Economics

The Bank of Canada’s July 2026 Monetary Policy Report projects that economic growth in Canada will pick up after a weaker-than-expected start to the year. GDP growth is expected to be slightly stronger in 2027 and 2028, according to the central bank’s projections. The outlook reflects expectations that the Canadian economy will gradually recover from the soft patch experienced in the first half of the year, supported by improving global conditions and the resilience of the domestic economy. However, risks to the outlook remain, including the potential for further trade disruptions and geopolitical uncertainties that could weigh on economic activity.

Headline inflation in Canada has risen above 3 per cent, but the Bank of Canada expects inflation to ease in the coming months if oil prices and gasoline refinery margins decline as assumed. The central bank’s projections are based on the oil price futures curve as of July 9, 2026, and on an assumed narrowing in gasoline margins. The Bank of Canada continues to monitor inflation developments closely and has indicated that it will adjust monetary policy as needed to achieve its inflation target. The central bank’s goal is to bring inflation back to the 2 per cent target, which it expects to achieve by early 2027.

The Canadian economy has faced a number of challenges in recent months, including the trade tensions with the United States, which have created uncertainty for businesses and consumers. The latest round of tariffs announced by the Trump administration would affect a wide range of Canadian products, and the threat of further tariffs has weighed on business investment and consumer confidence. The Bank of Canada has been monitoring the situation closely and has indicated that it stands ready to adjust monetary policy if the trade disruptions threaten the economic outlook.

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Small business confidence in Canada rose to 58.3 points in July, according to the latest Monthly Business Barometer by the Canadian Federation of Independent Business. The improvement in confidence is a positive sign for the Canadian economy, as small businesses are a vital part of the country’s economic fabric, employing millions of Canadians and contributing significantly to GDP. However, the new tariff threat from the United States could weigh on sentiment in the coming months, as businesses grapple with the uncertainty created by the escalating trade war. The CFIB’s data suggests that while businesses are cautiously optimistic about the economic outlook, they remain concerned about the potential impact of trade disruptions.

The Canadian Federation of Independent Business has also projected that private investment will weaken, even as GDP is expected to grow in the second and third quarters of 2026. The weak investment outlook reflects the uncertainty created by the trade tensions, as businesses delay capital expenditure decisions until the trade situation becomes clearer. The CFIB’s Main Street Quarterly report highlights the challenges facing small businesses, including rising costs, labour shortages, and regulatory burdens. The combination of these factors has made it difficult for small businesses to thrive, even as the broader economy shows signs of recovery.

Small businesses across Canada have been feeling the effects of the trade tensions, with many reporting that the uncertainty has made it difficult to plan for the future. The tariffs imposed by the United States have increased costs for businesses that rely on imported inputs, while the threat of further tariffs has created anxiety about the future. The Canadian government has been working to support small businesses through various programs and initiatives, including export development assistance and access to financing. However, many small business owners have expressed frustration with the lack of a clear plan to address the trade challenges.

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The Canadian dollar hit a one-week low as yield spreads widened on the U.S. tariff threat, with the currency weakening 0.2 per cent against the greenback and touching its weakest since July 14 at 1.4104. The depreciation of the loonie reflects growing concerns among investors about the impact of the escalating trade war on the Canadian economy. The currency’s decline has been driven by a combination of factors, including the widening interest rate differential between Canada and the United States and the flight to safety that has benefited the U.S. dollar. The Canadian dollar’s performance has important implications for the economy, as a weaker currency makes Canadian exports more competitive but also increases the cost of imports.

The Bank of Canada’s Monetary Policy Report noted that economic growth in Canada has been weak but is set to pick up. Headline inflation has risen above 3 per cent, but if oil prices and gasoline refinery margins decline as assumed, inflation should ease in the coming months. The central bank’s projections are based on the oil price futures curve as of July 9, 2026, and on an assumed narrowing in gasoline margins. The Bank of Canada continues to monitor economic developments closely and has indicated that it will adjust monetary policy as needed to achieve its inflation target and support economic growth.

