Canada: Economic Outlook for 2026

 

It is that time of the year and every good economist should offer their thoughts for the coming year’s economic performance.  However, forecasting the outlook for Canada’s economy in 2026 is ultimately an exercise in caution given the large number of domestic and international economic moving parts.  The trade and tariff situation between Canada and the United States including the future of CUSMA is an important variable as is the large number of proposed infrastructure and nation building projects and increased defence spending all which are sources of stimulus.  Then there are the efforts at export diversification and the role of prices for Canadian resource commodities. At the same time inflation and economic uncertainty may dampen consumer confidence and spending along with the headwinds of flat home construction and population growth which have been major drivers at least in terms of overall though not per capita economic growth.

A worst-case scenario would see CUSMA falling apart and a new set of higher tariffs shocking the Canadian economy and prompting capital outflow.  New tariffs would further depress exports.  If planned national infrastructure projects are bogged down, then that source of stimulus would not be there.  The economy would likely enter a recession with the loss of several hundred thousand jobs and the unemployment rate rising to the 8-9 percent range though inflation would likely moderate to below the 2 percent target.  On the plus side, lower inflation would result in downward movement of the Bank of Canada Overnight Rate to below 2 percent. 

Real GDP growth in this worst-case scenario would be negative but hopefully not catastrophic given the large amount of fiscal stabilization government spending is already injecting into the economy and the self-directed efforts by more Canadians to spend and travel domestically.  However, the Canadian political situation could be a factor in further making a worst-scenario case worse if the minority government falls plunging the country into the uncertainty of a federal election and both Alberta and Quebec announce they are going to hold referendums on separation leading to additional outflows of capital and investment.

However, there are reasons to be optimistic that 2026 will be at least as good as 2025 if not better.  Indeed, the recent update of GDP growth numbers by Statistics Canada suggests the Canadian economy has more steam than one might expect.   In the face of trade disruption and uncertainty, Canada’s economy in 2025 has been more resilient than one initially might have thought. High government spending for the time being is already injecting stimulus into the economy and the self-directed efforts by more Canadians to spend and travel domestically has been its own domestic stimulus program.  In the end, while there has been an impact of U.S. tariffs on specific Canadian sectors such as autos, steel and aluminum, it remains that most Canadian trade with the United States that is under CUSMA remains tariff free.

Going forward, despite President Trump’s rhetoric, the United States does need Canadian exports and there is eventually going to be some type of trade agreement that will ensure reasonable access to the American market.  If all goes well in terms of resolving trade issues with the United States, there is no major international crisis that disrupts trade, there is a start on one or two major infrastructure projects, some stimulus from defence spending, continued export diversification and commodity prices strengthen, then one might even see robust real GDP growth in the 2-3 percent range with the unemployment rate falling to the 5-6 percent range as hundreds of thousands of new jobs are added to the economy.   Indeed, faster than expected growth may put inflation well above the Bank of Canada target range resulting in higher interest rates and even a higher exchange rate relative to the U.S. dollar.

So, economic outcomes in 2026 are uncertain but the evidence suggests that when push comes to shove, the U.S. will have to negotiate some type of arrangement with Canada and Mexico if it does not want to harm its own economic welfare.  Even a cross between the best- and worst-case scenarios outlined here would be a reasonable economic outcome in terms of growth and employment.   I think guarded economic optimism is a good way to sail into the New Year. 

 

 

What Is Thunder Bay's Population?

 

During the last Thunder Bay City Council Meeting, the discussion over the city’s new Smart Growth Plan included a few remarks by the mayor that the city was growing and that according to conversations that he has had, it is probably around 150,000.  Of course, while it cannot be denied that Thunder Bay has seen its population grow over the last few years based on even anecdotal observation, the 150,000 number is vastly at odds with any estimate provided by Statistics Canada or even the City itself in its annual submissions of municipal data to the Ontario Government via the Financial Information Return (FIR). This type of mixed messaging and confusion on what Thunder Bay’s population is, including the usual casting of doubt on Statistics Canada, does not do anyone any favours.  This becomes even more problematic given that Thunder Bay is engaged in long-range financial planning that also presents population and household numbers. 

