Growth remains soft in Canada and government spending supports activity against weaker demand, said Morgan Stanley.
Consumption growth slows later in the year as labor-market softness, weaker population growth, and negative housing-wealth effects weigh on demand, writes the bank. Immigration caps could bring population growth close to zero in 2026, worsening the labor market conditions.
Monthly payroll gains should remain weak and volatile, while the unemployment rate is likely to be broadly stable, stated Morgan Stanley. Business investment and exports are likely to remain subdued, as the economy wades through trade-policy uncertainty, elevated supply-chain adjustment costs, and the upcoming CUSMA trade deal review.
While the Canadian government's push toward investment-led growth, via infrastructure, defense spending, the Major Projects Office, and the proposed sovereign wealth framework, should help over time, the bank expects the near-term macro impact to be modest.
Productivity challenges are increasingly recognized by policymakers, but improvement will likely take years, it pointed out. Artificial Intelligence-related capex supports growth at the margin, though much of the impulse is offset by imports.
A "benign" USMCA resolution could modestly lift sentiment and support investment at the margin, while a shift to annual reviews would prolong uncertainty, added the bank.
Expanded scope and/or higher United States tariff levels under Section 232 investigations remain a key downside risk, according to Morgan Stanley. Section 232 tariffs would supersede CUSMA coverage. This matters given Canada's export exposure in autos, metals, and other industrial sectors covered by the current and ongoing investigations.