely to recover meaningfully. A sustained rebound would require either a resolution of the Middle East conflict, a narrowing of the interest rate differential between Canada and the United States, or a significant improvement in Canadian growth prospects—none of which appear imminent, although markets are beginning to price in Bank of Canada rate hikes in the second half of 2026.

A pause turning into a strategy

The Bank of Canada has held its policy rate at 2.25% at all three of its 2026 meetings, and is likely heading toward a fourth consecutive hold in June. However, this pause should no longer be seen as a simple wait-and-see approach—Governor Macklem has explicitly signalled the possibility of consecutive rate hikes if inflation broadens, or rate cuts if trade tensions weigh more heavily on the economy.

Economic activity remains subdued, with growth struggling to regain momentum and clear signs that excess capacity persists. Meanwhile, the inflation outlook is shifting in a somewhat concerning direction. The disinflationary phase seen in February is proving temporary, with energy prices and the fading of favourable base effects expected to push inflation higher in the near term, while core inflation measures point to only a limited slowdown.

In this context, the Bank has limited room to manoeuvre in either direction. The easing implemented since mid-2024 has largely worked its way through the economy, but renewed inflationary pressures make it difficult to justify further cuts, even as the economy continues to operate below its potential. In total, the policy rate has been lowered by 275 basis points since the start of the cutting cycle in June 2024. Effective borrowing rates for households have declined by only 151 basis points, while those for businesses have fallen by approximately 200 basis points. Effective rates have even started to edge back up recently, reflecting rising credit risk premiums.

As a result, monetary policy is entering a holding pattern—not because conditions are stable, but because they are increasingly contradictory.

The market appears to be hit by new rate headwind

Activity remains steady in the residential resale market, as the number of recorded transactions remained flat in March compared to February but 2.3% lower than in 2025. Transaction volumes has been subdued for four consecutive months, pointing to a slow market ahead of spring season. There was a slight increase in the weighted average home price, but this remained modest as the MLS Home Price Index continued to decline.

The mortgage renewal wave remains the key vulnerability — and Canada's banking regulator is now sounding the alarm. Now, higher market rates from the Middle East war is adding fresh stress to an already stretched renewal cycle. As of January 2026, 3.1 million mortgages — or 52% of all outstanding — are due to renew by end of 2027, including 1.3 million fixed- and fixed-payment variable-rate mortgages renewing for the first time since rates were at pandemic-era lows.

SMEs are gradually getting used to uncertainty

April saw a modest rebound, with the CFIB confidence index rising to 58.5, but the recovery remains partial. Confidence is still broadly in line with the levels seen in late 2025, and well below the threshold typically associated with more sustained expansion.

While business sentiment has stabilized, it remains fragile and highly sensitive to cost pressures and external shocks, without signalling a durable recovery.