Thunder Bay will soon be dealing with a Long-Range Financial Plan for the 2026 to 2035 period, and the current draft presents population estimates (Plan starts at page 32 of December 9th Agenda for Finance and Administration Standing Committee) taking the city from 112,330 in 2020 to 117,003 in 2025.  Over the same period, the same draft has the number of households in Thunder Bay growing from 47,180 to 48,405.   In other words, the City of Thunder Bay says it has added 1,225 households since 2020 and 4,673 people.  However, it should be noted that average household size in Thunder Bay is approximately 2.2 people so the additional households should probably only be associated with only an additional 2,695 people.  Or perhaps it could be that our current population increase is also being accompanied by an increase in household size.  In addition, the household number in the draft plan is also out of whack with the household number and population in the finally submitted Thunder Bay FIR report to the provincial government for 2024 which says Thunder Bay has 50,995 households and a population of 108,843.

This range of estimates – none of which incidentally approach 150,000 - begs the question as to what then the population of Thunder Bay is?  Part of the issue is that there is a distinction between the population of Thunder Bay as contained within the city limits – the City of Thunder Bay – and the population of the immediate surrounding area as defined by Statistics Canada as the Census Metropolitan Area (CMA).  The accompanying map shows that the city itself is contained with a much larger CMA which in turn is within an even larger District which according to Statistics Canada in 2024 had a population estimated at 157,293.   Perhaps this the source of so much confusion among our elected officials in that they conflate the population of the district (which essentially stretches from Fort Frances to Wawa) with the population of the city itself which is anywhere from 108,843 to 117,003 or perhaps even the CMA at 133,063.  That Thunder Bay is a service centre for a regional population of 157,293 that accesses its government, health, retail and education services is a reasonable statement but saying that our city itself is swarming with 150,000 people is not.

 

 

The accompanying figure plots three population series: the CMA and City populations from Statistics Canada and the City population according to the annual FIR reports - which I again must note, are filed by the City of Thunder with the provincial government.  For the CMA, the StatsCan numbers show a decline from 2001 to 2011 from 126,696 to 124,926 followed by a flat population that starts to increase after 2016 and in 2024 is estimated at 133,063.  For the city itself, the Statistics Canada numbers show a pattern like the CMA but the numbers are larger than the numbers the city itself seems to be using in its annual FIR reports.  The City of Thunder Bay’s population according to this series declines from, 113,298 in 2001 to 110,861 in 2016 and then starts to grow and in 2024 was estimated at 117,100.  According to the StatsCan estimates, between 2016 and 2024, the Thunder Bay CMA grew 6.6 percent and the city itself 5.6 percent.  However, the FIR numbers say the Thunder Bay had a population of 115,419 in 2001 which shrank to 107,909 in 2016 and has since grown an anemic 0.9 percent to 108,843.

 

 

If the city is making the case that its population numbers are underestimates that affect the grants it receives from the federal and provincial governments, a key part of the problem is that the city itself seems to be submitting numbers in reports that are much lower than the StatsCan estimates.  On the other hand, the provincial government probably has a good handle on how many people live in the city of Thunder Bay versus the surrounding area based on Driver’s License and OHIP usuage data and does believe the population of the city itself is closer to 108,000 with a large percentage of the CMA population outside the city. Indeed, based on the FIR estimate, 20 percent of the CMA population lives outside the city limits and is probably a factor in all the traffic being generated as they come in and out of town accessing city services.

Of course, rather than blame someone else, the solution here in part is that the city of Thunder Bay needs to get its act together in terms of getting a handle on its own numbers.  For a city with 3,207 employees (2,165 full time, 995 part time and 47 seasonal), Thunder Bay seems unwilling or unable to hire a couple of graduate school level trained economists and statisticians who could provide a more disciplined and consistent approach to compiling and analyzing its economic and population data to make its case with both higher tiers of government and its own municipal ratepayers.  Instead, we are left with plans, pronouncements and submissions that have conflicting data and population estimates that seem to emerge out of thin air.

Measuring the Trump Travel Effect

 

Travel by Canadians to the United States has undergone a significant decline in 2025 while other international travel both to and from Canada is up.  According to recent numbers released by Statistics Canada, when it comes to air travel, “In October 2025, 1.3 million passengers were screened for international flights (outside the United States), up sharply compared with one year earlier (+12.0%). Moreover, international passenger traffic was significantly higher in October 2025 (+20.4%) than the pre-pandemic level posted in October 2019. Conversely, transborder passenger traffic (to the United States) in October 2025 decreased year over year for the ninth consecutive month, down 8.9% to 1.2 million, and was 5.7% below the October 2019 level.” Land traffic is also down especially when it comes to the annual snow bird migration to warmer parts of the United States and is expected to continue falling. Moreover, the decline has received substantial international media attention given that it represents a remarkable reversal in the perceived travel relationship between the two countries.

