Canada's Economic Tightrope: Growth Hinges on High-Stakes Trade Talks

OTTAWA, ON – January 09, 2026 – Canada’s economy is poised for a year of precarious balance, navigating a narrow path between domestic stimulus and significant international headwinds. New research from The Conference Board of Canada projects the national economy will grow by 1.3 per cent in 2026, a slowdown from the estimated 1.7 per cent growth in 2025. This modest outlook is buoyed by federal spending and recovering business investment, but it is overshadowed by the monumental uncertainty of the upcoming Canada–U.S.–Mexico Agreement (CUSMA) review and a cooling American economy.

“While the Canada–U.S.–Mexico Agreement negotiations later in 2026 could either support or hinder growth, we anticipate the latest federal budget will undoubtedly boost economic activity,” said Cory Renner, Director of Economic Forecasting at The Conference Board of Canada. “In one way or another, the budget will help growth prospects in every area of the economy, from trade and investment to housing and consumers.”

This forecast sets the stage for a critical year where the benefits of domestic policy will be tested against the turbulence of North American trade politics. While Ottawa is injecting billions to spur productivity, the nation's economic fate may ultimately be decided at the negotiating table.

The CUSMA Crucible Looms

The most significant variable for Canada's economy is the mandatory joint review of CUSMA scheduled for July 2026. This is not a simple check-in; it is a high-stakes process that will determine whether the agreement is extended for another 16 years. A failure to secure renewal could trigger a period of intense annual reviews, creating prolonged uncertainty that could chill investment and disrupt deeply integrated supply chains.

The political climate south of the border adds a layer of volatility. The Trump administration has openly signaled its dissatisfaction with the current deal, raising concerns that the U.S. may seek significant concessions or even let the agreement expire. Key points of contention are expected to resurface with renewed intensity. These include long-standing disputes over Canada’s supply-managed dairy and poultry sectors, softwood lumber exports, and American concerns about Canada's digital services taxes.

Furthermore, U.S. negotiators are expected to scrutinize automotive rules of origin, potentially pushing for higher regional content requirements, and raise alarms over Chinese investment in Mexico being used as a backdoor into the North American market. In response, Global Affairs Canada has been conducting consultations since late 2025 to fortify the country's negotiating position, with priorities focused on ensuring energy security, enhancing supply chain resilience, and proactively addressing trade irritants to protect vital exports.

A Stimulus-Fueled Foundation

Counterbalancing the external risks is a strong dose of domestic fiscal stimulus. The federal government's "Budget 2025," released in November, outlined an ambitious plan to inject over $110 billion in productivity-enhancing investments over five years. This strategy is designed to revive business investment, which faltered in 2025 under the weight of U.S. tariffs and economic ambiguity.

Key measures include a "Productivity Super-Deduction" allowing businesses to accelerate the write-off of new capital investments, enhancements to R&D tax incentives, and a $750 million fund to help growth-stage firms. The budget also earmarks $5 billion for a Trade Diversification Corridors Fund to strengthen supply chains and $2 billion for a Critical Mineral Sovereign Fund to secure Canada's role in the green energy transition.

These initiatives, combined with a middle-class tax cut designed to bolster consumer spending, form the bedrock of the Conference Board's growth forecast. However, other economic bodies offer a more cautious perspective. The OECD and several major Canadian banks project growth closer to the 1.0-1.2 per cent range for 2026, suggesting that while the federal spending provides a crucial backstop, it may not be enough to fully insulate the economy from global pressures.

Cracks in the Labour and Housing Markets

Beneath the headline GDP numbers, Canada's economic recovery appears uneven, with structural challenges emerging in the labour and housing sectors. A key factor dampening momentum is a planned slowdown in population growth. After years of record-breaking numbers, the federal government has moved to reduce immigration targets, stabilizing permanent resident admissions at 380,000 annually from 2026 to 2028, down from nearly 500,000 in 2024. More significantly, temporary resident arrivals are being sharply curtailed.

While intended to ease pressure on an overburdened housing market and social services, this policy is expected to constrain employment growth starting in mid-2026. This demographic shift is compounded by a significant reduction in the federal public service. As part of a cost-saving initiative, the government plans to cut 28,000 jobs by 2029 through a combination of attrition, early retirement incentives, and direct cuts. Notifications of workforce adjustments began rolling out across numerous departments in late 2025 and continue this month, adding another layer of drag on the labour market.

These dynamics are weighing on Canada's housing market. Despite some improvements in affordability, the Conference Board notes that economic uncertainty, slower population growth, and a softening labour market are expected to cause housing activity to ease in the coming years, affecting both homebuyers and builders.

Headwinds from the South

Canada’s deep economic integration with the United States means any instability there is felt acutely at home. The U.S. economy, while resilient for much of last year, showed clear signs of weakness in late 2025. A 43-day partial government shutdown starting in October 2025 was estimated to have dragged U.S. GDP down by as much as $15 billion per week, disrupting services and furloughing hundreds of thousands of federal workers.

More concerning for Canada are the ongoing trade tensions. Widespread U.S. tariffs implemented in March 2025, which prompted Canadian retaliation, are contributing to rising inflation and unemployment in the United States. The IMF and OECD have both pointed to these measures as a primary cause of softer U.S. demand for Canadian exports, directly impacting Canada's growth prospects.

This economic fragility in its largest trading partner makes the upcoming CUSMA review even more critical. A smooth and successful renegotiation could restore confidence and stabilize trade flows, providing a much-needed tailwind. Conversely, a contentious process or negative outcome would amplify existing headwinds, placing Canada's modest growth projections in serious jeopardy as the nation attempts to navigate the turbulent waters of 2026.