Canada's economy is expected to pick up speed over the next few years, according to a new forecast from UBS. The global investment bank sees growth accelerating from a modest 1.0% in 2026 to 1.9% in 2027 and 2.2% in 2028, driven by steady consumer spending, a gradual recovery in business investment, and firmer exports.
But the outlook comes with a clear caveat: the path depends heavily on how US tariff negotiations play out. UBS warns that ongoing trade uncertainty could weigh on investment and hiring, potentially slowing the recovery.
What's behind the forecast?
In a research note shared with media, UBS sketched out a recovery that relies on several key pillars. Consumer spending is expected to remain resilient, supported by a still-solid labour market and wage growth. Business investment, which has been sluggish in recent years, is projected to pick up gradually as uncertainty fades. And exports should benefit from firmer global demand.
However, the bank also flagged headwinds. Slower population growth—partly a result of reduced immigration targets—could dampen domestic demand. And less government support, as fiscal stimulus winds down, may also weigh on growth.
The forecast aligns with a broader view that Canada's economy is turning a corner after a period of sluggishness. The Bank of Canada has been cutting interest rates over the past year, which should help stimulate borrowing and spending. UBS has previously projected that the central bank's policy rate could climb to 3.5% by 2028, reflecting a gradual normalization as the economy strengthens.
The tariff wildcard
The biggest risk to the outlook is US trade policy. The United States is Canada's largest trading partner, and any new tariffs on Canadian goods could hit exports and corporate profits. UBS notes that uncertainty alone—even before any tariffs are imposed—can deter companies from making long-term investment decisions and from hiring.
This is not a new concern. Canadian businesses have been dealing with trade friction for years, and many have already adjusted supply chains or diversified markets. But the threat of new tariffs remains a live issue, and UBS's forecast assumes that the worst-case scenarios are avoided.
For everyday investors, the message is that Canada's economic recovery is real but fragile. A strong growth pickup would be positive for Canadian stocks, particularly in sectors like financials, industrials, and consumer discretionary. But if trade tensions escalate, those same sectors could face headwinds.
What it means for investors
For investors, the key takeaway is that Canada's economy is expected to improve, but the pace will depend on external factors. A faster recovery could boost corporate earnings and support stock prices. On the other hand, prolonged trade uncertainty could keep a lid on investment and hiring, limiting the upside.
Investors should also consider the broader context. UBS's view on Canada is part of a wider assessment of global growth. The bank has also been bullish on certain sectors, such as On Holding's innovative foam technology and Magna's long-term growth plan. But for Canada specifically, the focus is on the domestic economy and its ties to the US.
One area to watch is the Bank of Canada's interest rate path. If growth accelerates as UBS expects, the central bank may eventually need to raise rates to keep inflation in check. That would affect borrowing costs for consumers and businesses, and could impact everything from mortgage rates to corporate profits.
Another factor is the housing market. Canada's housing sector has been sensitive to interest rates, and a recovery in growth could support home prices. But higher rates later on could cool that market again.
Overall, UBS's forecast is cautiously optimistic. It sees a brighter future for Canada's economy, but with enough risks to keep investors on their toes. As always, diversification and a long-term perspective are prudent.
