As we enter the latter half of the year, the Canadian economic outlook remains clouded as it slipped into a technical recession. Persistent domestic and U.S. headwinds continue to weigh on markets, while escalating geopolitical events, a significant increase in AI-related issuance and the potential for private credit risks to spill over have added a new layer of complexity to the forecast. Central banks are remaining data dependent, given the elevated level of uncertainty and will likely lean towards a more balanced policy stance in order to maintain flexibility.
Outlook
| MID-YEAR HIGHLIGHTS |
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Inflation remains a concern in both Canada and the U.S. as energy prices continue to remain elevated in May. This has driven annual Consumer Price Index (CPI) inflation up 0.4% in Canada to 2.8%.1 In the U.S., CPI inflation has increased by 0.4% to 4.2% in May,2 and Personal Consumption Expenditures price index (PCE) inflation has increased by 0.3% to 3.8% for April.3
Source: Bank of Canada and Bloomberg, April 2026. The chart shows the unadjusted percentage change in the CPI, compared to the same month one year earlier. The US PCE Index shows the YoY change in the core price index on a seasonally adjusted basis.
Risks with Easing Inflation and Shifting Demographics
The Bank of Canada maintained the policy rate at 2.25% during its June meeting, yet market anxiety over energy costs has led investors to price in a potential 25 bps hike by year’s end. Despite this, we believe there is greater tolerance for an inflation up-tick in Canada compared to the U.S., as domestic price pressures have proven less stubborn. Prior to the conflict in the Middle East, measures of headline and core inflation were trending either near, or below the inflation target. The federal government has also intervened to support consumers through measures such as the suspension of federal fuel excise taxes. The ultimate impact on inflation has yet to be seen, but for now, the Bank of Canada is prepared to look through the short-term impacts of higher energy prices. Looking at the labour market, the Canadian economy is navigating a structural shift toward productivity-led stability, as preliminary estimates suggest the government’s pivot on immigration policy resulted in a decrease in population growth of 0.2% between October 1, 2025, to January 1, 2026.4
The unemployment rate declined slightly to 6.6% in May, but the composition of job gains remains mixed for now.5 Mortgage renewal risk remains a significant hurdle for consumers and the economy. As of early 2026, over half of all Canadian mortgages are set to renew by the end of 2027, with many borrowers facing their first renewals since the low-rate environment of 2021.6
The Fed Delays Rate Cuts as Inflation and Geopolitics Cloud Outlook
South of the border, the U.S. Federal Reserve (Fed) also kept rates unchanged at its April meeting, similarly citing elevated uncertainty stemming from trade policy, the conflict in the Middle East, and the ultimate impacts on inflation. The Fed signalled that a more balanced stance would likely be warranted in the months ahead, given the unknowns on the horizon. Earlier in the year, market participants were optimistic about the prospects of further easing this year, supported by a change in leadership at the Fed, tariff related goods inflation beginning to roll off, and a labour market showing signs of gradual cooling. However, market participants are now expecting rates to remain unchanged for the balance of the year given elevated levels of uncertainty, combined with the backdrop of higher inflation. Prior to the conflict, inflation in the U.S. remained firmly above the 2% target on both headline and core measures.7
The labour market was gradually easing through 2025 as the pace of job creation slowed. However, it has rebounded in recent months, and the unemployment rate remains at 4.3% in the U.S.8 The Fed is prepared to look through the short-term impacts of higher energy prices for now, preferring to wait for greater clarity, given its view that the U.S. economy is strong enough to allow it some patience before acting.
Credit Markets Balance AI Growth Against Private Credit and Energy Risks
Canadian and U.S. corporate bond spreads have been volatile given the aforementioned geopolitical tensions and negative headlines in private credit.
The impact of the oil shock and its longer-term impact on the overall economy and on corporate earnings and balance sheets remains to be seen.
We continue to monitor risks in private credit and a potential spillover into the broader markets. In our view, the risks need to be differentiated between liquidity and default risks. Private credit funds that have redemption rights have suffered from liquidity risk where there is a mismatch between how quickly funds can be redeemed and how quickly the holdings within these funds can be monetized. These funds represent a very small amount of the overall credit market. What remains to be seen is the overall credit risk and potential for defaults and impairment within private credit. These markets tend to be more opaque, but we are monitoring public market proxies for signs of broader risks.
Impacts of funding the AI renaissance
AI-related debt issuance has been a major theme as technology companies incur significant debt to fund their highly capital-intensive investments. Thus far, the bond market has absorbed this significant increase in AI-related debt issuance. However, we will monitor for signs of investor fatigue and whether some companies are able to generate a return on investment to sustain their balance sheets.
We expect the bifurcation between higher-quality and weaker issuers to continue. While corporate earnings remain generally resilient, weaker issuers could face increased headwinds from continued tariff pressure, increased energy prices and tighter access to capital. This environment underscores the continued importance of credit selection.
Download the full Empire Life 2026 Semi-Annual Market Outlook (PDF).
1 StatCan, Consumer Price Index, March 2026
2 U.S. Bureau of Labor Statistics, June 10, 2026
3 Bureau of Economic Analysis, Personal Consumption Expenditures Price Index, April 2026
4 StatCan, “Canada’s population estimates, fourth quarter 2025”, June 5, 2026
5 StatCan, “Labour Statistics”
6 Office of the Superintendent of Financial Institutions, “OSFI’s Annual Risk Outlook-Fiscal Year 2026-2027”
7 Bureau of Economic Analysis, “Personal Consumption Expenditures Price Index”
8 US Bureau of Labor Statistics, “The Employment Situation-May 2026”
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July 2026
