Canadian economic growth has struggled with uncertainty caused by U.S. tariffs, as businesses hold back on major investment and hiring decisions. Prospects for 2026 look better and, while a trade deal presents a believe-it-when-we-see-it scenario, fiscal stimulus and lower interest rates should provide support.

BMO Economics is forecasting 1.2% real GDP growth in 2025, before activity picks up to 1.4% in 2026. Growth is likely to remain below potential before rising closer to 2% on a quarterly basis through next year. The tariff situation remains an uncertainty, and it is difficult for firms to make major decisions in the absence of a firm deal—even then, trust might be fractured on a more sustained basis. On the positive side, past Bank of Canada easing continues to filter through the economy. And, a significant wave of federal fiscal stimulus has already begun to roll out, including income tax cuts, defence and infrastructure spending.

Most provinces are seeing growth run below potential, but those exposed to non-energy U.S. exports are now clearly struggling the most—that should continue to widen the regional disparity.

Alberta and Saskatchewan are expected to lead with growth around 2%, and Alberta is likely to hold the baton again in 2026. Demographic flows and housing activity are solid, although off the highs, and the tariff impact on energy exports is relatively low. British Columbia is also relatively sheltered, carrying the lowest U.S. export exposure in Canada, but real estate is struggling, and population growth has slowed sharply.

Ontario, Quebec and Manitoba are feeling the impact of tariffs. Ontario and Quebec are on track to grow less than 1% this year, with growth remaining below potential in 2026. These provinces carry high exposure to U.S. exports across a range of diverse manufacturing industries, autos (Ontario) and steel & aluminum (Quebec). Southern Ontario also continues to grind through a housing correction, which lower mortgage rates have yet to fully relieve.

Finally, Atlantic Canada remains mixed, with a few pockets of varying industry trade exposure. The region is still catching up to torrid population growth even if that will continue to slow next year, and the ‘Buy Canadian’ movement could drive domestic tourism activity this summer. Growth in the region is expected to fall to the 1.0%-to-1.5% range in 2026.

Eye on Finances

The combined FY25/26 provincial deficit is pegged at $48.2 billion, the largest on record in dollar terms (Chart 4). At 1.5% of GDP, that falls shy of the FY20/21 pandemic-era shortfall, but you have to go back to the Great Recession to find the next comparable—and this at a time that is absent recession. The sharp deterioration from last fiscal year’s shortfall is also noteworthy—a 1.3 ppt deterioration relative to GDP is usually reserved for major economic episodes. There are a few factors to keep in mind:

First-quarter fiscal updates tend to be thin, and we’ll get a more meaningful refresh during the October/November mid-year update period. This might be especially true since a number of provinces just posted much better-than-expected public accounts for FY24/25. With all provinces now reporting their results, the FY24/25 combined bottom line is looking $13 billion better than expected during the 2025 budget season. Some of the revenue gains that underpinned those upside surprises (spread across almost all provinces) could get carried forward in the mid-year updates.

Accounting for a major tobacco settlement is also skewing the numbers somewhat. Under the agreement, $24.7 billion will be paid to the Provinces and Territories, some upfront and the rest over at least 20 years. So far, there has been varying accounting treatment, but we judge that FY24/25 revenues were temporarily boosted by more than $7 billion (B.C. booked $2.7 billion in FY25/26), somewhat exaggerating the year-over-year deficit deterioration.

There’s also the reality that most provinces erred on the conservative side with their 2025 budgets given the uncertainty over the trade war. This included large contingencies of roughly $11 billion for the group. While the economy is not outperforming budget expectations by any means—most of BMO’s provincial GDP forecasts for 2025 are running below budget assumptions—contingencies should provide a cushion and could help steer ultimate FY25/26 results above budget expectations.

All of those factors aside, the fundamental reality is that economic growth and inflation (revenue drivers) have slowed, while spending pressures (be it public sector wages, health care or infrastructure stress from torrid population growth) continue to build. This will keep provincial borrowing programs running strong.

