United States
- The U.S. economy is forecast to run slightly above its long-run trend rate of growth in 2026/27, aided by expansionary fiscal policy, a less restrictive federal funds rate, some easing in regulation, and further investments in AI. The unemployment rate is expected to gradually drift lower starting in H2-2026, as above potential growth leads to some firming in employment. The unemployment rate is expected to return to its long-run average of 4% by mid-2027.
- Inflation pressures remain elevated, as the cooling in services inflation has slowed, while higher tariffs have pressured consumer goods prices higher. The impact of tariffs on prices is expected to persist through mid2026, while secondary effects from higher oil prices will add further upward pressure. Core measures of inflation are expected to hover around 3% through most of this year, with the Fed’s preferred measure of inflation (core PCE) not expected to reach the FOMC’s 2% inflation target until Q4-2027.
- We project the fed funds rate to be lowered at a moderate pace back to a level more consistent with its neutral (3.25%) rate by Q4-2026, and hold there as the economy finds its balance.
Canada
- Canadian economic growth is expected to run below trend through 2026. Output is held back by slower population growth and the impact of U.S. tariffs on export demand and business and consumer sentiment. Consumer spending had been improving on lower interest rates, but this is expected to slow as the unemployment rate holds above its long-run level until late 2027.
- CPI inflation is roughly at the Bank of Canada’s 2% target. Higher oil prices are expected to lift energy price growth in 2026 and filter through to prices more broadly. However, its impacts on core inflation are expected to be mitigated by sub-par economic growth and Canada’s removal of many retaliatory tariffs. Core measures of inflation are expected to return to the 2% target by H1-2027.
- The Bank of Canada is expected to keep its policy rate at our estimate of the neutral rate (2.25%) over the remainder of the forecast horizon, as economic growth returns to its trend pace.
- We expect the loonie to return to the 74 - 75 U.S. cent range as interest rate differentials narrow between Canada and the U.S.
Forecast Tables |
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| Long-Term U.S. Economic Outlook |
| Long-Term Canadian Economic Outlook |
| Long-Term Interest Rates |
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