Canadian provincial economies are expected to continue growing in 2026 despite renewed trade tensions with the United States, although the pace of expansion varies significantly across the country, according to RBC Economics.
The outlook projects 1 per cent growth for the Canadian economy this year, which RBC describes as low by historical standards but stronger when adjusted for significant demographic headwinds, including Canada's first recorded population decline.
RBC said the economy has shown resilience through the first half of 2026, with gross domestic product growth rebounding in the second quarter following a winter slowdown and labour market conditions improving. The unemployment rate fell to a two-year low over July and August and is down nearly three-quarters of a percentage point from a year earlier.
Trade tensions create regional differences
Trade tensions between Canada and the U.S. increased over the summer after the U.S. imposed 50 per cent tariffs on another group representing about five per cent of Canadian imports, while Canada introduced retaliatory measures on a similar dollar value of U.S. imports.
RBC expects the measures to have significant effects on targeted sectors but limited broader economic consequences, with fiscal support providing some cushioning. The bank said the greater risk is further escalation and the uncertainty over which products could face tariffs next.
Ontario, Quebec and British Columbia are expected to experience the greatest effects from U.S. tariffs, with key exports including vehicles, steel, transportation equipment and forestry products weakening and affecting jobs in impacted industries.
New U.S. Section 338 tariffs could add further pressure, with plastic products, electrical machinery, furniture and wood products among the sectors facing significant exposure. RBC said the tariffs could materially slow or halt some exports to the U.S. from the affected provinces.
The newly imposed tariffs could affect about 12 per cent of Quebec and Nova Scotia's domestic exports to the U.S. and 10 per cent of those from British Columbia and Ontario, roughly twice the national average.
Alberta and Newfoundland and Labrador lead growth
The regional growth outlook is being supported in part by higher commodity prices and increased production capacity in resource-producing provinces.
Newfoundland and Labrador is forecast to grow four per cent in 2026, followed by Alberta at 2.3 per cent, Prince Edward Island at 2.2 per cent and Saskatchewan at 1.9 per cent. New Brunswick is projected to grow 1.4 per cent, Nova Scotia 1.2 per cent and Manitoba 0.9 per cent.
British Columbia is forecast to grow 0.8 per cent, Ontario 0.7 per cent and Quebec 0.5 per cent, putting those provinces at the bottom of RBC's growth outlook. The bank said tariff exposure and slower population growth are weighing on the three economies.
RBC has made modest upward revisions to its forecasts for Ontario and Quebec despite their exposure to new Section 338 tariffs, citing stronger-than-expected recent economic performance. It also slightly upgraded Newfoundland and Labrador and Alberta because of sustained high commodity prices and, in some cases, increased production capacity.
Commodity production supports Prairies
Higher commodity prices and expanding production capacity are contributing to stronger growth in resource-producing regions, which also remain relatively insulated from U.S. tariffs.
RBC said Newfoundland and Labrador and Alberta are benefiting from increased capacity from the Trans Mountain expansion and the production ramp-up of all four of Newfoundland and Labrador's offshore oil fields following extended periods of downtime.
Higher canola prices, supported by strong domestic canola-seed crushing and Chinese demand, have also contributed to record planting in Saskatchewan.
Consumer spending remains resilient
Consumer spending has remained relatively firm across most provinces, even after accounting for the effect of higher gasoline spending.
Alberta is leading the country in retail sales growth so far this year, supported by above-average population gains and broader economic performance. Prince Edward Island, New Brunswick and Nova Scotia are also showing relatively strong retail sales growth, although RBC noted that gasoline prices are providing significant support to those figures. Underlying consumer spending remains solid, the bank said.
Higher energy prices are reducing household purchasing power, particularly for lower-income earners, but the national household saving rate increased in the second quarter. RBC attributed the increase partly to higher government transfers and a 1.4 per cent increase in wage and salary growth, the largest such increase in nearly two years.
RBC said there are not yet material signs of financial stress at the aggregate level in any province, despite earlier indications that some households were drawing down savings to cover higher bills. The bank expects this to support consumer spending through the remainder of 2026 and into 2027, although growth is expected to vary by province.
Interest rates remain a consideration
RBC expects the Bank of Canada to begin gradually raising interest rates in the first quarter of 2027, while noting growing risks that the first increase could come sooner.
The bank said the improving economy and lower unemployment rate could weaken the case for keeping the overnight rate at the lower end of the Bank of Canada's estimated neutral range of 2.25 per cent to 3.25 per cent. It expects the central bank to base decisions on the broader health of the Canadian economy and forward-looking inflation risks rather than directly responding to global oil prices.