The Canadian economy is still dealing with the burden of U.S. tariffs, but the impact is unven across the country, and conditions are beginning to drift apart. BMO Economics is forecasting 1.3% real GDP growth this year, down slightly from 1.7% in 2025. While activity around the turn of the year struggled, conditions should gradually improve over the course of the year—that includes firmer growth and an ebbing unemployment rate.

The tariff situation remains a key uncertainty, and the U.S. Supreme Court ruling against IEEPA tariffs does little in the near term given more aggressive use of sectoral tariffs. In the meantime, we await the mid-2026 joint review of CUSMA. Suffice it to say that the ongoing lack of certainty around the key trading relationship make it difficult for firms to make major hiring and spending decisions. On the positive side, past Bank of Canada easing continues to filter through the economy. And, a significant wave of federal fiscal stimulus has begun to roll out, including tax cuts, defence and infrastructure investment.

Most provinces are facing slower growth in 2026, 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 near or above 2%, with Alberta topping the pack. The conflict in the Middle East has lifted oil prices, while demographic flows are solid 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 sectoral tariffs on lumber hurt, 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 around 1% this year, with Quebec at the back of the pack. These provinces carry high exposure to U.S. exports across a range of diverse manufacturing industries, autos and steel & aluminum. Southern Ontario also continues to grind through a housing correction, which lower mortgage rates have yet to relieve.

Finally, Atlantic Canada remains mixed with varying 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 further drive domestic tourism activity this summer. Growth in the region is expected to fall to the 1.0%-to-1.5% range in 2026.

Provincial Budget Season Preview

Here are five themes to keep an eye on that might shape the 2026 budget-season narrative:

Will deficits narrow? The combined provincial deficit widened sharply to $43 billion in FY25/26 (latest estimate) from $7.0 billion in the prior year. That weighs in at a hefty 1.3% of GDP, and piggybacks the 2.4% of GDP deficit currently pegged at the federal level. For the upcoming FY26/27, recent projections have bounced around the $40 billion level, but the ultimate result will depend on policy choices and how much of the prior-year performance carries through. At any rate, we’re doubtful that the provinces as a group will run a significantly wider deficit under current economic conditions, but it won't get much better either.

Less forecast uncertainty: It’s hardly a certain economic environment, but 2026 budgets should be easier to pencil than they were a year ago, when tariff changes were swirling and the Bank of Canada was in an aggressive easing cycle. Finance Ministers should at least be able to work with one baseline economic forecast based on the status quo for trade (recall last year’s wide-ranging approaches to deal with tariff-related uncertainty). Some provinces, especially those with more U.S. trade exposure, will likely still build in larger-than-normal contingencies.

Stimulus settles: A large factor behind the FY25/26 deterioration was much flatter revenue growth (an area where we could ultimately see positive revisions). Spending growth was sturdy, although slowing from recent years on the operating side. Capital spending programs, however, are robust and should continue. On balance, we’re unlikely to see a major new stimulus push, especially with some provinces under credit-rating pressure.

Busy borrowers, again: The provinces will be active issuers again given continued deficits, capital spending plans and maturities. More than $140 billion of borrowing in FY25/26 nearly matched the pandemic high set in FY20/21. While a few provinces are already pre-borrowing ahead of FY26/27, we could see total requirements still lofty around the $140 billion mark, and the combined net debt-to-GDP ratio (around 43%) will likely hit the highest since FY21/22.

Spread the wealth: Finance Ministers are looking at favourable borrowing conditions heading into the budget season. While long-term interest rates are still higher than they’ve been accustomed to over the past decade, provincial spreads relative to GoCs have tightened dramatically. In the 30-year space, they've recently sat roughly 70 bps back of GoCs, near the lowest levels of the past decade. That’s also about 20 bps tighter than this time a year ago. There is clearly some variation among the individual provinces. Ontario is setting the bar right now with the tightest spreads. B.C. (fiscal performance) and Quebec (fiscal performance and political uncertainty) sit at the very wide end of their 3-year range versus Ontario. Alberta and Saskatchewan sit at the tight end. Broadly, light issuance recently has helped tighten spreads, the group has been active in non-C$ markets which has absorbed some domestic supply, and credit has been well bid. It’s hard not to envision at least some widening from current levels.

