Macro & Strategy - September 2026

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I’ll Sleep When I’m Dead

Canada’s economy isn’t done yet

« ’Til I’m six feet under
And they lay my bones to rest
Gonna live while I’m alive
I’ll sleep when I’m dead »

– Bon Jovi

As the trade relationship between Canada and the United States seemingly reaches a new low, with a treacherous path ahead, concerns about the Canadian economy are justified. But we don’t think it’s appropriate to write its obituary yet, as some will no doubt do.

August’s breakdown in trade talks surely deepens an already pessimistic mood. The narrative is familiar by now: technical recession, soft productivity, stretched household balance sheets, and the possibility of a future without the Canada- United States-Mexico Agreement (CUSMA). Add a silver medal in Olympic hockey and the mood becomes almost theatrical. At least the Montreal Canadiens gave the country a final four appearance to end the 2026 NHL season. To avoid stirring the pot too much, we’ll leave any commentary about the Maple Leafs to the reader’s discretion.

Yet investors are rarely rewarded for simply extrapolating the latest disappointment. The more useful question is whether the prevailing pessimism is already in the price, and whether the next marginal surprise is more likely to be positive than negative. On that front, Canada is becoming more appealing. Consensus forecasts are still cautious. Bloomberg survey data show that Canadian growth will be below 1% in 2026, roughly in line with the euro zone and much lower than the United States, before improving modestly to about 1.8% in 2027. That’s hardly the stuff of economic legend. But, beneath the headline, several small stories are beginning to point in a positive direction.

Highlights

• As trade tensions between Canada and the United States escalate, several indicators show that the Canadian economy is resilient and that growth is accelerating.
• Although risks remain very much present, the gap between pessimistic expectations and improving fundamentals creates potential for a favourable repricing of Canadian assets.
• We remain overweight in equities and commodities, while adopting a more neutral stance on bonds following the rise in yields.

The Canadian dollar is also a useful barometer of how unloved the country has become. At the beginning of August, several positioning metrics suggested the loonie was among the most shorted major currencies. That isn’t proof of an imminent rally, but it tells us that a lot of bad news has already been internalized. When currency speculators are crowded on one side of the boat, the burden of proof shifts. It no longer takes perfection to create upside. It can simply take news that is slightly less bad.

Two forces have weighed on Canada’s economy over the past year: trade uncertainty and population decline. Recent trade developments suggest the fog of war is nowhere near lifting, and signs are pointing to a prolonged conflict. Given the Trump administration’s actions throughout the negotiating process, we would be surprised if a favourable resolution were reached before the arrival of a new administration in 2028. Even if the Republican Party suffers blowout losses in the midterm elections this fall, one must question the White House’s willingness to be influenced, let alone steered, by Congress.

So, from our standpoint, as of late August 2026, the basecase scenario ought to be a long and windy road for trade with the United States. The silver lining is that we’re seeing decent progress on trade diversification with, for example, the first tanker carrying Canadian oil reaching the shores of Japan in August. But make no mistake, Canada isn’t free of the U.S. grasp on trade by any means and most likely won’t be anytime soon.

Population growth is likely to remain flat or negative over the next few quarters, but the hardest part of the adjustment is probably behind us. The population decline also brings the reversal of a much-discussed trend: falling GDP per capita. The post-pandemic population surge placed real strain on the economy, and newcomers initially faced challenges integrating into the labour market.

With time, and a needed reset of immigration policy, Canada may be starting to capture more of the benefits from that earlier population increase.

Taking the economy apart, then putting it back together

A useful way to get beyond the noise is to return to the basic accounting identity of gross domestic product: consumption plus investment plus government spending plus net exports. Canada’s headline GDP growth has remained weak over the past year, despite a rebound in the second quarter. But if we examine each component separately, the picture becomes surprisingly constructive.

Consumption

Let’s start with the biggest piece, the consumer. Consumption has been resilient over the past year, despite trade tensions and a shrinking population. Solid wage growth and healthy balance sheets, buoyed in part by stock market wealth, have supported spending. But a solid labour market was the missing piece, until lately.

Recent job gains have surprised to the upside, with almost 200,000 jobs created in the past three months, while the unemployment rate has fallen from 7.1% in September 2025 to 6.4% in July 2026. The employment rate, after a two-year slump, has begun to trend higher again.

This improved picture has led to stronger retail sales, which have beaten expectations for several consecutive months. Some of that lift is due to higher gasoline prices, which inflate nominal spending, but it’s clear that the Canadian consumer isn’t going anywhere. In fact, after declining for two years (2023 and 2024), real consumption per capita – a side effect of the post-pandemic population boom – is rising again, and consumers may have more catching up to do.

