The minority government is taking pragmatic action to address trade and security threats. The 2026 budget includes increased spending on infrastructure, defense, housing and AI, with a slight increase in the fiscal deficit (new spending over the next five years represents 0.5% of cumulative GDP) that would bring federal debt to just over 40% of GDP. The level of capital investment is four times higher than in the 2011-2019 period. Although Canadian policymakers and lenders have supported liquidity through rate stabilization, many firms carry thin cash buffers and face refinancing risk as debt maturities cluster. Corporate and household credit stress has emerged as a notable financing risk. Business insolvencies climbed +29% in 2024, reaching the highest levels in over a decade and mostly concentrated in the construction, transportation and services sectors. Corporate defaults moderated in 2025 (-22%) and their frequency is likely to reduce in 2026-2027 as well, by almost -10% per year, though the overall level will stay about +25% higher than the pre-pandemic average. Consumer insolvencies have followed a similar trend as household leverage remains elevated: The Canadian household debt-to-income ratio widened to around 175% in late 2025, reflecting sustained high borrowing relative to incomes, which could raise sensitivity to interest rate shifts. Although the Bank of Canada’s pause on rate moves through most of 2026 reduces service-cost risk, refinancing stress persists for borrowers rolling higher-rate mortgages. Credit conditions could tighten further if growth disappoints or external pressures re-intensify, amplifying default and restructuring risks across sectors.

Canada’s structural environment remains fundamentally solid, supported by transparent institutions, competitive tax treatment for investment and relatively low corporate tax rates. However, medium-term structural constraints persist. Productivity growth lags peers, limiting potential output and dampening long-run competitiveness. Firms face challenges in scaling productivity-enhancing technologies and addressing sectoral mismatches in skills and capital allocation. Trade uncertainty – especially regarding US tariff reviews under USMCA – continues to cloud supply chain integration and long-term investment planning, even as policy frameworks strive to maintain market access and attract diversification of export partners. Structural labor market issues, including skills shortages in key industries and relatively high youth unemployment, impede workforce flexibility. Regulatory and policy complexity around areas like housing affordability, the energy transition and environmental standards pose additional planning risks for businesses adapting to evolving domestic and international norms. Ongoing efforts to deepen investment incentives, foster innovation clusters and streamline regulatory processes could strengthen structural resilience, but progress is uneven and slow relative to competitiveness challenges.

Canada’s political system remains stable as a mature democracy, though domestic politics will influence economic policy direction. Recent federal electoral cycles and party leadership shifts have spurred debates over taxation, immigration and carbon pricing, which may affect investor confidence and fiscal priorities. Policy orientation toward fiscal restraint versus targeted support could oscillate with electoral outcomes, creating planning uncertainty for business and households. Trade policy remains a central political risk: potential US tariff-related negotiations and USMCA review outcomes could recalibrate Canada’s external economic integration, with political ramifications for export-dependent regions. Provincial-federal tensions over revenue sharing, housing policy and energy development also contribute to a layered policy landscape. Geopolitical volatility, including evolving US trade policy and broader fragmentation, may expose Canada to external shocks that require diplomatic and policy agility. Overall, political stability is intact, but the direction and pace of reforms, particularly in fiscal policy and trade diversification, will significantly influence medium-term risk profiles.