A Complex Universe for Decision-Making
Policy and business leaders in 2026 are confronting disruptive global forces that pose daunting economic and financial risks while also transforming markets and creating avenues for growth over the next years.
A rupture in the world order, strategic rivalry among the major powers, wars, an energy crisis, unpredictable U.S. tariff and trade policy, uncertain risks and rewards from massive investments in artificial intelligence (AI), and stress in capital markets are together creating a complex universe for decision-making.
There is wide agreement among political and business leadership in Canada that the adjustment to new global realities and the advancement of our economic and national security rest on unleashing private investment.
There is also a shared understanding that after years of languishing investment and productivity growth, a large step change in investment flows is required to make up for lost opportunity and to secure Canada’s future.
The problem to solve is not one of a lack of financial capital. There is ample capital from corporate, institutional and private sources, in Canada and internationally, that is in search of investment opportunities.
As a resource-rich, advanced economy with a well-educated workforce, sound institutions and respect for the rule of law, Canada presents lesser risk as an investment destination than most other places on earth. This said, domestic and foreign investors are driven by target returns.
It is largely the role of business leaders—the boards and executive teams of large, small and start-up enterprises—to identify the market opportunities, to manage the business risks and to execute on the investments.
While the government can set the ambition, and in some cases be an active partner, including as a co-investor, its principal role is to create a predictable and sound policy environment that enables market leaders and innovators to realize a competitive, risk-adjusted return.
In 2025, U.S. import tariffs and threats to our sovereignty and economic security served as a wake-up call.
Governments have sent many positive signals and taken early actions to promote investment. The investor response is still tentative. More remains to be done. Private sector engagement and stronger policy coordination among governments are critical to getting the investment conditions right.
Despite global uncertainty, risks and modest growth prospects in the short term, the direction must be set and the investment unleashed now to build resilience and place the economy on a path of greater prosperity.
The Short-Term Prospects
We outline a reference scenario for the U.S. and Canadian economies for 2026 and 2027.
The scenario is built on the assumption that a resolution to the conflict in Iran restores normal traffic in the Strait of Hormuz and that the effects of the energy and commodity supply disruption begin to dissipate in mid-2026. We assume that existing U.S. import tariffs stay in place, under one or another legal authority, and that the Canada–United States–Mexico Agreement (CUSMA) continues under substantially the same terms as before.
Under this scenario, U.S. real GDP grows by 2.1% on a Q4/Q4 basis in both 2026 and 2027. U.S. core inflation peaks at about 3.5% by mid-2026, and it gradually recedes to slightly under 2.5% by Q4 2027.
We consider that the Federal Reserve under incoming chairman Kevin Warsh will continue to be guided by the careful balancing of its twin mandate of price stability and maximum employment. Accordingly, it would hold its policy rate steady in 2026 and cut it by 25 basis points around Q2 2027, to 3.5%—near the middle of the range of estimates for the long-term equilibrium rate.
In Canada, real GDP growth would accelerate on a Q4/Q4 basis, from 0.7% in 2025 to 1.7% in 2026; it would moderate slightly, to 1.5%, in 2027. Average annual growth in real GDP would be 1.1% in 2026 and 1.6% in 2027.
Our projected annual rates of growth for Canada are by no means spectacular, but on a per capita basis, they would amount to better performance than in much of the past decade: about 1.1% in both 2026 and 2027.
Headline inflation in Canada would peak at about 3% in Q2 2026, pushed up by higher gasoline and energy prices. Inflation would come down again to the 2% target by the second half of 2027. The Bank of Canada would hold its policy rate steady at 2.25% through to the end of 2027.
There are both upside and downside risks around our reference scenario.
A prolonged conflict in the Middle East and sustained, high energy prices would fuel inflation and depress global demand. For Canada, however, there is an offsetting gain because of higher revenue from our exports. If higher commodity prices encourage stronger investment, there can be a larger net gain.
U.S. trade policy remains a wild card. The downside risk is material, but it must be kept in perspective. For illustrative purposes, if all our exports to the United States now exempt of tariffs under CUSMA were subject to a 10% import tariff, the estimated hit to the level of real GDP in Canada would be about 0.6% in 2027. There would be a permanent loss. But there would also be an adjustment.
Tail risks, particularly on the downside, cannot be ignored. An abrupt repricing of assets, such as AI-related assets that now dominate equity markets, could unsettle markets worldwide and raise the cost of capital. This would spill over to the real economy and depress activity through multiple channels.
The Investment Opportunity
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We are living through a period of mass disruption. And moments like this don't just test leaders. They define them. Because too often, we mistake stability for strategy. We confuse caution with prudence. And we accept gradual decline as inevitable rather than preventable. —Goldy Hyder, President and CEO, Business Council of Canada |
The global forces that may cause businesses to be prudent in the short term also shape the opportunities to capitalize on Canada’s strengths, build advantage, and develop and seize new markets.
Canada is committed with its NATO partners to grow its defence spending to 5% of GDP by 2035. The defence build-up is a lever to accelerate public and private investment in military and dual-use infrastructure, including in Canada’s Arctic regions, to build new industrial capacity, to stimulate technological innovation, and to expand our global economic and security relationships.
Properly executed, Canada’s Defence Industrial Strategy and a new federal agency to transform military procurement can leverage traditional domestic capabilities such as aerospace and communications while developing Canada’s proven potential in AI, quantum, cyber and other technologies. A national effort can enlist large and small businesses, domestic and foreign suppliers.
