Desjardins economists expect the Bank of Canada (BoC) to resume its tightening cycle, with a first rate increase anticipated at the end of October 2026 and a second in January 2027, according to the bank's Economic and Financial Outlook published on October 22, 2026. The forecast reflects a central bank facing competing pressures: energy prices remain elevated while economic momentum is showing signs of weakness, particularly in employment. On energy, the Desjardins team notes that Middle East energy exports have rebounded, with the most recent data showing volumes at about 80% of pre-war levels.
However, tankers are in short supply, and oil prices are unlikely to stabilize anytime soon. Desjardins still expects crude oil prices to end the year at around US$80 per barrel. The conflict in the Middle East is expected to keep energy prices elevated, which is a key reason the economists anticipate BoC rate hikes.
For Canada, Desjardins describes its outlook as having seen modest upward revisions. The economists anticipate third-quarter real GDP growth of roughly 2.0% annualized, supported by slightly higher business investment, while household consumption remains resilient. They also expect the federal government's “Productivity Mega Deduction” to boost economic activity over the medium term, estimating that it will increase business investment by about 1% on average annually from 2027 to 2030 and real GDP by approximately 0.1%.
That boost is likely to be somewhat offset by higher imports. Trade tensions with the United States remain a notable headwind, and the economists cite the recent escalation of the trade dispute between the two countries. Quebec's economy continues to show uneven performance, according to the report.
Real GDP grew in the second quarter, with a composition of growth that the economists describe as more encouraging than in previous quarters. However, a sharp decline in employment in September was exacerbated by unusual shifts in the education sector, and Desjardins advises interpreting it with caution. Real GDP growth for 2026 is estimated at 0.4%, and the economists note that the election of a minority Parti Québécois (PQ) government does little to change the province's main short-term challenges.
Weak economic conditions and budget constraints will limit the new government's room to manoeuvre, especially as it works toward balancing the budget in 2028–2029. Ontario's outlook has improved after revisions revealed greater economic resilience than previously anticipated. The province outperformed the rest of Canada over the first half of 2026, with first-quarter growth revised from contraction to flat.
Household spending should continue to benefit from a relatively solid labour market, while the goods sector is weaker, with Section 338 tariffs broadening the province's exposure. Housing starts returned to subdued levels in the third quarter, and Desjardins expects inflation in Ontario to remain below the national average. In the United States, the annual update of the National Economic Accounts published in September made a slight upward revision to real GDP growth for the first half of 2026.
Desjardins expects annualized growth of more than 3% in the third quarter, driven by household spending, continued investment in artificial intelligence and rising business inventories. The economists describe the US economy as surprisingly resilient despite higher fuel costs, interest rate hikes and another decline in consumer confidence. US inflation is expected to remain fairly high in the short term before starting to fall in the second quarter of 2027.
Desjardins has also revised its Federal Reserve outlook to include one further hike by year-end to contain inflationary pressures, while its longer-term view remains unchanged, with easing likely required next year. Elsewhere, Chinese real GDP picked up in the third quarter, supported by more robust domestic demand in September and ongoing strength in exports. In the eurozone, recent PMI readings suggest economic growth is fairly stable, but rising inflation and higher policy rates and bond yields could weigh more heavily on activity.
In financial markets, Desjardins notes that the Canadian dollar has weakened more than expected, and its previous forecast of 1.38 per US dollar by year-end is out of date. The economists now project USDCAD to remain around 1.42 over the next few months, while still expecting US-Canada interest rate differentials to narrow next year and the Canadian dollar to strengthen. Canadian equities are regaining ground following the September selloff and continue to outperform the S&P 500 this year, although technology company earnings over the next month will be an important driver of the outlook.
Desjardins identifies several risks to its scenarios. The main one is that the conflict with Iran becomes more prolonged or spreads to other countries, which could push energy prices higher and markedly increase inflation. Other risks include the war between Ukraine and Russia, the US-Canada trade dispute, continued rises in bond yields that could add pressure on highly indebted economies, the US midterm elections on November 3, and a sharp correction in equity markets that have benefited substantially from the AI boom.
The economists warn that central banks may need to accelerate their tightening cycles if inflation picks up considerably. Source: Desjardins Economic Studies, “Economic and Financial Outlook,” October 2026, authored by Jimmy Jean, Randall Bartlett, Benoit P. Durocher, Royce Mendes, Mirza Shaheryar Baig, Marc-Antoine Dumont, Tiago Figueiredo, Francis Généreux, Sonny Scarfone, Oskar Stone, Hendrix Vachon and LJ Valencia.
Source: desjardins.com