Investment

Investment is the more important swing factor. If one macro data point deserves more attention in 2026, it’s business confidence. The Canadian Federation of Independent Business indicator improved throughout the summer, both in total and in manufacturing, despite continued anxiety about trade and the future of CUSMA. The Bank of Canada’s Business Outlook Survey has also normalized after a threeyear slump. Most importantly, intentions for future investment in machinery and equipment are near historical highs. That kind of detail can easily get lost in a negative narrative, but it matters.

This improvement is arguably starting from a weak base. Canadian business investment as a share of GDP has been on a broad downtrend for three decades, and the productivity consequences are painfully familiar. But now that Canada is treating this problem as urgent, we may start to see some results.

Of course, the fog of the trade war is still a key risk. Does the recent upswing in business confidence reflect a true rise in optimism and point to better investment prospects? Or is it simply misguided hope of imminent tariff relief? Only time will tell, but, as in 2026, business confidence is likely to remain the key macro indicator in 2027.

Government spending

Shifting to the public sector, we see that Ottawa is preparing to spend more on infrastructure and defence, which means government demand is likely to keep providing vital support for domestic activity. Defence spending is moving into a different league, with a commitment to reach 2% of GDP immediately and a pathway toward 3.5% of GDP in core military spending by 2035. The 2025 budget included $81.8 billion over five years for personnel, equipment, infrastructure, cyber capabilities, and defence industrial development.

Infrastructure is no longer framed strictly as a social or regional development issue. It is becoming a core component of economic strategy. The 2025 budget was presented as an investment budget, with $280 billion in capital investments over five years, or $450 billion on a cash basis, directed toward trade corridors, housing-enabling infrastructure, energy systems, and community infrastructure.

The common theme is sovereignty, both economic and geopolitical: Canada is looking to strengthen its ability to move goods, defend territory, diversify trade, and build strategic capacity.

A crucial question arises: Can the federal and provincial governments afford to support businesses as they navigate the stormy waters of the recent trade escalation? We think the federal government is in good shape because the proposed counter tariffs (scheduled, at this writing, to come into effect on September 8) should raise and recycle enough money to pay for the programs.

The question is more complicated for the provinces, although we would argue that no province can afford not to help its economy cope with the shock. Indeed, it would be more costly to let market forces destroy key industries and human capital because of a potentially short-lived situation than to use fiscal space as available to weather the storm.

Net exports

The final piece is net exports, and here too the picture has brightened. Recent trade data show Canada moving back into surplus, helped by energy exports and by signs of trade diversification. Exports to the United States have picked up, partly because of the inventory cycle south of the border. But exports to global partners have also bounced, with LNG Canada probably contributing and commodities such as aluminum benefiting from shifts in trade flows. Tariffs can hurt in the short run, but they also remind firms and governments that being dependent on a single trade partner isn’t a winning strategy.

Canada’s most durable growth strategy isn’t to choose between the United States and the rest of the world; rather, it’s to become more capable of serving both. Investing in transport infrastructure should help Canadian goods reach global markets, while growing energy production will continue to turn North America into an energy superpower.

Let’s also remember that economies are dynamic, constantly adjusting to new realities. The United States may be closing some doors that have been very profitable for many years, but that just means Canada’s industrial structure will have to adapt.

Scenario analysis

When we put all the pieces of the puzzle together, growth is poised to exceed expectations over the next 18 months. As things stand, new tariffs on Canadian goods should have a relatively muted macroeconomic impact, probably shaving only a few tenths of a percentage point off GDP growth.

Therefore, we expect GDP growth of about 1% in 2026, followed by an acceleration to 2% in 2027. A more pessimistic scenario, whereby the trade war with the United States escalates further, could see growth stall in Canada alongside a rising unemployment rate.

But even then a recession is unlikely, as fiscal and monetary policy would adjust to absorb part of the shock.

Markets aren’t the economy, but they’re listening

Canada’s stock market and Canada’s economy are related, but they are certainly not twins. Energy represents roughly 15% of the Canadian equity market but less than 10% of nominal GDP. Financials offer an even starker contrast, making up about one-third of the equity market but only about 7.5% of GDP. Thus, a better view on the Canadian economy doesn’t automatically translate into the same view on the S&P/TSX, and a strong equity market doesn’t necessarily mean the domestic economy is booming.

