Q3 2026 - Economic Commentary by Ian McKinnon
Economy
Economic growth continues to demonstrate resilience despite ongoing trade tensions and geopolitical uncertainty, supported in part by a weaker US dollar and firmer commodity prices. While consumer spending has moderated, strong wage growth, healthy household savings, continued credit expansion, and fiscal stimulus are helping to sustain domestic demand. At the same time, the US economy may be more vulnerable than headline indicators suggest, as underlying labour market conditions remain soft. Looking ahead, uncertainty surrounding the outcome of USMCA negotiations could weigh on business confidence, potentially leading companies to delay investment and hiring decisions.
Continued strength in Canadian wage growth is keeping inflation above the Bank of Canada’s target, with both goods and services prices contributing to ongoing price pressures. At the same time, productivity performance remains significantly weaker in Canada than in the United States, highlighting a growing divergence between the two economies. In contrast, rising labour productivity in the US is helping to ease inflationary pressures, and favourable base effects are expected to further support disinflation over the next six months. Despite these trends, many corporations continue to maintain elevated prices and profit margins, using the Iran war and trade tensions as justification for price increases that exceed underlying cost pressures.
Markets
Central banks continue to face a challenging environment. The Bank of Canada (BoC) is balancing signs of excess capacity in the economy with ongoing inflation pressures. The Federal Reserve raised its policy rate in September for the first time in three years within a target range of 3.75%- 4.00%. The central bank said trend inflation was too high and even though recent inflation shocks have been dominated by supply, eventually these shocks can put pressure on inflation expectations. Adding to these complexities, governments continue to provide fiscal support to their economies, which is helping sustain growth but is also contributing to larger budget deficits and increasing focus on sovereign debt and credit quality.
In the third quarter, Canadian bond yields have risen from the second quarter, similar to the US. Oil prices, after falling toward $70 a barrel following the Memorandum of Understanding (MOU) between the US and Iran increased once again, hitting $100. Combined with more hawkish central banks, markets are worried that these higher energy prices could have broadening impacts, as the price of diesel and the costs of transportation for all goods rose quickly. In equity markets, forward-looking earnings growth is resilient. However, markets have moderated their rise, resulting in lower valuations due to higher interest rates.
Risks
The economic outlook continues to be shaped by several external risks. Ongoing conflicts in the Middle East and Ukraine have kept energy prices elevated, adding to inflationary pressures and increasing uncertainty for businesses and consumers. At the same time, central banks have reduced their reliance on forward guidance and economic projections, making the future path of interest rates less predictable and contributing to greater market volatility. Trade policy also remains a key source of uncertainty, as negotiations surrounding the renewal of the United States-Mexico-Canada Agreement (USMCA) continue against the backdrop of a less collaborative US administration, potentially weighing on business confidence, investment, and cross-border economic activity.