Provincial Economic Conditions Drifting Apart

Provincial economic conditions are starting to split again after a year marked by tariff uncertainty, an ongoing housing downturn and some big budget plans. After a period where most provinces were riding similar economic waves, there are signs now that regional variation is returning—and that’s more of the norm for Canada.

Across-the-board strength in GDP growth from 2021 through 2024 gave way to more regional variation in 2025, and we expect that to get magnified even further this year. Significant differences in U.S. trade exposure are shaping the near-term outlook. This relative performance can be largely tied to the magnitude of effective tariff increases faced by these economies, and continued reliance on sectoral tariffs figures to keep the impact fractured (industries are often highly concentrated by region). Limited effective tariff increases in the Prairies and Atlantic Canada (less than 2 ppts) are in contrast to estimated increases in Ontario (roughly 7 ppts) and Quebec (roughly 11 ppts), due to exposure to auto parts, steel and aluminum. Meantime, higher oil prices stemming from the conflict in the Middle East will lift incomes in the oil-producing provinces.

There are some signs that trade uncertainty is seeping into the job market. While employment has slowed, growth was still running at +0.6% y/y as of January. Manufacturing and transportation & warehousing, however, have fallen below year-ago levels, with the former posting the deepest annual decline since the pandemic. This has pulled down employment in some highly-exposed CMAs in Southwestern Ontario and Quebec. Separately, attrition and lower employment targets at the federal level (and some provinces) are already weighing on employment in Ottawa.

Changes to the federal immigration plan are cutting deeply into population growth in B.C. and Ontario. In fact, Ontario and B.C. saw their first annual population declines on record (-0.2% y/y) as of 2025Q4. As it stands now, B.C.’s nonpermanent resident share sits at 8.4% and Ontario’s is at 7.9%. With the rest of the country around the 5% federal target, these two provinces will continue to face the brunt of the adjustment. Meantime, Canadians are still moving around the country, flattering growth in Alberta and Atlantic Canada (the latter is fading), while dragging on Ontario and Quebec.

The housing downturn is deepening in Ontario and B.C., while most other provinces remain largely immune. Home prices in Ontario are now down 24% from their early-2022 high, B.C. is down 12%, while markets across the Prairies, Quebec and Atlantic Canada are mostly punching record highs. This is the inverse of how much valuation froth and investor activity was in the market before the Bank of Canada raised rates. The gaps are seen in residential construction activity, where housing starts are expected at 62k units in Ontario this year, or about 60% of levels seen three years ago. Construction across many other markets has pushed higher.

Finally, the 2026 budget season just got underway, but already has the makings of shifting relative fiscal performance. British Columbia’s FY26/27 budget forecasts a $13.3 billion deficit, or 2.9% of GDP, now the deepest shortfall in Canada. That from a province that was not long ago running surpluses alongside a AAA credit rating. Within three years, B.C.’s net debt-to-GDP ratio is expected to move into the neighbourhood of Ontario and Atlantic Canada. Fiscal performance in oil-producing provinces, namely Alberta and Saskatchewan, remains solid. And, despite a tough economy, Ontario continues to perform relatively well and is getting rewarded as such with the tightest spreads in the bond market.

British Columbia

B.C. is expected to grow 1.4% this year, down from 2.0% in 2025. The province is relatively insulated from the trade war given lower exposure to U.S. exports, although sectoral tariffs on lumber are hurting.

The residential real estate downturn continues, with sales volumes running at the low end of pre-COVID norms. Vancouver sales are similarly stuck at subdued levels, while prices are down 5.7% from a year ago. Province-wide construction has softened, and new starts are expected to cool further to 40k this year. B.C. population growth is seeing the impact of federal caps on nonpermanent residents more than other provinces—growth was negative from a year ago as of 2025Q4.

