Canada may avoid a recession in 2026 — but only if global tensions and trade disputes ease — according to Bank of Canada Governor Tiff Macklem, who cautioned the outlook remains highly uncertain.“If the situation changes, we may need to change course,” Macklem told reporters, pointing to elevated global risks and the possibility of new U.S. trade restrictions that could force the central bank to cut interest rates further to prop up growth.Blacklock's Reporter said in its latest Monetary Policy Report, the bank projected the Canadian economy will expand by about 1% this year, with growth expected to slow further to roughly 1.2% in 2026. Officials attributed the weaker outlook to slowing population gains and the impact of U.S. trade policy.The forecast marks another downgrade from earlier projections. The bank had initially expected 1.8% growth for 2026 before trimming it to 1.4% last fall and again to 1.1% earlier this year.According to the report, the economic outlook hinges heavily on the outcome of trade negotiations with the United States, as well as the duration and severity of conflict in the Middle East. Escalating tensions abroad have already driven up oil prices and transportation costs, contributing to higher fuel surcharges across parts of the economy.The bank warned that additional U.S. tariffs would further weaken Canadian exports and drag down overall GDP growth.Labour market data is also showing strain. Employment growth has slowed since 2025, with job losses concentrated in sectors most exposed to U.S. tariffs, while labour force participation has edged lower..Despite the softer outlook, the bank held its benchmark interest rate steady at 2.25%, with its next rate decision scheduled for June 10.Macklem did not directly address the probability of a recession, though he has previously acknowledged the economy is underperforming expectations. Speaking in March, he noted exports remain weak and the housing sector continues to struggle, with first-quarter growth tracking below earlier forecasts.“The risks are tilted to the downside on growth,” he said at the time.The central bank’s cautious tone comes amid criticism over past forecasting errors. Macklem has previously admitted the bank misjudged inflation trends, including a 2020 projection that price growth would remain below 2% and later claims inflation would be “transitory.” Inflation ultimately peaked at 8.1% in 2022, far above those estimates.