British Columbia

B.C. is expected to grow 1.5% this year, before picking up to 1.7% in 2026, leaving both years above the national average. The province is relatively insulated from the trade war given lower exposure to U.S. exports, with Asia accounting for a large share.

Residential real estate continues to struggle, with sales volumes running at the low end of pre-COVID norms. Vancouver sales are similarly stuck at subdued levels, while prices are down 3% from a year ago. Province-wide construction has also slowed, and new starts are expected to cool further to 40.0k in 2026. B.C. population growth is seeing the impact of federal caps on nonpermanent residents more than other provinces—growth was just 0.5% y/y as of 2025Q3.

The job market continues to soften, with the unemployment rate rising to 6.4% by September. While labour force growth has cooled, job growth has also slowed notably in the past year. We expect the unemployment rate to move down in 2026, but still average just above 6%. While relatively sheltered on the U.S. trade front, some major projects such as LNG Canada and the TMX expansion have passed peak construction phases.

The Province of British Columbia is projecting an $11.6 billion deficit in FY25/26, or a hefty 2.6% of GDP—that’s the largest shortfall as a share of GDP among the provinces. Deficits persist above $12 billion in the future two years, while the net debt burden continues to rise.

Alberta

The Alberta economy is expected to lead the country this year and next, with real GDP growth pegged at 2.1% in 2025 and 2.3% in 2026. The province is arguably best positioned to handle tough macroeconomic conditions, even if oil prices fail to gain much traction.

Oil production continues to grow at a steady pace, as increases in oilsands output are set against stable conventional output. While capital spending remains less than half of its 2014 peak, maintenance spending and cash flow are ongoing. With additional TMX pipeline takeaway capacity now online, producers have benefitted from a tighter spread relative to WTI (although it has widened a touch in recent months), all at a time when the loonie is weak.

The housing market has cooled from earlier highs, but remains relatively resilient. Edmonton’s sales-to-new listings ratio keeps it in sellers’ market territory, while Calgary prices have ebbed in recent months with the market more balanced. Although net interprovincial migration has come off record highs, it remains well above historic trends and is dampening the effect of slower international immigration. The commercial real estate backdrop, however, remains tough with elevated vacancy rates in the downtown office market.

Job growth is solid, but hasn't kept pace with the influx of labour. That has left the unemployment rate drifting up to almost 8%.

The Province of Alberta is projecting a $6.5 billion deficit in FY25/26, or just over 1% of GDP, a significant swing from an $8.3 billion surplus in FY24/25. WTI oil prices are assumed at $63.75, a bit higher than prices near the end of October, but there are $2.5 billion of unallocated contingencies from the budget.

Saskatchewan

Saskatchewan's economy will likely grow 1.8% this year and 2.0% in 2026, behind only Alberta. The province has been performing relatively well through the trade dispute thanks to lower rates on energy and potash, although heavy tariffs on canola from China are weighing on agriculture.

Agriculture output is a wildcard, but yields on wheat and canola have been above average despite droughts in some parts of the province. Meantime, potash prices have drifted higher from a year ago, while BHP’s massive Jansen project buildout will lift activity until reaching production in 2026. Capital spending intentions in the province have been strong this year.

Although the unemployment rate spiked in September, at 6.0%, it is the second lowest in the country. The employment rate has come off recent highs but is in line with long-term trends. Job growth remains resilient in the construction and agricultural sectors, while health care and public administration have also been strong.

The housing market remains well supported by relative affordability, as Regina and Saskatoon are some of the tightest markets in the country.

The Province of Saskatchewan is projecting a $349 million deficit in FY25/26, worse than the small surplus previously pencilled in for the budget. The deterioration was primarily driven by the removal of the carbon tax from the net income of SaskPower, and higher costs to address wildfires.