The job market has softened, with the unemployment rate rising above 6% amid weak hiring. Labour force growth, however, has also stalled and limited the increase in the jobless rate. 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 a $13.3 billion deficit in FY26/27, or a hefty 2.9% of GDP—that’s the largest shortfall as a share of GDP among the provinces and the largest on record for B.C., if it stands.

Alberta

The Alberta economy is expected to lead the country this year, with real GDP growth at 2.3%. The province remains best positioned to handle challenging conditions in trade and housing, while firm oil prices are supporting incomes.

Oil production continues to grow at a steady pace, as increases in oilsands output are set against stable conventional output. Capital spending remains less than half of its 2014 peak, but 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, all at a time when the loonie is weak. Further capex in areas such as carbon capture (Pathways) could keep the pipeline full.

The housing market has cooled from earlier highs, but remains relatively resilient. Calgary has softened, with sales and prices both down from a year ago. 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 remains tough with elevated vacancy rates in the downtown office market. Job growth is solid which, alongside slowing labor force growth, has pulled the unemployment rate down to 6.5% from above 8% last summer.

The Province of Alberta's 2026 budget was tabled on February 26. The Province is facing a $9.4 billion deficit in FY25/26, or 1.9% of GDP, as spending pressures build in health and education. Alberta maintains the lowest debt burden in Canada.

Saskatchewan

Saskatchewan's economic growth is pegged at 1.8% this year, behind only Alberta, before pickup up to 2.3% in 2027 as BHP's Jansen project begins production. The province has been performing relatively well through the trade dispute thanks to lower rates on energy and potash. Although China's canola tariffs were weighing heavily, the bilateral agreements signed in January are a welcome sign of more stability on that front.

Agriculture output is a wildcard. Yields on wheat and canola have been sturdy but are expected to return to average levels in the year ahead. Meantime, potash prices continue to drift higher, while production from the Jansen mining project is expected to kick off in 2027.

The unemployment rate turned up through the second half of 2025 before improving sharply in January, leaving it among the lowest in the country. 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's budget is expected in mid-March. The latest estimates called for a $427 million deficit in FY25/26, but a return to surplus in FY26/27.

Manitoba

The Manitoba economy is expected to expand 1.2% this year and 1.7% 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—especially in sectors like equipment, agriculture and pharmaceuticals.

While agriculture output should benefit from a resumption of Chinese purchases, trade uncertainty remains a risk. The labour market has been relatively steady, and the jobless rate remains among the lowest of its provincial peers. We expect the unemployment rate to average more than half 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 almost 6% y/y in Winnipeg (vs. down almost 5% nationally).

The Province of Manitoba's last budget projected a $890 million summary 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 1.2% as tariffs continue to weigh heavily this year. Growth is expected to accelerate to 2.2% in 2027, assuming some trade uncertainty is lifted. 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 high shares of non-permanent residents compared to other provinces.

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 remains in its softest range since the mid-1990s. A number of cities continue to be buyers’ markets as affordability remains a challenge despite past rate cuts.

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 continues to face headwinds from a glut of existing inventory and weak demand.

In the commercial real estate sector, GTA office vacancy rates have stepped back from recent highs, according to CBRE, but continue to reflect 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 employment is down 0.4% from a year ago as of January. The unemployment rate is off recent highs—and is lower than it was a year ago—but is still above 7%. The mixed picture reflects the sharp reversal in population growth against the impact of tariffs and trade uncertainty on activity. A number of auto assembly plants have announced shutdowns and shift cuts, while many previously announced investments in EVs and battery plants have been delayed, scaled back, or cancelled.

The Province of Ontario's latest projections are calling for a $13.4 billion deficit for FY25/26, much deeper than the $1.1 billion shortfall in the previous year. The near-term fiscal outlook has clearly deteriorated as trade uncertainty clouds the outlook for economic activity and, thus, tax revenues. An updated budget plan is expected by the end of March.

