1Q26_ Quarterly Outlook Report_Final_EN - Flipbook - Page 56
T H E P LUMB LI N E | A RETU RN TO F I RS T PRI N CI PL ES
Unit labour cost revisions
135
Index value
130
125
120
115
110
105
2021
2022
2023
2024
Canada unit labour costs
2025
Pre-revision
Source: Statistics Canada, Scotiabank Economics
The culmination of this data suggests that there is less economic slack than the BoC previously
thought. According to estimates from Scotiabank Economics, the output gap as at 2Q25 was 0.8% instead of the -1.1% that was estimated in the BoC’s October Monetary Policy Report. The
output gap was trimmed further to -0.6% in 3Q25 due to the productivity lift seen in that quarter.
Economic account revisions point to less economic slack than previously thought
3%
2%
1%
0%
-1%
-2%
1Q22
3Q22
1Q23
3Q23
Pre-revision
1Q24
3Q24
Canada's output gap
1Q25
3Q25
1Q26
3Q26
Forecast period
Source: Statistics Canada, Scotiabank Economics
In sum, we believe Canada’s economy is entering a period of slower but still positive growth, with
recent upside surprises masking underlying softness in private demand. The composition of
growth remains a concern, as final domestic demand has cooled, business investment remains
weak, and population dynamics are turning from a tailwind into a headwind. With monetary
policy likely on hold and limited scope for further easing, the outlook increasingly hinges on how
effective fiscal policy proves at catalyzing private-sector investment and productivity gains, as
well as on the resolution of external uncertainties, particularly around trade. In the event that
trade concerns are resolved, supportive fiscal policy may align with the release of pent-up
household and business demand, as well as the delayed economic dividend from past
immigration flows, culminating in a better outlook over the medium term. However, until there is
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