Canada's economy appears to be finding firmer footing after a sluggish stretch, with fresh data showing a stronger-than-expected bounce in April and stock markets hovering near all-time highs. But a looming review of the Canada-United States-Mexico Agreement (CUSMA) is casting a shadow over the outlook, according to economists at BMO.
GDP Bounce and TSX Rally
In a note released this week, BMO Economics — led by chief economist Douglas Porter and economist Robert Kavcic — highlighted that Canada's real gross domestic product jumped 0.5% in April, beating expectations. Early indicators suggest further gains in May and June, pointing to annualized growth of roughly 2% in the second quarter. That marks a clear improvement after several quarters of flat or negative growth.
At the same time, the Toronto Stock Exchange (TSX) has been trading near record highs, buoyed by strength in energy, financials, and materials stocks. BMO argues that rising portfolio values can support consumer spending through a so-called wealth effect, where households feel richer and are more willing to spend. That dynamic could help sustain the economic recovery.
For context, Canada's economy had been struggling with weak growth through much of 2025 and early 2026, weighed down by high interest rates and sluggish business investment. The Bank of Canada has been cutting its benchmark rate gradually since mid-2025, and the latest GDP data suggests those cuts may be starting to filter through to the real economy.
CUSMA Review Adds Uncertainty
However, BMO warns that the positive momentum could be tempered by the start of a new CUSMA review cycle. The trade deal, which replaced NAFTA in 2020, includes a clause that requires a joint review every six years. The first review is now underway, and the United States has already signaled it will not agree to a 16-year extension, triggering annual reviews instead. That creates an ongoing source of uncertainty for businesses that rely on cross-border supply chains.
As we reported in US Skips CUSMA 16-Year Extension, Triggering Annual Reviews and Trade Uncertainty, the decision means the deal could face repeated renegotiations, making it harder for companies to plan long-term investments. Canada's manufacturing base has already shrunk to a decade low ahead of this review, as noted in Canada's Manufacturing Base Shrinks to Decade Low Ahead of CUSMA Trade Review.
BMO's economists suggest that while the GDP bounce and TSX rally are encouraging, the trade uncertainty could keep businesses cautious about hiring and capital spending. That might limit the pace of recovery in the second half of the year and into 2027.
What It Means for Investors
For everyday investors, the key takeaway is that Canada's economy is showing signs of life, but the path ahead is not without risks. The TSX's near-record levels reflect optimism about corporate profits and the broader economy, but they also mean stocks are priced for a relatively smooth recovery. Any negative surprise from the CUSMA review — such as new tariffs or trade barriers — could quickly sour sentiment.
Investors should also keep an eye on upcoming data releases, such as Canada's June Jobs Report Expected to Show Modest 10,000 Gain After May's Surge, which will provide further clues about the economy's trajectory. A strong labor market would support consumer spending and corporate earnings, while a weak one could raise concerns about the durability of the recovery.
BMO's note reinforces that the second half of 2026 and early 2027 could be a period of steadier growth, but the CUSMA review adds a layer of unpredictability. Investors may want to focus on companies with diversified revenue streams and less exposure to trade-sensitive sectors, while staying alert to policy developments.
Overall, the combination of a GDP bounce, a rallying stock market, and lower interest rates is a positive backdrop for Canadian equities. But the trade uncertainty means that caution is warranted, and investors should be prepared for potential volatility as the CUSMA review unfolds.
