Relatively speaking

Key points

• The Bank of Canada’s latest forecast sees the Canadian economy growing by 1% this year followed by 2% in 2027 and 2028.
• The inflation rate is projected to average 3% next year before returning to the 2% target in 2028. 
• The forecast depends on the trade war with the U.S. not getting worse and energy inflation slowing down and eventually turning negative by the end of 2027.

Proving that everything (at least when it comes to economic outlooks) is relative, the Bank of Canada sees economic growth rates in Canada of 1% this year and 2% in both 2027 and 2028 as “showing resilience.”

Fair enough; it could be worse given the trade war with the U.S., elevated energy costs, and the associated uncertainty created by both.

Early on in the trade war, a recession in Canada looked likely. Thankfully, Trump’s bark was worse than his bite and the overall impact, while still damaging, has not been catastrophic.

Similarly, the initial fear was that the war in Iran and the closure of the Strait of Hormuz would trigger a massive oil shock and, as a result, a major global downturn. The shock that has materialized is working against global growth and pushing up inflation, but has been kept in check by a variety of factors such as the draining of strategic oil reserves, increased production, alternative pipeline routes, and reduced Chinese demand.

Add to this Canada’s bleak track record of productivity growth and business investment over the last decade, and growth rates of 1-2% do seem to deserve the resilient label.

With that said, we would not describe these levels of projected growth as “strong” and they are not going to do much to allay the current cost-of-living concerns of Canadians, raise standards of living, or help the Canadian economy weather future challenges. That requires successful execution on a variety of fronts, including completing major projects, removing ongoing barriers to internal trade, increasing exports to countries other than the U.S., repairing our trade relationship with the U.S., increasing private sector investment in Canada, and putting our productivity growth on steroids.

In the meantime, back to the Bank of Canada’s forecast. The Bank is assuming that, boosted by the Productivity Mega Deduction, business investment in Canada will grow by about 4% on average in 2027 and 2028. This seems a tad optimistic with the Bank admitting that the strength and speed with which businesses respond to the new incentive “remains uncertain.”

The Bank also assumes that the average Canadian consumer will spend even more over the next two years, with consumption growth rising by 2% in 2027 and 2028. This seems a bit optimistic given widespread concerns about the rising cost of living, elevated inflation, and higher borrowing costs all weighing on the Canadian consumer.

In general, risks to the forecast are, as the Bank notes, still running extra high. In a nutshell, energy prices may not come down (which is what the Bank’s forecast assumes) and the trade war with the U.S. could get even worse.

The opposite is also true, with a sudden resolution to the conflict in the Middle East taking pressure off inflation and a trade deal with the U.S. improving the outlook. As has been the case for some time now, we will just have to wait and see on these fronts with a clear sense of what’s next not currently available.

On inflation, the Bank sees cost pressures building and now sees inflation remaining above 3% through much of 2027 before gradually declining to around the 2% target by the middle of 2028. The Bank linked its inflation outlook to high energy prices, stronger prices for non‑energy imports, Canadian counter‑tariffs, survey results that suggest businesses will be passing on a greater share of their cost increases to customers over the next 12 months, and the lift provided by the aforementioned “resilient” economic growth.

Inflation running above target at 3% throughout most of next year is the reason the Bank gave for raising its policy rate from 2.25% to 2.5% as it attempts to get ahead of the curve and keep it from rising even higher. The Bank assumes that energy costs put upward pressure on inflation into early 2027, but that shipping through the Strait of Hormuz gradually returns to normal and refinery margins ease such that energy price inflation turns negative at the end of 2027.

The Bank provided little in the way of forward guidance yesterday, saying that it will “proceed carefully.” Nonetheless, barring something dramatic shifting the Bank’s concerns about high energy prices bleeding into other prices, additional increases to the policy rate before the end of the year and/or early in 2027 seem likely.

Answer to the previous trivia question: Tabled in Parliament on December 7, 1970, the Report of the Royal Commission on the Status of Women in Canada included 167 recommendations on updating the legislative system and addressing critical issues for women.

Today’s trivia question: Which Canadian artist has been described as “Canada’s Van Gogh”?