Economic forecasts are always uncertain. But understanding where the economy might be headed helps you make better borrowing decisions.
Let’s look at the Canadian economic outlook for the next 12 to 24 months and what it means for commercial and agricultural borrowers.
The Current Economic Picture
Start with where Canada stands in early 2026.
GDP growth has been modest but positive, running around 1.5% to 2.2% annually. That’s slow by historical standards but not recessionary.
Unemployment is around 6.0% to 6.3%, up from the lows of 2022 but not crisis levels. The labor market has softened from the extreme tightness of a few years ago but remains reasonably healthy.
Inflation has come down significantly from the 6% to 8% peaks of 2022-2023. We’re currently running around 2.4% to 2.7%, close to but not quite at the Bank of Canada’s 2% target.
Consumer spending has moderated. People are being more cautious with discretionary spending as mortgage renewals at higher rates hit household budgets.
Business investment has been weak. Companies are cautious about major capital investments given economic uncertainty and higher borrowing costs.
It’s not a strong economy, but it’s not in crisis either. Call it a soft landing scenario so far.
What Economists Are Forecasting
The consensus view among economists is for continued modest growth through 2026 and into 2027.
Most forecasts call for GDP growth in the 1.5% to 2.5% range. Enough to keep employment growing slowly and avoid recession, but not strong enough to feel like boom times.
Unemployment is expected to stay in the 6% to 6.5% range. Not dramatically better or worse than current levels.
Inflation is forecast to continue gradual decline toward the 2% target, reaching 2.1% to 2.3% by late 2026 or early 2027.
Interest rates are expected to decline modestly. The Bank of Canada might cut the policy rate another 25 to 50 basis points over the next year if inflation cooperates. But don’t expect dramatic rate cuts.
These are base case scenarios. Reality could differ significantly if major shocks occur.
The Upside Scenario
What would it take for the economy to perform better than expected?
If inflation drops quickly and convincingly to 2%, the Bank of Canada could cut rates more aggressively. That would stimulate housing, construction, and consumer spending.
If the U.S. economy stays strong, that supports Canadian exports and economic activity. We’re heavily dependent on U.S. demand.
If business confidence returns and companies start investing in expansion and equipment, that could accelerate growth.
If immigration continues at high levels and newcomers integrate successfully into the economy, that drives demand and activity.
In the optimistic scenario, GDP growth could be 2.5% to 3.0%, unemployment could drop back toward 5.5%, and we’d see more economic momentum.
For borrowers, this would mean continued credit availability, potentially lower interest rates, and stronger property values and farm income supporting refinancing.
The Downside Scenario
What could go wrong?
If inflation stays stubborn above 2.5%, the Bank of Canada might hold rates higher for longer or even raise again. That would hurt economic growth.
If the U.S. enters recession, Canada would likely follow given our trade dependence. U.S. economic weakness shows up quickly in Canadian exports and employment.
If mortgage renewals at higher rates cause more consumer stress than expected, spending could drop significantly, triggering recession.
If global financial markets face disruption, credit availability would tighten and borrowing costs would increase.
If geopolitical events disrupt energy or food markets, that could create stagflation: weak growth with elevated inflation.
In the pessimistic scenario, we could see GDP growth turn negative (recession), unemployment rise to 7.5% or higher, and continued high interest rates.
For borrowers, this would mean tighter credit, continued high rates, and pressure on property values and farm income.
Regional Economic Variations
Canada is large and different regions face different economic prospects.
Ontario: Closely tied to U.S. manufacturing and consumer spending. If U.S. economy stays healthy, Ontario benefits. Toronto-centric services and finance sectors face their own dynamics with hybrid work and office market challenges.
Quebec: More diversified economy with less U.S. trade dependence than Ontario. Aerospace, technology, and services provide some stability. Montreal real estate and business activity moderate but steady.
British Columbia: Dependent on resource exports (lumber, minerals), real estate activity, and Asia-Pacific trade. Vancouver real estate cooling affects provincial economy significantly.
