Bank of Canada Survey Finds 96% See Economy Running Below Capacity

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Canada’s economy may be growing again, but a near-unanimous group of financial-market professionals believes it is still producing considerably less than it could. In the Bank of Canada’s latest assessment, 96% of respondents said gross domestic product remains below its potential level—a sign of unused workers, equipment and productive capacity.

The finding captures an economy caught between recovery and restraint. Consumer spending has shown resilience, exports are improving and inflation has begun easing from its recent energy-driven spike. Yet hiring remains cautious, housing activity is soft and uncertainty surrounding U.S. trade policy continues to discourage investment. The result is not necessarily a recession, but an economy struggling to build enough momentum to close the gap between its actual performance and its sustainable potential.

The 96% Figure Requires Some Important Context

The headline number came from the Bank of Canada’s second-quarter Market Participants Survey, conducted from June 11 to 18, 2026. Approximately 26 financial-market participants responded to the broader questionnaire, while 25 answered the question about Canada’s output gap. Of that group, 96% said current GDP was below potential output, 4% believed the economy was operating at potential and no respondents saw GDP running above capacity.

This does not mean 96% of Canadians believe the economy is weak. It reflects the views of a relatively small, specialized group that follows economic data, monetary policy, bonds and financial markets professionally. Their agreement is still notable because the output gap is notoriously difficult to measure. Potential output cannot be observed directly; economists estimate it using labour availability, investment, productivity, machinery and other indicators. In practical terms, a negative gap might resemble a factory with unused production lines, a retailer carrying more inventory than expected or a professional-services company capable of accepting additional clients without hiring more employees.

Growth Expectations Have Been Marked Down

The median participant expects Canadian GDP to be 1.3% higher at the end of 2026 than it was a year earlier. That is lower than the 1.6% median prediction recorded in the first quarter. The outlook for the end of 2027 remained stronger at 1.9%, suggesting that most participants still expect an eventual recovery rather than a prolonged contraction. Almost half of the average probability assigned to the 2026 outcome was concentrated in the 1.01% to 2% growth range, while only 8.5% was assigned to outright negative year-over-year growth.

Those numbers use a different calculation from the Bank of Canada’s annual forecast, which calls for the economy to grow only 0.7% during 2026 before expanding 1.8% in both 2027 and 2028. The Bank nevertheless estimated that second-quarter growth reached an annualized 2.5% after economic activity was essentially flat during the first quarter. That apparent contradiction reflects timing: an economy can accelerate during one quarter but still record weak growth for the full year after starting from a low base. It is recovery, but not yet the kind of sustained expansion required to quickly absorb unused capacity.

Trade Tensions Dominate Both Sides of the Outlook

Trade policy has become the clearest dividing line between a stronger Canadian recovery and another period of stagnation. When participants were asked to identify the biggest risks to their forecasts, 96% selected an increase in trade tensions as a leading downside threat. Tightening global financial conditions ranked second at 65%, while 42% pointed to worsening geopolitical risks. The concentration around trade shows how closely the domestic outlook remains tied to decisions made outside Canada.

The reverse was equally revealing. An easing of trade tensions was selected by 92% of respondents as a potential source of stronger growth, making it the most widely identified upside risk. Larger-than-expected government stimulus was chosen by 58%, while stronger consumer spending and a stronger housing market were each selected by 31%. For a Canadian manufacturer, the difference between those scenarios can be immediate. A clearer trading environment may unlock a postponed equipment order or hiring plan. Another tariff threat can produce the opposite reaction, prompting companies to conserve cash, delay expansion and wait for customers to clarify their own purchasing plans.

Below Capacity Does Not Automatically Mean Recession

A negative output gap is not the same thing as a recession. It means the economy is producing less than its estimated sustainable potential. GDP can continue rising while remaining below that level, particularly when population, technology, available workers and productive assets allow the economy to expand faster than current demand requires. A recession, by the definition used in the Bank’s questionnaire, involves two consecutive quarters of negative real GDP growth.