The trade tensions with the United States have created significant uncertainty for the Canadian economy, making it difficult for businesses to plan for the future. The latest round of tariffs announced by the Trump administration would affect a wide range of Canadian products, including electronics equipment worth more than $4 billion US. The uncertainty has weighed on business investment and consumer confidence, with many Canadians expressing concern about the economic outlook. The Canadian government has been working to reassure businesses and consumers that it has a plan to address the trade challenges, but the situation remains fluid.

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U.S. President Donald Trump has imposed a tariff of 50 per cent on a wide range of Canadian products, citing what the White House calls Canada’s “discrimination” against U.S. alcohol, automotive, and dairy products. The new tariffs, which are expected to take effect in 30 days, represent the latest escalation in the trade war between the two countries. The announcement has created significant uncertainty for Canadian businesses and workers, as the tariffs would affect billions of dollars’ worth of Canadian exports. The Canadian government has vowed to respond forcefully, with Prime Minister Mark Carney stating that his government will do “whatever it takes” to defend Canada’s national interests.

Karl Schamotta, chief market strategist at Corpay, said the latest round of tariffs risks deepening the tit-for-tat spiral of retaliation and dragging Canada’s currency to a weaker place. While the Canadian dollar slid following the announcement, Schamotta noted that the fact that it didn’t “fall off a cliff” is good news and a sign that markets view the new proclamations as a threat rather than a certainty. Still, he said the 50 per cent levies could deal a “devastating blow” to the Canadian economy if they do come to pass. The uncertainty created by the tariff threats has made it difficult for businesses to plan for the future, with many delaying investment decisions until the trade situation becomes clearer.

The Ontario Chamber of Commerce described the decision to expand tariffs as a “needless, reckless escalation” in the trade war imposed on Canada by Trump. Daniel Tisch, president and CEO of the Ontario Chamber of Commerce, said Canadian and American businesses alike are tired of the endless cycle of threats, retaliation and uncertainty. Tariffs are taxes on growth, Tisch said, meaning higher costs, disrupted supply chains, delayed investment decisions and increased pressure on workers, businesses and communities on both sides of the border. The chamber called on Canada’s first ministers to act now to remove internal trade barriers, accelerate approvals for nation-building infrastructure, help businesses diversify export markets and create conditions for businesses to invest and innovate.

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Canada’s annual inflation rate cooled more than expected to 2.8 per cent in June, according to data released by Statistics Canada, as gasoline costs fell sharply following the signing of a memorandum of understanding between the United States and Iran. The reading came in below the 2.9 per cent forecast by analysts polled by Reuters and represented a significant decline from the 29-month high of 3.2 per cent recorded in May. The moderation in inflation has been welcomed by economists and policymakers alike, as it suggests that the Bank of Canada’s efforts to bring inflation under control are beginning to bear fruit. The central bank projects that inflation will ease to about 2½ per cent in the second half of 2026, reaching the 2 per cent target by early 2027.

Gasoline prices were the biggest contributor to the easing in the inflation rate, with the cost of fuel purchased at the pump falling by over 10 per cent in June. On a year-over-year basis, gasoline costs rose at a rate of 20.5 per cent in June, down from a rise of 33.2 per cent in the prior month. Excluding gasoline, the Consumer Price Index was unchanged in June compared with May, at 2.2 per cent. The decline in gasoline prices reflects broader trends in global energy markets, including the geopolitical developments that have influenced oil prices. However, the war in the Middle East has since flared up again, and gasoline costs have started inching up, suggesting that inflationary pressures may persist.

Transportation costs, which account for around 18 per cent of the CPI basket, rose by 6.7 per cent in June on an annual basis. Other items in the basket that grew at more than 3 per cent were food, which rose by 3.5 per cent in June, and the recreation, education and reading category, which increased by 3.8 per cent. However, the rise in grocery prices cooled slightly, with the cost of food purchased from stores rising by 3.9 per cent on an annual basis last month, down from 4.3 per cent in May. June was the 17th consecutive month that grocery price inflation outpaced the all-items CPI, reflecting the persistent pressure that food costs have placed on Canadian households.

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