Manitoba

The Manitoba economy is expected to expand 1.1% this year and 1.2% next year. While Manitoba’s diverse and steady economic base has historically helped the province avoid major swings in growth, the economy has a high exposure to U.S. trade that leaves it vulnerable to the trade war—especially in sectors like agriculture and pharmaceuticals.

While agriculture output should benefit from favourable growing conditions, tariff uncertainty from China and the U.S. remains a risk, especially around canola. The labour market has been relatively steady; although the jobless rate has drifted upwards in recent months, it remains one of the lowest in the country. We expect the unemployment rate to average roughly a percentage point below the national rate this year and next.

Housing activity has stabilized alongside lower rates and relative affordability. Like the economy more broadly, the previous housing market swings have been more moderate in Manitoba. While there was less froth on the way up, the rate-driven correction was also milder; now, benchmark prices are still up more than 5% y/y in Winnipeg (vs. down almost 3.5% nationally).

The Province of Manitoba is projecting a $890 million summary budget deficit in FY25/26, improved from the $1.1 billion shortfall in FY24/25 and weighing in at a manageable 0.9% of GDP. The Province sees a return to balance, but not until FY27/28.

Ontario

Ontario’s economy looks to grow 0.9% this year and 1.2% in 2026, near the bottom of the pack in both years. The province’s high exposure to manufacturing—especially autos—leaves it behind only Quebec as most vulnerable to U.S. tariffs. Additional headwinds include a prolonged recovery in the housing market and more restrictive immigration targets. The latter disproportionally impact Ontario and B.C. given relatively strong inflows of international students in recent years.

Housing activity remains subdued across the province with particular softness in Toronto condos, which is arguably the weakest segment in Canadian real estate. The sales-to-new listings ratio has come off earlier lows, but this period remains the softest since the mid-1990s. A number of cities continue to be buyers’ markets as affordability remains a challenge despite lower interest rates.

Rent growth continues to slide, driven by strict immigration targets and ample supply, which is keeping investors on the sidelines. We expect the housing market to remain soft until valuations revert to reflecting income, interest rate and rent fundamentals. Meantime, construction activity remains firm though it has pulled back from recent highs on a glut of existing inventory and weak demand.

In the commercial real estate sector, GTA office vacancy rates have stabilized but remain just below 20%, according to CBRE, with this period marking the softest conditions since the mid-1990s. Multifamily cap rates are also increasing as the caps on non-permanent residents weigh particularly hard given a high concentration of international students.

Job growth has stalled, and the year-ago comparison has turned negative for the first time since 2015 (ex-pandemic) in September. The unemployment rate has risen to near 8% and is up almost a full percentage point from a year ago. Past immigration inflows had previously kept the unemployment rate relatively high among youth and lower-skilled workers, with additional pressure seen since the start of the trade war earlier this year. A number of auto assembly plants have already announced temporary shutdowns and shift cuts, while previously announced investment in EVs and battery plants have been delayed or scaled back.

The Province of Ontario is projecting a $14.6 billion deficit for FY25/26, much deeper than the $1.1 billion shortfall in FY24/25. The near-term fiscal outlook has clearly deteriorated as trade uncertainty clouds the outlook for economic activity and, thus, tax revenues. The Province will publish revised estimates in its fall update in early November.

Quebec

Quebec’s economy is expected to grow just 0.6% in 2025 and 0.9% next year. Quebec is expected to be the most impacted province from tariffs due to its high concentration of manufacturing, especially steel and aluminum. The province is also coming into the trade war with limited momentum given smaller past population inflows and less fiscal stimulus relative to other provinces.

On the positive side, the aluminum sector benefits from a lack of North American alternatives, allowing producers to pass along some higher tariff costs to their U.S. customers.

Even so, labour market softening has been limited with the unemployment rate up just two-tenths in the year to September. Still, at 5.7%, it remains well below its historical median of 9%.

Quebec is home to some of the tightest housing markets in the country amid the ongoing shift to more affordable cities. Benchmark prices in Quebec City have jumped by over 17% y/y, just a couple of percentage points off their all-time high growth rate reached in the spring.