Quebec

Quebec’s economy is forecast to grow just 0.9% in 2026. The province is expected to be the most impacted province from tariffs due to its high concentration of manufacturing, especially steel and aluminum. The economy is also coming into the trade war with limited momentum given smaller past population inflows and less fiscal stimulus relative to other provinces.

Growth is expected to recover in 2027 as some of the trade uncertainty lifts, but this province is particularly vulnerable to a larger-than-normal confidence interval

On the positive side, the aluminum sector benefits from a lack of North American alternatives, allowing producers some room to pass along higher tariff costs to U.S. customers. Nevertheless, the elevated tariff rate (50%) is weighing heavily on confidence.

Despite these headwinds, the impact on the labour market has been limited, and the unemployment rate actually slipped three-tenths in the year to January. At 5.2%, 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 17% y/y, just a couple of percentage points off their all-time high growth rate reached last spring.

The Province of Quebec is projecting an $9.9 billion deficit in FY25/26 before transfers to the Generations Fund, which weighs in at 1.5% of GDP. The previous budget expected deficits through most of the subsequent four-year forecast horizon, extending a years-long deteriorating trend for fiscal finances. Note that the Province goes to the polls in October in what will be a closely-watched election.

New Brunswick

New Brunswick’s economy looks to expand 1.2% in 2026, matching last year's growth. The province’s higher exposure to manufacturing leaves it in a weaker position than its Atlantic peers amid the highly uncertain trade backdrop.

As a result of past population growth (which has since decelerated dramatically) and the province’s exposure to U.S. trade, the unemployment rate had drifted higher through most of 2025, before reversing course in the fall alongside surprising firmness at the national level. Even with some deterioration in January, the unemployment rate is currently holding below 7%.

The Province of New Brunswick is projecting a $835 million deficit for FY25/26, following a $104 million shortfall in the prior fiscal year.

The previous budget expected the deficit to gradually shrink over the forecast horizon though it did not provide an estimated return to balance. Broadly, past population inflows have 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 1.5% in 2026, in line with the previous year's pace. The province's medium-term outlook looks to benefit from federal stimulus directed toward defence and port infrastructure amid a broader diversification push.

The labour market remains relatively healthy; although the jobless rate is off recent lows, it remains in line with post-pandemic norms at 6.9% in January. The rate is expected to improve, averaging around 6.5% this year and next.

While population gains have come down sharply, 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, as affordability concerns restrain activity in other regions.

The Province of Nova Scotia's 2026 budget is projecting an $1.2 billion deficit in FY26/27, little changed from the shortfall expected in the previous year. The current outlook reflects some efforts to cut departmental spending, but few new measures after last year's cut to the Harmonized Sales Tax. The budget did not include a return to balance within the four-year forecast horizon.

Prince Edward Island

The PEI economy looks to expand 1.4% this year, in line with the national average after outperforming for the past seven years. 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 population growth has stepped down from the all-time high reached in 2023, labour force participation has held up, keeping the size of the labor force elevated. That has put upward pressure on the unemployment rate, which sits at 7.6% as of January. Aside from Newfoundland & Labrador, that is the highest in the country.

The Province’s latest estimates call for a record $184 million deficit this year, weighing in at 1.6% of GDP, though it includes some personal and corporate income tax cuts.

Newfoundland & Labrador

Newfoundland & Labrador’s economic growth looks to slow to 1.2% this year following two years above 2%. The province is expected to underperform the national average, with the gap widening in 2027 as other provinces recover from the 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 fell over a percentage point in January alone and is back in the single digits, though it remains the highest in the country.

Heading into budget season, the Province of Newfoundland & Labrador last forecast a $948 million deficit in FY25/26 (2.2% of GDP), significantly worse than the $297 million shortfall estimated for FY24/25. The last budget expected a return to balance next fiscal year and through the rest of the medium-term outlook, so we'll see how that outlook evolves this season. In October's election, the Progressive Conservative party won a narrow majority following ten years of Liberal governments. 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.