Still, equity market views on Canada are becoming more constructive. Public companies in Canada are reporting strong profit growth rarely seen outside post-recession recoveries. Earnings growth should remain above 20% over the next 12 months, despite some moderation from recent highs. This picture will look even better if the macro narrative shifts from stagnation to acceleration, making Canadian equities an attractive proposition.

For the Bank of Canada, the message is more nuanced. Policy has been on hold for several months, with rates already in mildly stimulative territory and the economy still operating with excess supply. If growth strengthens, however, that margin will narrow, leaving less room for the economy to expand without renewed inflation pressure. Core inflation is still close to target, but headline inflation looks less comfortable once energy is included.

At the same time, the trade war reinforces the Bank’s cautious risk-management approach. Retaliatory tariffs could temporarily lift prices, but that effect should be short-lived. The larger impact would most likely come from weaker demand, which is disinflationary over the mediumterm.

And if trade tensions escalate further, the case for more easing could return. For now, the Bank is likely to stay on the sidelines over the next few meetings, pushing any discussion of rate hikes further into the future.

For the Canadian dollar, the setup is asymmetric. A crowded short position, improving domestic data and firmer commodity exports all argue for upside, despite trade headwinds. The loonie doesn’t need Canada to become the hottest economy in the G7. It needs investors to conclude that the worst case was overbought. Currency markets often move when narratives stop deteriorating, not only when they become outright bullish.

The comeback doesn’t need to be perfect

So, yet again, Canada finds itself in the throes of the trade war. But it is going into it in a better position than in many years.

The risks are still real. Trade tensions are unlikely to abate and may get worse. Canadian productivity is still weak, and business investment has disappointed before. Fiscal sustainability will become more of an issue if public capital spending rises while bond yields stay elevated. Household sensitivity to interest rates hasn’t disappeared. And the global cycle can always intrude on a local recovery story.

But risks are different from destiny. For much of the past year, Canada has been priced and discussed as if it were an economy running out of options. That view now looks too pessimistic. An improving labour market, firmer retail spending, improving business sentiment, rising public investment, trade diversification, and healthier net exports suggest the economy has more life than the consensus gives it credit for. The country still needs to solve its productivity puzzle, and that will require sustained investment, smarter regulation, and a more ambitious approach to infrastructure. But the direction of travel is improving.

The investment implication is straightforward: Canada deserves a closer look. Canadian equities have the benefit of reasonable earnings expectations, cyclical leverage, and meaningful exposure to energy and financials. None of these factors suggest a boom, but they do suggest something more investable: a country where expectations are low, fundamentals are improving, and the market may have become too comfortable with the bearish story.

To borrow the spirit of the title, Canada isn’t ready to roll over. The economy has been written off before, and perhaps that is exactly why the next chapter could be more compelling. The comeback may be uneven, but it is happening in enough places at once that investors should pay attention. When pessimism peaks, even a modest improvement can raise the dead.

Positioning

We remain overweight equities. The fundamental backdrop continues to support a constructive stance, with earnings growth outpacing share price gains. The current expansion is being led by profits rather than broad multiples, while the artificial intelligence investment cycle continues to translate capital spending into revenues across many sectors. Meanwhile, consensus positioning is not especially stretched following recent de-risking. We recognize that a rapid rise in real or nominal yields could challenge valuations, but absent another disorderly move in rates, strong profitability and a broadening capital expenditure cycle continue to favour equities.

We have moved to a more neutral tactical stance on government bonds following the recent selloff, while retaining a cautious strategic, longer-term view. The rise in yields has improved income and valuation. Measures to reduce net longend issuance may also moderate some of the immediate upward pressure on yields. We think these considerations, along with a very pessimistic consensus on bonds, create scope for a tactical stabilization or rally after the repricing. However, the structural backdrop remains challenging. Inflation risks are still asymmetric, fiscal borrowing needs remain large, and public and private issuers are competing for long-term capital to fund expansive investment programs.

We maintain an overweight allocation to commodities. The physical economy is being reshaped by a global push for economic security and a large investment cycle tied to artificial intelligence. Together, they are increasing demand for energy, industrial metals and other scarce resources at a time when supply capacity remains constrained. The near-term energy backdrop is also supportive. Oil markets have absorbed the closure of the Strait of Hormuz through inventory releases, rerouted flows, and restrained Chinese imports, but these buffers are finite.

More broadly, commodities remain attractive portfolio diversifiers in an environment where fiscal expansion, geopolitical fragmentation, and recurring supply shocks can keep inflation above the levels embedded in traditional stockbond portfolios. We think this supportive backdrop for commodities also favours commodity-exporting countries and regions, such as Canada.