Alberta: Energy sector performance drives economic outcomes. Current moderate oil prices ($70 to $85) support reasonable economic conditions. Higher prices would boost economy significantly, lower prices would hurt.
Prairies: Saskatchewan and Manitoba tied to agriculture and resources. Current grain prices support moderate farm income and economic activity. Less volatile than Alberta.
Atlantic Canada: Benefiting from population growth and renewed investment attention. Smaller economy less affected by national trends. Local conditions matter more.
Understanding regional factors helps assess local borrowing conditions.
What It Means for Interest Rates
The economic outlook translates to interest rate expectations.
If the economy performs roughly as expected, we’re looking at modest rate declines over the next 12 to 18 months. Maybe 25 to 50 basis points from the Bank of Canada.
That would bring five-year fixed mortgage rates from current 5.2% to 6.0% range down to maybe 4.8% to 5.6% range by late 2027. Better, but not dramatically so.
Variable rates would follow policy rate changes directly. If the Bank of Canada cuts rates, variable rates decline accordingly.
But there’s meaningful risk that rates stay higher than people expect. If inflation is stubborn or the economy shows more strength, rate cuts might not happen or might be smaller.
For borrowers, the prudent planning assumption is that rates stay in roughly current ranges through 2026, with modest downward drift in 2027 but nothing dramatic.
Implications for Property Values
Economic conditions affect commercial and residential property values.
If the economy muddles through with modest growth, property values should be relatively stable. Not huge appreciation, but not crashes either.
Multi-family and industrial properties should maintain values based on strong fundamentals. Office properties face continued challenges. Retail will stay bifurcated.
If interest rates decline modestly, that should support some compression in cap rates, which would boost property values. But the effect might be small if economic growth is weak.
If we slide into recession, property values would face downward pressure, particularly for property types already struggling.
For borrowers, understanding that property values might not bail out weak deals is important. Don’t count on appreciation to fix overleveraged situations.
Agricultural Sector Outlook
The farm economy has its own dynamics but is affected by broader economic conditions.
Commodity prices are influenced by global supply and demand, which depends partly on economic growth in major consuming countries. Weak global growth could pressure commodity prices.
Input costs are affected by oil prices, fertilizer market dynamics, and general inflation. Continued moderate inflation suggests input costs stay elevated but stable.
Farmland values depend on farm income, interest rates, and investor demand. Current economic outlook suggests flat to modest farmland appreciation.
Agricultural credit should remain available for strong farm operations. Lenders view agriculture relatively favorably despite economic uncertainty.
Commercial Lending Conditions
How will the economic outlook affect commercial lending availability and terms?
Lenders will continue being selective. They want to see strong property fundamentals, good borrower credit, and adequate equity.
Loan-to-value ratios will likely stay conservative. Don’t expect the 75% to 80% LTV that was common in 2020-2021. 65% to 70% is more realistic for most property types.
Rates will be influenced by bond yields and credit spreads. Some modest improvement is possible if the economy stays stable and inflation declines, but don’t expect dramatic rate drops.
Debt service coverage requirements won’t relax. Lenders want to see 1.20 to 1.30 times coverage or better.
Credit availability should remain reasonable for quality properties and borrowers, but marginal deals will struggle to get financing.
The Mortgage Renewal Wave
One important factor is the wave of mortgage renewals happening through 2026-2027.
Hundreds of thousands of Canadian homeowners have mortgages maturing that were originated at 2% to 3% in 2020-2022. They’re renewing at 5% to 6%.
This payment shock is reducing consumer spending and affects the broader economy. It also creates some risk of payment defaults if household budgets are too stretched.
For commercial borrowers, this matters because consumer spending affects retail tenants, restaurant viability, and general economic activity.
The mortgage renewal impact should peak in 2026 and gradually diminish through 2027 as people adjust to higher payments.
Business Investment Outlook
Business investment has been weak and is likely to stay moderate.
