UBS Says Risks to Canada's Economy Look Roughly Balanced

12:50 PM EST, 12/30/2025 (MT Newswires) -- Canada activity slowed in mid-2025, but the worst appears to be over, said UBS.

Gross domestic product growth is tracking below 2%, wrote the bank in its "Global Economics and Markets Outlook" note of November.

Labor market conditions softened notably through mid-2025, which, in the bank's view, is a key factor behind the recent policy easing by the Bank of Canada. Another is the retrenchment of inflation risks with Canada withdrawing reciprocal tariffs against the United States and a growing number of Canadian firms complying with the USMCA trade accord, stated UBS.

The bank views risks to its outlook as "roughly balanced."

Additional fiscal support can be more growth-accretive than it currently has baked in. The government's housing initiatives on top of monetary policy easing may improve infrastructure and residential investment, and the Canadian consumer may deliver positive surprises if rising housing activity helps renters and first-home buyers --provided house prices don't decline noticeably such that existing owners and stakeholders lose asset value.

On the other hand, a potential deterioration in global financial conditions or renewed strains in Canada-U.S. trade relations could weigh on the outlook.

UBS retains its forecast of a 2.25% policy rate through the end of 2027. The statement following the October BoC meeting stated, "If inflation and economic activity evolve broadly in line with the October projection, Governing Council sees the current policy rate at about the right level to keep inflation close to 2% while helping the economy through this period of structural adjustment."

This is consistent with UBS' view that it would require notable economic weakening for the BoC to lower the policy rate further below 2.25%, which is the lower end of its estimate of neutral.

In addition to ongoing trade uncertainty and changes to fiscal outlook, population trend is a key area to watch, pointed out the bank.

In 2023, annual population growth reached 3%, the highest rate since 1957. According to Statistics Canada, "in 2023, the vast majority (97.6%) of Canada's population growth came from international migration (both permanent and temporary immigration) and the remaining portion (2.4%) came from natural increase."

Population growth remained around this rate in 2024, but this trajectory is set to reverse with slowing immigration flows. The bank's forecast for 2026 and 2027 are 0.4% and 0.6%, respectively, as UBS doesn't anticipate the current immigration tightening to ease.

In the bank's view, this trend is likely to continue in the next two years, which is one reason UBS believes GDP growth will stay below 2%. On the other hand, this trend also helps offset inflation pressures, specifically when it comes to rent inflation.

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