The Province of Quebec is projecting an $11.4 billion deficit in FY25/26 before transfers to the Generations Fund, which weighs in at 1.8% of GDP—the deepest by that measure since the mid-1990s. Looking ahead, Quebec will run deficits right through most of the subsequent four-year forecast horizon. The budget is just the latest in a years-long deteriorating trend for fiscal finances.

New Brunswick

New Brunswick’s economy looks to expand 0.9% in 2025 before picking up to 1.2% next year. The province’s higher exposure to manufacturing leaves it in a weaker position than its Atlantic peers, with growth expected to be the slowest outside Central Canada this year.

While population growth has come off all-time highs, it remains at the high end of historic norms. As a result of past population growth and the province’s exposure to U.S. trade, the unemployment rate has jumped above 8% for the first time since 2019 (ex-pandemic).

The Province of New Brunswick’s first post-election budget is projecting a $699 million deficit for FY25/26, following a $104 million shortfall in the prior fiscal year.

The deficit is expected to gradually shrink over the forecast horizon though there is no estimated return to balance. Broadly, robust population growth has driven higher spending across a range of public services and infrastructure, pushing up the Province’s debt load while the trade war adds further downside risks.

Nova Scotia

The Nova Scotia economy is expected to grow 1.2% in 2025 before picking up to 1.5% next year. The province looks to benefit from federal stimulus directed toward defence and port infrastructure.

The labour market remains relatively healthy; although the jobless rate is off its recent lows, it remains in line with post-pandemic norms at 6.2% in September. The rate is expected to average 6.5% this year and next.

While population gains are down from all-time highs, mirroring trends across the country, relatively low cost of living continues to support housing demand. That leaves Halifax as one of the tighter markets in the country even as other regions start to recover on lower mortgage rates.

The Province of Nova Scotia is projecting an $1.4 billion deficit in FY25/26 (2.2% of GDP), a notable shift following four straight years in the black. The current outlook reflects a new contingency fund (with broadly defined usage) and a one percentage point cut in the Harmonized Sales Tax.

Prince Edward Island

The PEI economy looks to expand 1.8% this year, tied with Saskatchewan for second place behind Alberta. A relatively affordable cost of living has helped drive population growth into the province in recent years, while the tourism sector has benefitted from a recent shift toward domestic travel. While growth looks to slow in 2026, we expect it to be in line with the national average.

While population growth has stepped down from its all-time high in recent quarters, labour force participation has ticked up, driving up the size of the labour force for the past four months. That’s driven the unemployment rate up to 9.7% as of September, the highest in the country aside from Newfoundland & Labrador.

The Province’s latest estimates call for a record $184 million deficit this year; the relative size (1.6% of GDP) is one of the deepest among the provinces, though it includes some personal and corporate income tax cuts.

Newfoundland & Labrador

Newfoundland & Labrador’s economy is on track to be one of the better performers this year with a forecasted 1.6% growth rate. Real GDP growth is expected to cool to 1.2% in 2026, underperforming the national average as other provinces recover from this year’s trade shock.

The long-term outlook is more closely tied to energy prices, along with reserve levels and maintenance of production capacity. This leaves broad economic activity, and the labour market, susceptible to large year-over-year swings. The unemployment rate has trended upward since the spring and, at 10.6%, remains the highest in the country by almost a full percentage point.

The Province of Newfoundland & Labrador is forecasting a $626 million deficit in FY25/26 (1.4% of GDP), significantly worse than the $297 million shortfall now estimated for FY24/25. Still, the latest budget does expect a return to balance next fiscal year and through the rest of the medium-term outlook. The province recently elected the Progressive Conservative party to govern with a narrow majority, following ten years of Liberal governments. Incoming Premier Tony Wakeham has identified dealing with the Province’s debt burden (net debt estimated at over 45% of GDP in FY25/26) as a priority.