ecent data suggest that Canada’s economy is slowly regaining its footing — and this, in turn, is influencing the path of the Canadian dollar. Here’s a breakdown of where things stand and where markets (and everyday Canadians) might be headed.
A Mixed but Stabilizing GDP Picture
After a sharp drop in the second quarter of 2025 — when GDP fell by an annualized 1.6% as exports and trade were hit hard.
The outlook for Q3 2025, however, is more encouraging. According to a recent analysis by RBC, the economy is expected to post 0.5% annualized growth in Q3, helped by a rebound in trade, improving manufacturing and wholesale activity, a pickup in residential investment, and continued consumer spending.
Some estimates put Q3 growth closer to 0.3–0.4%, after a minor bounce in September.
In short: while the drag from tariffs and export disruptions remains real, domestic demand — especially from households — has shown resilience. For many Canadians, this means the economy may have dodged a technical recession for now.
Longer-term forecasts remain cautiously optimistic: growth is expected to gradually recover through 2026 and 2027, as business investment improves, exports stabilize, and households resume more normal spending patterns.
What This Means for the Canadian Dollar (CAD / “Loonie”)
The CAD — always sensitive to economic growth, interest-rate expectations, and trade flows — is reacting to the improved growth outlook and shifting investor sentiment.
- As of recent weeks, the loonie has seen some strengthening. Markets increasingly believe that the easing cycle of the Bank of Canada (BoC) may be nearing its end — a signal that tends to support the currency.
- Commodity prices and resource demand remain important tailwinds for Canada’s resource-heavy economy. As global demand — particularly in energy and raw materials — firms up, it tends to boost CAD, thanks to stronger export revenues.
- That said, economists remain cautious: some recent forecasts see USD/CAD ending 2025 in the $1.39–$1.40 range. That suggests a moderately weak loonie relative to mid-2020s ranges, but not a dramatic collapse.
- In short: the loonie may see modest appreciation if growth and export conditions keep improving — but volatility remains likely as global trade and commodity prices shift.
What’s Driving the Outlook
A few key dynamics are shaping the GDP and CAD outlook:
- Trade recovery & export stabilization — After a slump caused by trade disruptions, exports are gradually recovering. This is essential given Canada’s reliance on international trade.
- Domestic resilience — Despite softer investment, consumer spending and housing-related activity have held up reasonably well. That domestic base may cushion further shocks.
- Interest-rate expectations — With inflation relatively under control (per recent BoC data), markets are pricing in fewer rate cuts than before. A stable or rising yield differential relative to the U.S. helps support the loonie.
- Commodity & global demand environment — As global economies navigate slower growth but still demand energy, metals, and resources, Canada’s exports remain under a supportive backdrop — which helps keep CAD viable.
What It Means for Canadians
- For savers & travellers — A moderately firmer loonie could stabilize import prices, travel costs to the U.S., and the price of foreign-denominated goods.
- For exporters and resource firms — A recovering CAD combined with improving export conditions may help profitability, especially if global commodity cycles strengthen.
- For households with mortgages or debt — The fact that growth is stabilizing and monetary policy is likely to remain cautious suggests borrowing conditions might remain steady — but inflation, export-driven shocks, or commodity swings could still bite.
- For investors — A diversified portfolio that balances exposure to Canadian equities (especially resources), foreign investments, and currency-sensitive assets may help smooth out volatility while capturing growth upside.
The Bottom Line
Canada’s economy appears to be slowly but cautiously emerging from a rocky period. Modest GDP growth, improving trade and resilient domestic demand have bolstered hopes that the worst may be behind us. For the Canadian dollar, the path forward is a delicate balance: gains are possible if growth and export conditions improve, but the loonie will likely remain sensitive to global commodity cycles, trade tensions, and interest-rate differentials.
In short: the Canadian economic outlook — and by extension, the loonie — is a story of recovery in progress, not dramatic rebound. For Canadians and investors alike, that means preparation, patience, and a watchful eye on how global factors evolve.
