1Q26_ Quarterly Outlook Report_Final_EN - Flipbook - Page 7
T H E P LUMB LI N E | A RETU RN TO F I RS T PRI N CI PL ES
The U.S.'s narrowing growth advantage
annual GDP growth
3%
2%
1%
0%
-1%
2024 actual
U.S.
Canada
2025 estimate
U.K.
Germany
2026 forecast
France
Italy
Japan
2027 forecast
G6 average
Source: National statistics agencies, Scotiabank Economics, Scotia Wealth Management. * All forecasts from Scotiabank Economics, except Italy's (Bloomberg
survey median).
Markets have long rewarded U.S. positions because of stronger growth dynamics in relation to
other advanced economies. It is difficult for us to conceive that Europe or Japan will outperform
the United States economically in years to come. However, it may well be that U.S. growth
exceptionalism diminishes as the impact of U.S. policy developments weigh on the domestic
economy. The U.S. economy is dealing with a large negative supply shock because of higher tariffs
and diminished labour availability given changes in immigration policy. It is hoped that a lighter
regulatory burden, a reduction in corporate tax rates, and the AI boom will lead to a surge in
investment and productivity that would offset the impact of the tariff and immigration policies.
It is not clear these positive impacts will materialize, while the damaging impacts of the policies
are clear and mounting at the moment. We expect that this will lead to a reduction in the U.S.
growth advantage over other advanced economies through 2027 at least, and it is not clear to us
that markets have fully internalized a narrowing of growth differentials between the United States
and other economies.
The Canadian and global outlook is of course affected by developments in the U.S. and the risks
to that economy. Our forecast assumes that Canadian economic growth slows modestly in 2026
relative to 2025, as growth would go from 1.7% last year to 1.5% in 2026. This relative stability in
growth results from more effective policy support in Canada relative to the U.S. as the damaging
impacts of tariffs and related uncertainty continue to be felt. It is clear to us that Canadian
governments are deploying a set of policy tools designed to strengthen the outlook over the
medium term and focusing on raising investment as the country adapts to a new trading
relationship with the U.S. We expect non-residential investment to rise starting in early 2026,
coming off muted momentum in late-2025, and strengthen more robustly in 2027 given the
nature of infrastructure projects. There are, however, clear risks of under-execution on these
projects and, consequently, on private-sector investment.
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