Long-Term Forecast

United States

• The U.S. economy is forecast to run below its long-run trend rate of growth in 2025, as growth is slowed by tariffs, fiscal constraint and slower population growth. Real GDP growth then briefly overshoots in 2026/27 and then converges closer to potential by 2028. Slower near-term growth pushes the unemployment rate slightly higher, reaching 4.5% by Q4-2025 before gradually returning to its long-run average of 4% by mid-2027.
• Inflation has slowed from its multi-decade highs, though progress towards the Fed’s 2% inflation target has stalled in recent months. Higher tariffs pose an upside risk to the medium-term inflation outlook. Under our current baseline assumptions, core PCE inflation (the Fed’s preferred measure of inflation) isn’t expected to reach the FOMC’s 2% inflation target until H1-2027.
• We project the fed funds rate to be lowered at a moderate pace back to a level more consistent with its neutral (3.0%) rate by 2026, and hold there as the economy finds its balance.

Canada

• Canadian economic growth is expected to run below trend in 2025 and 2026, before finding greater balance in 2027. Slowing population growth and the impact of tariffs on business and consumer sentiment are the drivers of lower growth. Consumer spending had been improving on lower interest rates, but we expect this to act as a drag on growth as higher prices cut into spending power. This has the unemployment rate moving above its long-run level until 2027.
• After a period of somewhat stable inflation, headline and core consumer price inflation are expected to remain above target through 2025 on trade tariffs, before starting to return to the 2% target over the medium term.
• The Bank of Canada is expected to cut its policy rate back to our estimate of the neutral rate of 2.25% by 2025.
• We expect the loonie to return to the 74 - 76 U.S. cent range once Canadian economic growth is able to catch-up to the U.S.