The Bank of Canada has maintained its policy rate at 2.25% for a consecutive meeting, navigating a rare combination of tariff-driven trade disruption and Middle East-driven energy inflation that is squeezing the economy from two directions at once, according to the Bank of Canada’s June 2026 rate announcement.

A Soft Economy Absorbing Two Shocks

Canadian GDP edged down 0.1% in the first quarter, weaker than the Bank’s April projection, even as global equity markets stayed buoyant and the Canadian dollar weakened against its US counterpart. Governing Council says it will “look through” the near-term inflation impact of the Middle East conflict but will not allow higher energy prices to become entrenched, a distinction the Bank has drawn explicitly to avoid repeating the policy mistakes of the 2021-22 inflation surge, per the Bank’s official statement.

The Bank’s April Monetary Policy Report forecasts GDP growth of just 1.2% in 2026, rising to 1.6% in 2027, as exports and business investment recover only gradually from a US tariff regime the Bank now treats as a structural, not cyclical, feature of the outlook, according to the Bank of Canada’s April 2026 report.

The Tariff Toll So Far

RBC Economics estimates the US has imposed a roughly 6% average effective tariff rate on Canadian exports, with most trade remaining exempt under CUSMA compliance rules, based on RBC’s structural-damage assessment. Steel, aluminum, and auto exports have declined sharply, while other sectors have proven more resilient than initially feared. HSB Pricing Lab research conducted with Bank of Canada staff found roughly a quarter of Canada’s own retaliatory tariff costs passed through to consumer prices before being rapidly unwound once most retaliatory measures were lifted.

The Canada-United States-Mexico Agreement (CUSMA) review is, in the words of Desjardins Group economists, “the defining issue” of 2026 for Canadian policy, with FTSE Russell analysts suggesting the agreement is unlikely to survive in its current form even as the broader global trading system adapts around it, according to Yahoo Finance Canada’s economist survey.

Structural Damage, Not Just a Cyclical Dip

Bank of Canada officials have been unusually direct about the long-run cost of trade disruption. The Bank’s own commentary describes Canada’s potential output growth falling to roughly 1.0% in 2026 before a modest recovery to 1.3% in 2027, driven by both trade friction and slower population growth from reduced immigration, according to the Bank of Canada’s “Structural change” commentary. The labour market remains soft, with unemployment in the 6.5%–7% range reflecting weak hiring rather than mass layoffs — what Indeed Canada economist Brendon Bernard describes as a “low-hire, low-fire” dynamic.

Watching the Same AI Risk From Ottawa

Notably, the Bank of Canada’s own risk assessment flags the same concern now dominating global financial commentary: a “sudden tightening in global financial conditions sparked by a correction in AI related stock market valuations” as a distinct downside risk to its inflation projections, according to RBC’s analysis of the Bank’s scenario planning. That makes Canada one of the first G7 central banks to formally embed AI-valuation risk into its published monetary policy framework.

The Bank’s next rate decision and full Monetary Policy Report are due July 15, 2026.

China’s economy is being pulled in two directions at once. Fixed-asset investment fell 4.1% year-on-year in the first five months of 2026 — the steepest decline since May 2020 — while exports surged 19.6% in May alone, powered overwhelmingly by semiconductor and AI-hardware demand, according to Deloitte’s Weekly Global Economic Update.

The Property Sector’s Deepening Slide

Property investment within that fixed-asset figure fell 16.2% year-on-year, the sharpest drop recorded in the current downturn. Roughly two-thirds of Chinese household wealth is held in property, so the sustained decline in home values is pushing consumers toward higher savings and lower spending as they attempt to rebuild balance sheets, per Deloitte’s analysis from chief global economist Ira Kalish. Government efforts to stabilize the housing market have so far failed to reverse the trend, with the excess capacity built during the prior debt-fueled construction boom still working through the system.

Exports Riding the Global AI Supercycle

The export side of the ledger tells a starkly different story. Semiconductor exports rose 110% year-on-year in May, mobile phone exports climbed 44%, and exports of automatic data-processing machines — the category covering computer and data-storage components — increased 66%. The May export growth of 19.6% was the second-largest year-on-year increase since January 2022, trailing only the 39.6% surge recorded in January–February 2026. Part of that strength reflects inventory build-up by global buyers anticipating further supply-chain disruption from the ongoing Middle East conflict.

Tariff Investigations Add a New Layer of Risk

Even as exports boom, the trade environment China and its partners face is becoming more adversarial. The US administration has launched an investigation into 60 countries — including the European Union — to determine whether they are importing goods made with forced labor, with the goal of imposing tariffs ranging from 10% to 12.5%. The move sets the stage for renewed friction even after the US and EU reached a trade agreement approved by the European Parliament the previous year, according to Deloitte’s tracking of the administration’s tariff strategy.

The China-Russia Financial Relationship Under New Strain

China’s export strength has not shielded it from secondary pressure tied to its economic relationship with Russia. US Treasury sanctions actions have begun targeting cross-border payment channels between Russian and Chinese entities used to facilitate sensitive-goods transactions, and Chinese banks have reportedly started refusing payments from Russian counterparties amid the threat of US secondary sanctions, according to CEPA’s analysis of the sanctions squeeze. China has supplied more than 90% of Russia’s semiconductor imports since the Ukraine war began, per CSIS’s research on sanctions reshaping Russia’s economy, making Beijing’s compliance posture a critical swing factor for Moscow’s continued access to Western-branded technology.

