Canada's Economy, One Year On: Slower Growth, Stickier Inflation, and the Tariff Drag

A year makes a difference. In 2025 Canada's economy was slowing but holding up; heading through 2026 it looks softer on almost every front, with growth cooling, inflation creeping back, and a trade war with the United States hanging over everything. Here is how the Canadian economy stacks up against a year ago, by the numbers, and what it means for Canadian stocks. For the names behind the headlines, see our Canadian stocks hub.

Growth: Slower Than Last Year

Real GDP grew 1.7% in 2025, already the weakest pace since the 2020 pandemic shock. For 2026, private-sector forecasters see growth slowing further to around 1.1%. First-quarter output in 2026 was essentially flat versus a year earlier, held back by US tariffs, trade-policy uncertainty, and slower population growth after Canada tightened immigration. The economy is, in the Bank of Canada's framing, weak but expected to pick up, not contracting, just stuck in low gear.

Inflation: Creeping Back Up

This is the uncomfortable reversal. Inflation averaged about 2.1% in 2025, helped by the removal of the federal consumer carbon price. For 2026 it is projected to run higher, around 2.6%, as firmer commodity prices and tariff costs offset easing shelter inflation. So unlike the US and most of the developed world, Canada's inflation is drifting away from the 2% target rather than toward it, which complicates the Bank of Canada's job.

Jobs: Off the Peak, Still Soft

The labour market tells a mixed story. Unemployment climbed to a cycle peak of 7.1% in September 2025, then eased to the mid-6% range through 2026 (around 6.5% by mid-year). That is better than the peak, but still noticeably higher than Canadians were used to before 2024, a sign the slowdown is real even if a recession has been avoided.

Rates, the Loonie, and the TSX

Higher inflation has kept the Bank of Canada cautious, and bond yields have pushed up, with the 10-year near 4%, among the highest in years. The Canadian dollar has stayed weak, trading around 1.41 to 1.42 per US dollar, which helps exporters but signals caution about the economy. The S&P/TSX Composite, meanwhile, has held near record highs, carried by its heavy weighting in energy, banks and gold miners, a reminder that the index and the economy do not always move together.

The Tariff Overhang

The single biggest change from a year ago is the US-Canada trade conflict. Tariffs and the uncertainty around them have become the dominant risk, weighing on manufacturing, investment and confidence, and are a major reason growth forecasts were cut. For an economy where exports to the US are the lifeblood, this is the story to watch into 2027.

Frequently Asked Questions

Is Canada's economy better or worse than last year?

Broadly softer. Growth is slowing from 1.7% in 2025 to around 1.1% in 2026, inflation has risen from about 2.1% to 2.6%, and unemployment, though off its 7.1% peak, remains elevated in the mid-6% range.

Why is Canada's inflation rising while the US eases?

Firmer commodity prices and the cost of tariffs are pushing Canadian inflation up, while the 2025 drop was partly a one-off from removing the consumer carbon price. That makes the Bank of Canada more cautious than peers.

How is the TSX doing if the economy is weak?

The S&P/TSX Composite has held near record highs because it is dominated by energy, banks and miners that track commodities and global conditions, not just the domestic economy.

The Bottom Line

Compared with a year ago, Canada's economy is running slower, with inflation heading the wrong way and a trade war as the defining risk. It is bruised rather than broken: no recession, but no momentum either. For investors, the split between a soft economy and a buoyant, commodity-heavy TSX is the key tension. Track the Canadian names driving the index on our Canadian stocks hub, and watch tariffs and the Bank of Canada for the next move.