Canada's economic outlook improves despite tariff and fuel risks

Fitch Ratings anticipates an improvement in Canada's economic outlook following a soft start to the year. Although the economy entered a technical recession in 1Q26 due to weak investment and increased imports, recent data suggest the downturn may be temporary. Consumer spending rose by 0.3% quarter-on-quarter in 1Q26, primarily driven by food and financial services, though spending on new vehicles declined.

Despite the brightening outlook, several risks persist. Trade uncertainty remains a significant factor as CUSMA/USMCA is subject to annual reviews, and recently announced Section 338 tariffs of 50% on certain Canadian goods could complicate negotiations. Additionally, elevated fuel prices pose risks to both consumers and supply chains.

Fitch has issued a deteriorating outlook for Canadian credit card and auto loan asset-backed securities (ABS). This reflects soft growth, high household debt, and trade uncertainty. While credit card ABS performance improved in 2Q26, delinquencies and charge-offs are expected to rise modestly in 3Q. Auto loan delinquencies continue to increase in line with pre-pandemic levels, driven by vehicle affordability pressures.