What It Means for the Regional Outlook

Asia House projects China’s growth easing modestly from 4.8% in 2025 to 4.6% in 2026, a relatively soft landing given the scale of tariffs imposed on Chinese exports, reflecting redirected trade flows toward Asian and European markets and a weaker real effective exchange rate, according to Asia House’s Annual Outlook. For ASEAN economies plugged into China’s supply chains — Malaysia and Vietnam in particular — the divergence between China’s property drag and export strength will remain a key variable shaping regional growth through the rest of 2026.

Canada’s economy has slipped into what Deloitte calls being “on pause,” with the mandatory July 1 review of the Canada-United States-Mexico Agreement having passed without a clear resolution, leaving businesses across the country’s most trade-exposed sectors unable to plan with any confidence, according to Global News’ reporting on the Deloitte assessment.

A Technical Recession, Officially Disputed

The economic backdrop into which the CUSMA review has landed is already fragile. Canada’s GDP data show a technical recession spanning October 2025 through March 2026, with business investment falling for five consecutive months, per Deloitte’s report as covered by Global News. Several Bank of Canada officials, along with Prime Minister Mark Carney, have pushed back on the recession framing, with Deloitte itself describing the claims as “exaggerated” even while acknowledging that the headline numbers, a one percent GDP drop in the fourth quarter of 2025 followed by a first-quarter 2026 decline, technically meet the standard definition.

Deloitte’s report identifies the core problem plainly: “unresolved trade issues with the U.S. remains the leading risk to the outlook,” warning that a failure to extend CUSMA or further American tariff escalation would hit Canadian exports and confidence hard. The firm now expects 2026 GDP growth of just 0.7%, down from 1.7% in 2025.

What CUSMA’s Review Actually Means

The stakes of the review are structural, not just cyclical. Under its current terms, CUSMA could be renewed for another 16 years under existing terms, extended for 10 years with annual reviews, or replaced entirely, according to Global News’ reporting. Canada and Mexico have both pushed for the longer, more stable extension, while President Trump has said he would be willing to sign the agreement but would “prefer to see it terminated,” a comment that has done little to settle business planning.

The Bank of Canada has held its policy rate steady at 2.25% through the middle of 2026, citing both the trade uncertainty and a separate inflationary pressure from the Iran war’s effect on oil prices, according to the central bank’s own rate announcement. The Bank’s April forecast projects GDP growth of just 1.2% in 2026, rising gradually to 1.6% in 2027 and 1.7% in 2028, contingent on exports and business investment resuming along what the Bank describes as “a lower trajectory” than pre-tariff projections assumed.

The Regional Damage Is Uneven

Not every part of Canada is being hit equally. RBC Economics research shows that manufacturers of steel, aluminum, copper, motor vehicles and parts, and softwood lumber have borne the brunt of US trade actions, concentrating the economic pain in Ontario and Quebec, which face the highest effective tariff rates on exports to the US, both exceeding 6%, according to RBC’s year-one tariff assessment. By contrast, provinces with smaller exposure to those industries, including Newfoundland and Labrador, New Brunswick, Alberta, Saskatchewan, and Prince Edward Island, face effective tariff rates below 1%.

There is evidence of adaptation underway. Canada’s merchandise exports to non-US economies rose 17% year-over-year in the twelve months to January 2026, even as exports to the US fell 10% over the same period, RBC’s data shows. The federal government has set a goal of doubling non-US exports by 2035, backed by infrastructure spending and new trade-diversification programs, though RBC notes that shifting supply chains and building new trade relationships outside the US “is a lengthy process” that cannot offset near-term losses.

Where the Upside Case Comes From

Not every recent analysis is downbeat. A separate RBC assessment argues that Canada’s resource base, agriculture, energy, and critical minerals, is increasingly well positioned to meet growing global demand for AI infrastructure and defense spending, representing what the bank’s economists call “a moment for Canada to invest in itself,” according to RBC’s separate outlook note. That report points to five specific positives: most Canadian exports remain exempted from the broadest US tariff increases, monetary policy retains flexibility, government net debt levels remain relatively low compared with other advanced economies, and both federal and provincial governments have signaled willingness to provide additional fiscal support if needed.

TD Economics strikes a similarly cautious-but-not-dire tone, forecasting real GDP growth accelerating from 2025’s “anemic” 0.7% pace to 1.3% in 2026 and 1.8% in 2027, contingent on the CUSMA talks not deteriorating further, according to TD’s quarterly forecast. TD’s baseline assumes the tariff status quo holds, a 10% rate on non-CUSMA-compliant goods alongside sector-specific Section 232 tariffs, while flagging that new Section 301 tariffs on forced-labor violations, set to take effect in late July and covering 60 countries, add a fresh layer of complexity just as the CUSMA question remains unresolved.

The Structural Shift Ahead

Bank of Canada officials have framed the moment as something bigger than a cyclical downturn. In a recent address, the central bank described the economy as being “at a crossroads,” warning that if Canada fails to restructure around new trade relationships, “productivity and GDP growth do not recover,” and the country becomes a less attractive place to invest, according to the Bank of Canada’s own address. Roughly half of the GDP shortfall attributable to US tariffs comes from reduced potential output rather than simple cyclical weakness, the Bank’s own projections show, a distinction that matters because potential-output damage does not automatically reverse once trade tensions ease.