Canada’s Outlook Brightens Despite Tariffs, Fuel Price Risks
Fitch Ratings expects Canada’s economic outlook to improve after a soft start to the year, although risks from U.S. tariffs and higher fuel prices persist.
The economy entered a technical recession in 1Q26, driven by weaker investment and a surge in imports; however, more timely data suggest the downturn will not persist.
Consumer spending was a relative bright spot in 1Q26, rising 0.3% quarter-on-quarter, led by food and financial services, while spending on new vehicles fell. Consumers prioritise essentials over discretionary items, a trend Fitch expects to continue while fuel prices stay elevated.
Fitch noted that a soft labour market forced consumers to draw down savings and lean more on credit cards, although a rebound in employment and wages in 2Q26 points to a labour market slowly on the mend.
Trade uncertainty remains a risk. CUSMA/USMCA protects most Canadian exports to the U.S., but the agreement is now subject to annual reviews.
Recently announced Section 338 tariffs of 50% on certain Canadian goods add to the tariff burden and could complicate future negotiations.
Elevated fuel prices pose a further risk, both directly through pump prices and indirectly through supply chains. However, second-round effects that would warrant Bank of Canada rate hikes have not emerged.
Fitch maintains a deteriorating outlook for Canadian credit card and auto loan asset-backed securities (ABS), reflecting soft growth, elevated household debt and trade uncertainty.
Credit Card ABS performance improved in 2Q26 but is expected to remain pressured in 3Q, with delinquencies and charge-offs likely to rise modestly.
Auto loan ABS delinquencies continued to gradually increase, remaining in line with pre-pandemic levels as vehicle affordability pressures borrowers.
Fitch said delinquencies in the broader market have shown early signs of stabilisation, although rising consumer insolvencies, still above pre-pandemic levels, remain a key downside risk. Oil Prices Slide Below $85 as Supply Risk Eases
