The U.S and Canadian economies are still very similar, RBC says

Trade disruptions and political strain weighed on Canada–U.S. relations in 2025, but the two economies continued to share more in common than might be assumed, according to RBC Economics.

In the season three finale of The 10-Minute Take podcast, RBC Economics analysts Claire Fan and Carrie Freestone said slowing population growth, unexpectedly resilient consumer spending, and expanding government deficits emerged as three defining themes shaping both economies this year, despite differences in policy and structure.

Fan said tighter federal targets on non-permanent residents sharply reduced Canada’s population growth in 2025 to just under 1%, down from an average of about 2.5% over the previous three years. While immigration typically boosts both labour supply and demand, she said the slowdown has changed how labour market strength should be interpreted.

“When the labour force is growing at a slower rate, less monthly job creation is needed to prevent the unemployment rate from rising,” Fan said. As a result, RBC expects Canada’s breakeven employment growth to turn negative in 2026, meaning even modest job gains could signal an improving labour market; unlike the past two years, when strong hiring still failed to offset rapid labour force growth.

Freestone said the U.S. is experiencing a similar pullback in immigration, though with less visibility in the data. Immigrant visa issuance was down about 20% year over year as of May, and border encounters, a proxy for undocumented inflows, fell roughly 90%. RBC has lowered its estimate of U.S. breakeven employment growth to about 40,000 jobs per month, from roughly 100,000 previously.

“The challenge for the U.S. is that this is happening alongside a major retirement wave,” Freestone said, noting that more than two million workers retired over the past year, leaving fewer sources of labour if immigration remains weak.

Despite softer labour markets and trade uncertainty, both economists said consumer spending held up better than expected in 2025. In the U.S., Freestone described a “K-shaped” dynamic, with higher-income households driving most spending as dividend and investment income outpaced wage growth.

“A large segment of the population feels stretched,” she said, but overall consumption has remained resilient as long as the top income decile continues to spend and employment conditions avoid a sharp deterioration.

Fan said Canada showed similar resilience, supported by relatively smaller U.S. tariff hikes on Canadian goods, a cumulative 275 basis points of Bank of Canada rate cuts, and strong equity valuations. Together, these factors helped improve household balance sheets even as unemployment rose.

“That creates upside risk to consumption and inflation in the year ahead,” Fan said, adding that the backdrop makes further Bank of Canada rate cuts harder to justify. RBC expects the overnight rate to be held at least through 2026.

The final common theme was fiscal policy. Fan said large government deficits have become entrenched in the U.S. since the pandemic, with the Congressional Budget Office estimating a US$1.8-trillion deficit in fiscal 2025, or about 5.9% of GDP.

“That’s larger than any pre-pandemic year outside of recession or war,” she said, adding that persistent deficit spending has contributed to inflationary pressures and delayed the Federal Reserve’s return to neutral interest rate levels. Moody’s downgraded U.S. sovereign credit earlier this year, though markets reacted calmly.

Canada, while starting from a stronger fiscal position, is moving in a similar direction. Freestone pointed to the federal government’s 2025 budget, which nearly doubled the deficit to $78 billion and projected a rising debt-to-GDP ratio into the mid-2030s, driven by infrastructure, housing and defence spending.

“As a share of GDP, Canada’s deficit is still less than half the U.S. level,” Fan said. “But this represents a clear departure from the balanced-budget focus of earlier decades, and that shift could raise market risks if fiscal guardrails weaken further.”

Fan noting that even in a year marked by strained bilateral relations, the economic experiences of Canada and the U.S. remain closely aligned.

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