The question that inevitably arises is how much of this drop in Canadian travel to the United States is the result of a deliberate boycott and shift in preferences as a result of the words and actions of U.S. President Donald Trump and how much is due to the usual determinants of cross border travel which include variables like the Canada-US exchange rate. Past surges and declines – the most famous being the late 1980s/early 1990s cross border shopping phase were strongly affected by changes in the exchange rate.  However, after the travel peak reached in the early 1990s, one can also argue that there has been a longer-term decline in total trips by Canadians to the United States.

 

 

Figure 1 plots monthly data stretching back all the way to 1972 on the total trips by Canadians returning from the United States (Data Source: Statistics Canada v1296956586).  Also plotted on the chart is the monthly exchange rate in terms of US dollars per Canadian dollar with a rise indicating an appreciation of the Canadian currency relative to the US dollar and a decline a depreciation. In 1972, the Canadian dollar was near parity with the US dollar and began a depreciation that by the mid 1980s had brought about a 75 cent US Canadian dollar. There then began a rebound that saw the dollar peak at just under 90 cents US that was also accompanied by the massive cross border shopping surge from about 1987 to 1993.  Incidentally, this also coincided with the introduction of the much-despised GST in 1991.  In general, there do seem to be periods of increase in travel during periods of appreciation and decline during periods of depreciation.  However, the Canadian dollar approached parity again briefly circa 2010 and while travel by Canadians to the United States increased, it did not approach the levels of the early 1990s.

A more useful approach to try and sort out the effects of the exchange rate from those of the presence of the US President would be a regression approach. The accompanying table presents results from a quick regression of the log of the monthly level of all return trips from the United States by Canadians from 1972 to 2025 on a set of variables (with STATA as the estimation package).  First, there are quarterly dummies with the first quarter omitted.  Traditionally, trips peak in the summer months and are lower in the winter months particularly for automobile trips, so the months of the winter quarter are omitted. The 12 months in 1991 that coincide with the onset of the federal Goods and Services Tax (GST) are included as a variable.  The exchange rate defined as US dollars per Canadian dollar is included (Source: FRED CCUSSP01CAM650N and Bank of Canada).  One expects that as it goes up (an appreciation), the level of trips should also be greater.

I then include several additional qualitative variables that try to capture shocks that may have affected travel in the 21^st century including a dummy for the September to December period in 2001 that was marked by the 9/11 terror attacks in New York.  The Covid-19 pandemic variable takes on a value of 1 for the months from April 2020 to November 2021 and of course zero otherwise.  President Trump’s first term from January 2017 to January 2021 gets its own dummy variable and of course so does his second term starting in January of 2025.  

 

 

The results? Well, oddly enough, the exchange rate does not appear to be a statistically significant determinant of Canadians travelling to the United States when the span of monthly data from 1972 to 2025 is considered.  This does seem a bit odd though I should add that if the regression is only run from the 1972 to 2000 period (on the seasonal dummies and exchange rate and omitting all the 21^st century shocks) then one gets the expected relationship.  This suggests that Canadians over time may have perhaps gotten used to a 70-cent dollar and their behaviour became more inelastic with respect to its fluctuations when travelling to the US. 

More interesting are the other variables.  The onset of the GST was associated with a 64 percent surge in monthly trips all other things given.  The months associated with the 9/11 Terror attack saw a 36 percent drop.  The COVID-19 pandemic was associated with a collapse in trips in the order of 230 percent, all other things given.  The first Trump term which did not come with as belligerent a tone towards Canada as the second term was not statistically significant in affecting Canada-US travel.  On the other hand, President Trump’s second term to date after controlling for the exchange rate and seasonality is associated with a statistically significant 34 percent drop in total monthly trips by Canadians to the United States.

Of course, this is a very simple specification, and one might want to add things like income and gasoline prices and perhaps even a time trend but as it stands, it explains about 70 percent of the variation in the monthly level of total Canadian trips returning from the United States.