Ottawa (Rajeev Sharma): Canada’s economy is effectively “on life support” and facing a clear recession risk in 2026, according to economist David Rosenberg, who says the Bank of Canada (BoC) will be forced to cut interest rates further to prevent a deeper slowdown.
In a new report titled Canadian Economy on Life Support, Rosenberg Research warns that despite aggressive monetary easing since 2024, economic momentum remains weak. The Bank of Canada has slashed rates by 275 basis points from a peak of five per cent, yet per capita GDP continues to decline and overall economic growth is stuck at around one per cent annually.
“Unless the policy lags are just a lot longer this time around, this is what 275 basis points of Bank of Canada rate cuts delivers — a grand total of a one per cent growth economy,” Rosenberg, founder and chief economist of Rosenberg Research, told BNN Bloomberg. “The next question is, is that all you get?”
The report projects that Canada’s economy will contract in the fourth quarter, shrinking at an annualised rate of 0.5 per cent quarter-over-quarter — weaker than the Bank of Canada’s own forecast of flat growth. With the economy having contracted in two of the last three quarters, Rosenberg Research says Canada is officially on “recession watch” for 2026.
Housing and manufacturing under pressure
Key sectors remain under strain. Home prices are down two per cent year-on-year, while residential construction spending has stagnated despite lower borrowing costs. Manufacturing output, which is heavily dependent on trade with the United States, has fallen by five per cent.
“Residential construction expenditures are flat as a beaver tail,” Rosenberg said, pushing back against expectations that rate cuts would reignite housing demand. He noted that nationwide home prices have been flat or declining sequentially for ten consecutive months.
Even with a competitive exchange rate and strong U.S. economic growth, manufacturing has failed to rebound. “When you adjust for inflation, there’s practically no growth there either,” Rosenberg said.
Inflation no longer the main concern
Rosenberg argued that inflation is no longer a pressing issue for policymakers. According to him, most underlying inflation measures are now well within the Bank of Canada’s target range, and the central bank itself expects a disinflationary output gap to persist until the end of 2027.
“Inflation in this country is not really an issue,” he said, adding that weak demand is now the dominant challenge.
As a result, Rosenberg believes the Bank of Canada will be compelled to ease policy further from its current benchmark rate of 2.25 per cent. He also warned that additional rate cuts could put renewed downward pressure on the Canadian dollar.
Canadian dollar faces headwinds
Despite recent weakness, Rosenberg said the loonie may still not be cheap enough. He urged Canadians to compare their currency with those of Australia and New Zealand — economies with similar commodity exposure.
Over the past two months, the Canadian dollar has fallen more than four per cent against those currencies, a sign, Rosenberg said, that stronger internal demand and higher interest rates elsewhere are attracting capital.
“If you want to be bullish on the Canadian dollar, you need to see real positive thrust in the sectors most sensitive to the currency,” he said. “It’s just not happening.”
Rosenberg concluded that stagnation in credit-sensitive sectors such as housing, construction and retail trade suggests monetary policy has not gone far enough. “As much as the BoC has done, they haven’t done enough just yet,” he said.