Participants placed the median probability of a recession at 25% during the next six months and another 25% during the six-to-12-month period. The median probability fell to 20% for both the 12-to-18-month and 18-to-24-month windows. Those figures represent meaningful risk, but not a recession as the central expectation. Recent data reinforce that distinction. First-quarter GDP was flat rather than deeply negative, and the Bank believes growth resumed during the second quarter. Canada therefore appears closer to a slow, uneven expansion than a conventional downturn—an environment in which some businesses remain busy while others experience weak orders, cautious customers and more competition for every sale.

The Labour Market Is Showing Signs of Slack

Canada’s unemployment rate declined slightly to 6.5% in June, while employment increased by 18,000 positions, or 0.1%. The improvement was welcome, but the unemployment rate remained above the 6% average recorded between 2017 and 2019. The Bank of Canada has also described labour-market conditions as soft, noting that unemployment has generally remained between 6.5% and 7% since the end of 2024.

Business-level evidence points in the same direction. Only 16% of firms in the Bank’s second-quarter Business Outlook Survey reported labour shortages, down from 21% during the first quarter. Employment intentions also weakened to below their historical average, particularly outside the Prairies. For job seekers, this type of slack may appear as longer application processes, fewer competing offers or employers leaving positions vacant after someone departs. For businesses, it can mean less pressure to raise wages aggressively or recruit workers away from competitors. The economy is not experiencing mass job destruction, but it is also not generating the widespread labour scarcity typically associated with an economy operating at or above capacity.

Inflation Is Preventing an Easy Policy Response

Economic slack would normally give a central bank room to lower interest rates. Weaker demand tends to reduce wage pressure, limit businesses’ ability to raise prices and slow inflation. Canada’s current situation is more complicated because energy costs, international conflict and trade-related expenses can raise prices even while the domestic economy remains weak. This creates an uncomfortable mix in which households and businesses face higher costs without receiving the benefits of strong economic growth.

Market participants expect headline inflation to end 2026 at a median rate of 2.6%, easing to 2.1% by the end of 2027 and 2% five years from now. They assigned an average probability of nearly 52% to inflation finishing 2026 between 2.01% and 3%. Statistics Canada reported that inflation slowed to 2.8% in June from 3.2% in May as gasoline prices increased less sharply. Excluding gasoline, inflation was 2.2%. These numbers suggest underlying price pressures are more contained than the headline rate implies, but inflation remains high enough to make immediate and aggressive interest-rate cuts difficult to justify.

Financial Markets Expect Rates to Remain Unchanged This Year

The median forecast among participants keeps the Bank of Canada’s policy interest rate at 2.25% through every remaining decision in 2026. The expected rate rises to 2.5% in March 2027 and reaches 2.75% by the third quarter of that year. There is far from complete agreement about the direction of the next surprise: 40% said risks were tilted toward a higher rate path, 28% saw greater risk of lower rates and 32% considered the risks broadly balanced.

The Bank held its overnight rate at 2.25% on July 15, describing that level as appropriate for supporting the recovery while gradually returning inflation to the 2% target. Its next scheduled decision is September 2. For households, an extended pause could bring more predictability without necessarily delivering immediate relief. Variable-rate borrowers would see little change, while fixed mortgage rates would continue responding to bond markets rather than moving automatically with the overnight rate. Businesses would face a similar situation: financing conditions would be less restrictive than at the peak of the previous tightening cycle, but borrowing would not become dramatically cheaper unless inflation, growth or trade conditions shifted substantially.

A Recovery Is Possible, but It Remains Vulnerable

Financial-market participants are not forecasting economic collapse. Their median projections call for positive growth, inflation moving back toward target and interest rates remaining stable through the end of 2026. They also expect the Canadian dollar to be worth approximately US$0.73 at year-end, West Texas Intermediate oil to average about US$80 per barrel and the 10-year Government of Canada bond yield to sit near 3.5%. These forecasts describe an economy moving forward slowly rather than falling rapidly backward.

There are already signs of resilience. Retail sales increased 1% to $73.7 billion in May, although the gain was a more modest 0.3% after accounting for price changes. Exports of goods and services increased 0.9% during the month, and the Bank has said consumer spending remains solid while export growth has resumed. The difficulty is turning those improvements into sustained momentum. Closing the output gap will require more than one strong quarter. It will depend on trade stability, continued consumer demand, productive business investment and enough confidence for employers to begin hiring more decisively. Until then, the economy may continue growing while still feeling weak to many Canadians.

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