Higher interest rates make capital investments less attractive. A new manufacturing line or building expansion needs to clear higher return hurdles when borrowing costs 6% instead of 3%.
Economic uncertainty makes companies cautious about long-term commitments.
But necessary investments will still happen. Equipment replacement, facility maintenance, technology adoption, these continue even in uncertain times.
For commercial real estate, this means tenant demand for new space will be modest. But existing tenant renewals should be reasonable for quality properties.
Government Policy Factors
Government decisions can significantly affect economic outcomes.
Fiscal policy (government spending and taxation) at federal and provincial levels influences economic growth. Current deficits and debt levels limit how much additional stimulus governments can provide.
Housing policy changes could affect residential construction and property values. Various governments are trying to encourage more housing supply.
Immigration levels are a policy choice that directly affects economic and housing demand. Current high immigration is government policy, not economic accident.
Business regulations and tax policies affect investment and employment decisions.
Borrowers should monitor policy developments but can’t predict them. Build flexibility into financing to handle policy changes.
Inflation Watch
Inflation trajectory is critical to the economic and interest rate outlook.
If inflation settles at 2% as the Bank of Canada hopes, that supports economic growth and rate cuts.
If inflation stays stuck at 2.5% to 3.0%, the Bank will keep rates higher, which constrains growth.
If inflation reaccelerates above 3%, we’re back to tightening mode, which would be very negative for growth and borrowing conditions.
Key inflation drivers to watch: wage growth, housing costs, services inflation, energy prices.
For borrowers, understanding that inflation uncertainty creates interest rate uncertainty helps in making fixed vs. variable rate decisions.
Practical Guidance for Borrowers
Given the economic outlook, here’s how to think about borrowing decisions in 2026.
Don’t wait for perfect conditions. If you need financing and can get reasonable terms today, move forward. Timing the market is hard.
Plan for modest economic growth. Don’t base borrowing on assumptions of strong growth bailing you out. Underwrite to moderate conditions.
Stress test your finances. Make sure you can handle debt service if rates stay at current levels or go slightly higher. Don’t assume rates will drop dramatically.
Maintain liquidity. Keep cash reserves for unexpected challenges. Economic uncertainty argues for financial flexibility.
Focus on quality assets. Strong properties and farms in good locations will perform better and be easier to refinance than marginal assets.
Build relationships with lenders. In uncertain times, having lenders who know you and your business matters.
The Long View
Step back and think about the longer-term economic picture for Canada.
Demographics are favorable. Immigration-driven population growth supports long-term demand for housing, goods, services.
Natural resources provide economic foundation. Energy, minerals, agriculture, forestry, Canada has resources the world needs.
Political and economic stability compared to many countries makes Canada attractive for investment.
Quality of life and rule of law support business activity and wealth creation.
The short-term economic uncertainty we face now doesn’t change these long-term fundamentals.
For borrowers with multi-decade horizons, the current economic environment is just one moment in a longer story.
Stay Informed and Flexible
Economic conditions will continue evolving. What looks likely today might change based on events we can’t predict.
Stay informed about economic trends. Read Bank of Canada announcements, follow major economic indicators, understand what’s happening in your specific sector.
Build flexibility into your financing where possible. Prepayment privileges, portable mortgages, lines of credit for backup liquidity.
Be prepared to adapt as conditions change. Rigid plans break when reality doesn’t cooperate.
Work With Knowledgeable Advisors
Navigating financing decisions in uncertain economic times requires understanding both macroeconomic trends and specific lending markets.
At Creek Road Financial Inc., we help borrowers across commercial and agricultural sectors make informed financing decisions. We track economic conditions, understand lender behavior, and can help you structure financing that positions you well regardless of how the economy evolves.
Whether you’re financing acquisitions, refinancing existing debt, or planning for growth, we can provide guidance and access to competitive lending options.
Let’s discuss your financing needs and how to approach them given the current and expected economic environment. We’ll help you make decisions that work today and into the future.