RBC “cautiously optimistic” about Canada’s economy

Royal Bank of Canada chief economist Frances Donald says Canada’s economy has shown resilience through early 2026, with per-capita data pointing to an early-stage recovery despite weak headline GDP.

In a June 15 report, Donald said a second consecutive quarterly GDP decline in Q1 sparked recession concerns, but the underlying data suggest the economy is “bending, not collapsing.”

“To be clear, the economy is not strong yet,” Donald said. “Unemployment is still too high. Population declines will continue to limit the underlying growth rate that can be generated. Sectors directly targeted by U.S. tariffs continue to underperform, and high fuel costs are cutting into household purchasing power.”

Donald said slowing population growth is depressing aggregate GDP, while measures that better reflect household conditions are improving. On a per-person basis, she said, the economy is still growing, while the unemployment rate fell to 6.6% in May from 6.8% at the end of 2025.

She said higher energy costs remain a headwind, particularly for lower-income households, but gasoline purchases still account for about 3.5% of household incomes, up from 2.9% in Q4 but not historically high. As a net oil exporter, Canada is also benefiting from higher oil revenues and improved terms of trade.

Donald said labour markets remain weak but are improving on a per-worker basis as slower immigration and population declines shrink labour supply. She said modest employment declines that would normally raise recession concerns can now be consistent with improving per-worker conditions.

Trade policy has also stabilized, she said. Product-specific tariffs on steel, vehicles and wood products continue to hurt affected sectors, but most Canadian exports remain exempt under CUSMA compliance rules. Donald said the share of U.S. imports subject to tariffs has fallen from a peak of 45% in June 2025 to just over one-third in April 2026.

RBC does not expect the Bank of Canada to hike rates in response to the oil price shock, with core inflation easing and some fuel-related price pressures unwinding. Donald said federal and provincial deficit spending should also support growth, though most benefits are likely to appear in 2027 or later.

Provincially, RBC expects energy and mining regions to outperform in 2026. Newfoundland and Labrador leads its forecast with 4% growth, followed by Alberta at 3% and Saskatchewan at 1.8%. Ontario and Quebec are expected to grow just 0.4%, while British Columbia is forecast at 0.6%.

Donald said per-capita GDP should still improve in most provinces because of slower population growth, making economic conditions feel less strained than headline GDP suggests.

“We remain cautiously optimistic that enough support remains in place to sustain gradual improvement in those per-person and per-worker economic indicators this year with further tailwinds building into 2027,” Donald said.

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