The disruptions in energy and commodity markets underscore for our economic partners the strategic and economic value of a reliable, responsible supply of oil, liquefied natural gas (LNG), fertilizer and critical minerals.
With a wide dispersion of scenarios of global demand, supply and prices, the private sector has to lead in assessing the market opportunity, advancing the commercial arrangements, mobilizing the capital and managing the market risks.
The principal task of governments is to streamline and de-risk the regulatory process and to facilitate consultations and the participation of Indigenous peoples. The diligent implementation of stated policies will help Canada turn the page on years of lost opportunity.
More than one year after “Liberation Day,” while much is still uncertain about U.S. trade policy, what is evident is that world trade is driven by a wider set of forces and that it continues to grow as markets adjust.
Canada is, and will remain, a trading nation, with the United States as its principal trading partner. Internationally, our challenge is twofold.
First, to the greatest extent possible, we must strive to secure with the U.S. administration the terms of a renewed, predictable and mutually beneficial trade relationship that includes, in the course of the 2026 review, the renewal of at least the core elements of CUSMA. The experience of other U.S. counterparts shows that expediency is not an answer. Canada is aiming for the right deal.
Second, governments and businesses must work together as Team Canada in expanding our trade and investment relationships with non-U.S. partners, requiring not so much new trade agreements as more aggressive pursuit of opportunities to sell our goods and services to the rest of the world.
AI and digital technologies are emerging as ever more powerful disruptors, requiring actions by governments and businesses today to realize value while protecting sovereignty and economic and national security.
For Canada, the productive and sound development and diffusion of AI and digital technology necessitate investment in digital infrastructure and in innovation and skills, so as to strengthen our own AI ecosystem and to enable the adjustment of workers to change in the content of jobs.
We can define success in the digital economy by our capacity to scale up innovative enterprises for the commercialization of intellectual property, ensuring that we capture our share of value and not merely grow dependence on U.S. (or Chinese) big tech.
The modernization of framework policy for the digital economy—from data sovereignty and privacy to competition and taxation—requires innovation and new levels of intergovernmental collaboration, in Canada and internationally with other middle powers.
Some Horizontal Policy Conditions
Confronted with harsh global realities, governments over the past year have been inspired by a renewed sense of ambition and urgency.
Discrete and targeted measures to unleash or “catalyze” investment have included the creation of new agencies and funds, the target expansion of public investment, and the introduction of new spending to address immediate pressures and to target early results.
The delivery of these initiatives requires ongoing commitment.
To go further, governments have to transform the core of the current policy and service delivery architecture.
This will be harder. It will take longer. The direction must be set early, with interim targets over a timeline.
First, governments have to undertake a principled and structured review of framework legislation and regulation to improve the incentive structure for investment and innovation. The tax system is a priority.
- Targeted tax credits or super-deductions such as legislated in the past years, with defined sunset dates, have merit to accelerate business investment. But they introduce added complexity, and they interfere with the flow of capital to its most productive uses.
- While following through with announced measures, the federal government could set out the direction and principles of a wider review of the tax system to simplify the rules and, over the following years, create a more uniform incentive for all forms of investment.
Second, intergovernmental coordination should be reinforced. Most domains of policy involve shared jurisdiction. In sectors like AI and the digital economy, where competitive forces and technology require agile policy frameworks, collaboration is essential to building capacity. This need not mean a heavy federal hand. Provinces can take the lead.
- The low-hanging fruit remains the dismantling of barriers to internal trade. Despite a holding of arms in early 2025, and some progress, energy behind this priority is not at a level that can generate breakthroughs. Provinces and territories have to step up.
- Governments may also focus together on the task of working with employers and unions to augment and sharpen the skills of the estimated 60% of Canadian workers likely to be affected by the deployment of AI technology over the next five to 10 years. Policy must help accelerate the adoption of productivity-enhancing technology and support adjustment.
Third, while reaching out to the private sector to attract new talent in the public service, governments must also modernize and streamline public institutions to deliver high-quality policy and services.
Our system of government rests on the capacity of the public service to deliver non-partisan, expert advice to ministers and to implement effectively their decisions. There is a concern that this capacity has been eroded. It needs to be reestablished.
Fourth, the actions of governments must be situated within sound fiscal plans.
Canada fares better than most advanced economies, in particular the United States, on important fiscal metrics. Nonetheless, governments are significantly exposed to a disruption in capital markets that, absent margins of prudence, could require painful adjustment.
Fiscal discipline and sound stewardship of the financial system are critical means of inspiring confidence, supporting private investment, and strengthening resilience. Canada demonstrated this strength during the Global Financial Crisis (2007–2009).
In recent years, fiscal anchors have been redefined by governments as convenient to meet their spending pressures. Projected fiscal deficits have been adjusted upward, and the bending of the curve on the debt-to-GDP ratio has been pushed to later years. With a higher debt, and higher market interest rates, debt service costs have absorbed a rising share of government revenue.
While funding core responsibilities, from national security to education and health care, governments can reclaim and draw strength from a global advantage by establishing credible fiscal plans that place the ratio of public debt to GDP on a firm downward path. This will entail hard choices.
The Time Is Now
In a disrupted world, Canada has assets to build resilience and embark on a path of stronger growth. The right policy conditions must be in place.
Businesses must be prepared to allocate capital and take risks.
Bennett Jones looks forward to working with its clients to help Canada seize this moment.
