North American economic outlook 2026: Growth slows amid global conflict, inflation and uncertainty

North America’s economies weathered trade headwinds in 2025 better than expected, with growth exceeding forecasts and recession avoided across the region. Even so, momentum slowed late in the year as uncertainty disrupted business and household spending plans.

Economic anxiety remains elevated. Spillover effects from the ongoing conflict in the Middle East have added to uncertainty ahead of this summer’s review of the Canada-United States-Mexico Agreement (CUSMA), clouding the outlook for trade and investment.

One limited support to the outlook emerged in February, when the U.S. Supreme Court overturned the administration’s broad use of emergency tariff powers. However, relief is limited. Officials have signalled a shift toward slower-moving, sector-specific tariffs, leaving trade policy uncertainty firmly in place.

Across the continent, hiring has eased and is likely to remain subdued through the first half of 2026 as businesses delay major investment and hiring decisions until greater policy clarity around CUSMA emerges. Elevated uncertainty continues to weigh on overall economic activity.

At the same time, conflict-driven pressure on energy and commodity markets is expected to push inflation higher. Central banks across North America are likely to proceed cautiously, balancing rising price pressures against weakening growth. Higher living costs will further strain lower-income households and dampen consumer demand.

These risks come against a backdrop of high household debt. Elevated mortgage rates and housing supply shortages continue to constrain construction in Canada and the United States, keeping affordability out of reach for many families and limiting discretionary spending across the continent.

For practical guidance on managing export risk amid ongoing trade uncertainty, watch Export Development Canada’s webinar, Navigating trade volatility in 2026, which explores ways to protect cash flow, manage risk and reduce dependence on the U.S.

U.S. economic growth slowed sharply in the final quarter of 2025, partly reflecting the longest government shutdown on record. While the shutdown has ended, broader spillover effects from the Middle East conflict and ongoing policy uncertainty are expected to weigh on growth.

Affordability concerns remain pronounced. Slower hiring, moderate increases in unemployment and weak consumer confidence are curbing discretionary spending. Housing affordability remains a key pressure point as Americans contend with elevated mortgage rates, high home prices and rising rents, alongside soaring insurance and electricity costs.

The conflict in Iran has added to these pressures. The 30-year conventional mortgage rate jumped more than 30 basis points by late March as lenders priced in higher inflation risk. With borrowing costs rising further, some households are turning to credit cards to manage expenses (see Chart 1).

In our assessment, mortgage rates and housing prices are unlikely to return to pre-pandemic levels. Higher U.S. tariffs, countervailing duties and anti-dumping measures on Canadian lumber and wood products—now between 30% and 50%—have added thousands of dollars to U.S. home prices, further discouraging new construction. Labour shortages tied to tighter immigration policies are compounding the challenge.

Business investment remains uneven. Uncertainty surrounding trade policy and regulatory changes continues to dampen non-artificial intelligence (AI) business investment. Independent estimates point to nearly $35 billion in cancelled clean-energy projects in 2025, affecting about 38,000 jobs. In contrast, AI and data centre projects are accelerating, with major tech firms such as Amazon, Alphabet, Microsoft, Meta and Oracle committing US$600 billion to US$700 billion in new investment for 2026. 

Energy price volatility will likely keep the U.S. Federal Reserve cautious through much of 2026. With oil prices spiking and gasoline prices rising sharply after the conflict began—20% of global crude oil transits through the Strait of Hormuz—inflation risks remain elevated (see Chart 2). The Fed is expected to remain on hold for most of this year unless labour market conditions weaken materially or inflation pressures ease more decisively.

Real gross domestic product (GDP) growth is forecast to advance 2.3% in 2026, broadly in line with last year’s pace. However, risks remain tilted to the downside, reflecting geopolitical uncertainty from the conflict in the Middle East and the potential introduction of new sector-specific tariffs being contemplated by the U.S. administration.

For deeper insight into economic conditions, tariffs and policy risk in Canada’s largest export market, explore EDC’s U.S. market intelligence site, which offers analysis and resources to help exporters navigate ongoing uncertsssainty

Canada’s economy faced significant challenges in 2025 as U.S. and Chinese tariffs hit exporters hard and uncertainty restrained consumer spending. Despite these pressures, the economy proved resilient, with real GDP growing by 1.7% and avoiding a recession many had anticipated.

Momentum heading into 2026 has slowed as prolonged uncertainty and elevated borrowing and living costs weigh on businesses and households. Prices remain high, while rising mortgage rates—partly influenced by global energy shocks from the Middle East conflict—are compounding affordability challenges.

Canada’s labour market has softened, with job losses in tariff-exposed sectors outweighing gains elsewhere (see Chart 3). Weak employment growth, combined with high home prices, continues to suppress residential construction. With housing activity slowing, consumer spending is also expected to moderate.

Mexico’s economy is stabilizing after a weak 2025, but growth remains modest. Real GDP is forecast to expand 1.7% this year—an improvement, but well below the country’s economic potential.

Policy choices continue to constrain private investment. Greater state control over sectors such as energy, electricity, water management and critical minerals—reinforced by constitutional reforms—has weakened institutional checks and reduced investor confidence. Several previously announced foreign direct investment (FDI) projects have been cancelled or delayed.

While most of Mexican exports to the United States qualify for tariff-free treatment under CUSMA, tariffs on non-compliant goods are discouraging new investment. Honda’s decision to shift Civic Hybrid production from Mexico to Indiana highlights the impact of tariffs on autos, steel and aluminum—given the 15% tariff on all autos and parts and the 50% tariff on steel and aluminum entering the United States. With more than 80% of Mexico’s exports destined for the U.S., exposure remains high.

Business and consumer confidence remain weak (see Chart 4). Limited investment has kept job creation subdued, while ongoing U.S. immigration enforcement has reduced remittances, further constraining household incomes.

Rising energy prices have pushed inflation higher, prompting the Bank of Mexico to pause interest-rate cuts in the first half of this year. While easing is expected to resume later in 2026, weak labour conditions and elevated prices will continue to restrain consumer spending.

The peso is expected to weaken as risk aversion rises and interest-rate differentials narrow. After strengthening earlier this year, it’s forecast to fall MX$18.52 per U.S. dollar by year-end and average MX$18.97 in 2027.

EDC offers practical solutions to help Canadian businesses navigate uncertainty—from market intelligence to financing and risk management tools. Our experts provide guidance and connections to help exporters adapt, compete and grow in a complex global environment.

Here’s how we can support you:

• U.S. market intelligence: Access insights on the U.S. business environment.
• EDC’s Trade Impact Program (TIP): Launched in March 2025 as part of the Government of Canada’s $6.5-billion support package, TIP will facilitate an additional $5 billion until March 2027 for eligible companies.
• Export Help Hub: Connect with EDC trade advisors for market strategies, regulations and customs guidance.
• Business Connections Program: Promote your export capabilities to international buyers.
• Risk management tools: Explore financial solutions and resources, including the Country Risk Quarterly.

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