Canada's economy is expected to regain momentum over the next few years, according to a new forecast from KPMG. The accounting and advisory firm projects gross domestic product (GDP) growth of 1.0% this year, accelerating to 1.8% by 2027, as consumer spending holds up and business investment starts to recover.
In a note, KPMG Canada said the outlook is improving, with a slightly growth-friendly federal budget adding support. The firm expects capital spending to get a boost from technology upgrades, energy infrastructure, and large construction projects, with data center builds singled out as a particular tailwind.
What's driving the recovery?
KPMG's base case is that the Canadian economy will gradually pick up speed. Consumer spending, which has been resilient despite high interest rates, is expected to continue supporting growth. Business investment, which had been sluggish, is seen turning a corner as companies invest in technology and infrastructure.
Data centers, in particular, are becoming a significant driver of construction and investment. As demand for cloud computing and artificial intelligence grows, companies are building more facilities to house servers and data. This trend is not unique to Canada—globally, tech giants and telecom firms are pouring billions into data center capacity—but it is providing a tangible boost to Canada's capital spending outlook.
Energy infrastructure is another key component. Canada's oil and gas sector, a major part of the economy, is expected to see continued investment in pipelines and other projects, though the pace will depend on energy prices and regulatory conditions.
The energy wildcard
The swing factor in KPMG's forecast is energy prices. The firm's base case assumes inflation cools as oil prices ease, which would allow the Bank of Canada to hold interest rates steady or even cut them. However, KPMG warned that stubbornly high energy costs could keep inflation hotter than expected, potentially forcing the central bank to raise interest rates one more time.
That same backdrop could also keep long-term Government of Canada bond yields elevated. When investors expect higher inflation or more rate uncertainty, they demand more compensation for holding long-term bonds, pushing yields up. This matters because many borrowing costs in Canada—especially fixed-rate mortgages—are tied more to long-term bond yields than to the central bank's overnight rate.
KPMG also sees the Canadian dollar staying soft in the near term, then improving if growth firms up later in the forecast window. A weaker currency can make exports more competitive but also raises the cost of imported goods, which can feed into inflation.
What it means for investors
For everyday Canadians, the most immediate impact may be on mortgage rates. As KPMG notes, fixed-rate mortgages are often priced off long-term Government of Canada bond yields. If those yields stay high because investors think rates might stay higher for longer, banks may pass that through into fixed-rate mortgage offers. That means households renewing into a new fixed term could find that rates don't fall as quickly as they might expect from inflation headlines alone.
Similarly, businesses refinancing longer-term debt could face higher borrowing costs than they hoped. This is a reminder that the path of interest rates is not just about the Bank of Canada's next move—it's also about what bond markets are pricing in for the future.
KPMG flagged a potential US-Canada trade deal as a positive for the outlook. A trade agreement could reduce uncertainty and boost business confidence, supporting investment and growth. On the flip side, renewed market volatility is seen as the main risk, which could derail the recovery if it leads to tighter financial conditions.
For investors, the forecast suggests a gradually improving economy but with notable risks. Sectors tied to technology and data centers could benefit from the investment boom, while energy-sensitive industries remain at the mercy of oil prices. Bond investors should watch long-term yields, which could stay elevated if inflation proves sticky.
As always, it's important to remember that forecasts are just that—projections based on current data and assumptions. The actual path of the economy will depend on a range of factors, from global commodity prices to trade policy to consumer behavior. But KPMG's outlook offers a useful roadmap for what to watch in the coming years.
