The Canadian economy faced headwinds during 2025. The imposition of tariffs by the United States and China on Canadian exports had a definite impact on Canadian economic growth.
The new year seems to be shaping up to be yet another turbulent one. This is due to the renegotiation of the United States-Mexico-Canada Agreement (USMCA), which is likely to once again create a climate of uncertainty that may hamper the country’s economic activity, particularly in sectors heavily reliant on trade with the U.S. and Mexico. Canada’s GDP is expected to grow by a modest 1% during ’26. This figure reflects a slight decrease from ’25, when the latter, yet to be tabulated, was expected to close with a 1.2% growth.
Before analysing the ’26 economic outlook, let’s review ’25. It ended on a positive note, marked by growth in real GDP and employment. This performance marked a significant rebound after a 1.8% contraction in real GDP during the second quarter.
The impact of tariffs
The impact of tariffs on the economy was significant last year. Canadian steel exports reduced by 25%. Aluminium declined by 6%. The automotive sector also declined by 5%. Furthermore, the Canadian economy has probably not yet fully felt the effects of the tariffs which were recently imposed on the lumber and kitchen-cabinet sectors.
The good news, meanwhile, is that the impact was limited. Especially in sectors affected by tariffs. This is evident in the fact that growth in the rest of the economy has offset the effect of tariffs in preventing a recession.
The employment market has meanwhile also strengthened. The last three months of ’25 saw the creation of 180,000 new jobs. Such growth resulted in a decrease in Canada’s unemployment rate to 6.5% in November ’25. The quantum of jobs even increased in the manufacturing sector, which had been hit hardest by tariffs, indicating a potential recovery in that industry and contributing to overall economic growth.
Expectations in ‘26
The Canadian economy may continue to evolve in a highly uncertain context. It’s once again dominated by tariffs and the USMCA’s renegotiation, likely scheduled for July ’26. It’s likely to continue to impact exports negatively. Businesses anticipate that these trade tensions will dampen their enthusiasm for investment.
