BMO Sees "Stronger" Economics Growth In 2026 "Assuming No Nasty Surprises On the Trade Front"

01:11 PM EST, 01/05/2026 (MT Newswires) -- The best that can be said about Canada's economy in 2025 is that it likely skirted a recession, thanks to the duty-free status of USMCA-compliant goods, supportive fiscal and monetary policies, and the TSX's "blistering" 28% rally, BMO Capital Markets said in a note entitled '2026 Outlook: Resilience and Risks' and dated Jan. 5.

Still, BMO said, real gross domestic product growth likely slowed to 1.7% from 2.0% in 2024. In addition, it said, the annual average figure likely understates the true deceleration in activity, with GDP likely rising just 0.8% on a Q4/Q4 basis after surging 3.1% in 2024.

BMO expects stronger 1.9% growth in 2026 -- Q4/Q4, or 1.4% annual -- "assuming no nasty surprises on the trade front".

The bank's critical assumption for 2026 is that the USMCA review will extend beyond this year, keeping the United States in the trade agreement and preserving the compliance exemption on most Canadian goods. Potential issues for discussion include supply management and the Online Streaming and News Acts, it noted.

According to BMO, the review could lead to a reduction of some sectoral duties, notably the 50% import tax on steel, aluminum, and some copper products, trimming the U.S. average tariff on Canadian imports from its current level of around 7%. Apart from a few hard-hit industries, the economy will largely adjust to the lower level of exports, it said.

However, BMO added, ongoing uncertainty could cast a longer shadow on business confidence and investment. "The impact of a USMCA breakdown would be far worse, potentially spiking the average tariff rate and triggering a moderate recession in Canada, even with significant policy support. Manufacturing industries that depend heavily on U.S. sales, including automobiles, electrical equipment, machinery, computers, and chemicals, would face dire consequences."

BMO said stimulative fiscal policies at both the federal and provincial levels should continue to cushion tariff effects in 2026. Combined deficits are projected at nearly 4% of GDP this fiscal year. "Federal initiatives aim to jump-start investment by accelerating infrastructure, mining and energy projects, while reinstating full and immediate capital expense deductions and supporting tariff-impacted industries."

It added the economy will also benefit from last year's 100 bps of rate cuts from the Bank of Canada, although the easing cycle is probably over.

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