The Canadian economy faced a number of headwinds in 2025, mainly a trade war with the United States that had the potential to bring about a recession.

Fortunately, a technical recession never materialized, though Canada’s

gross domestic product is losing steam to finish off the year. The l abour market has held up, but unemployment remains elevated at 6.5 per cent. The economy has so far proven resilient, but new risks are arising that could threaten economic growth next year.

For example, trade uncertainty will continue into 2026, with the

Canada-United States-Mexico-Agreement (CUSMA) set to be reviewed by all three countries in July. The uncertainty over how this will play out will continue to weigh on business investment in the Canadian economy.

There are also growing concerns over the volatility of the artificial intelligence (AI) sector, which could have ramifications for the stock market , and possibly a weakening job market. Here is a deeper look at the top three risks facing the Canadian economy next year.

CUSMA review

One of the top risks is the upcoming review of CUSMA. U.S. Trade Representative Jamieson Greer has floated the idea of doing away with the three-country trade pact and exploring separate bilateral deals with Mexico and Canada.

However, most U.S. industry groups told public hearings in Washington, D.C., earlier in December that they would like to see the trade pact preserved.

CUSMA is set to expire in 2036, but is subject to a review every six years, with a provision that allows any member to withdraw from the pact with six months’ notice.

“The way it is drafted now, these review provisions are designed to give every bit of leverage to the U.S.,” Lawrence Herman, an international trade lawyer and senior fellow at the C.D. Howe Institute, said. “There is no way the Americans are going to agree to CUSMA continuing into 2036, even with some improvements. The Trump administration has no use for broad-scope trade agreements like CUSMA.”

Greer has signalled he has two targets in the upcoming review: Canada’s dairy supply management system and the Online Streaming Act, which regulates U.S. tech giants.

Canadian exporters to the U.S. currently have a carve-out in place thanks to CUSMA, with nearly 90 per cent of the country’s exports entering the U.S. market tariff-free since they are compliant with the trade pact, making them exempt from the U.S. blanket tariff of 35 per cent.

The Bank of Canada , in its October forecast, said the average U.S. tariff on Canadian goods is 5.9 per cent.

The risk is that if CUSMA negotiations go sour or the trade pact is abandoned, Canadian exporters could lose their exemption status.

In recent deliberations by the Bank of Canada’s governing council, the CUSMA review was labelled a “significant risk” to the Canadian economic outlook.

Policymakers discussed both a worst-case scenario involving the dissolution of CUSMA and higher tariffs as well as a scenario where CUSMA negotiations are resolved and provide some stability for North American trade policy.

No matter what the result, the uncertainty about CUSMA will continue to be a drag on business investment in Canada in 2026 until the negotiations are finished.

The AI bubble

One major question going into 2026 is whether an AI bubble in the stock market will prove to be a threat to global financial market stability.

Mark Zandi, chief economist at Moody’s Analytics, said there is a lot to be optimistic about when it comes to AI’s impact on the broader U.S. economy, but he remains concerned about the level of debt taken on by big tech companies.

“There are the massive (over)investments being made in data centres and other AI infrastructure,” he said in a post on X in early December. “There is the seemingly incestuous financial relationships between the big AI companies. And then there is the substantial increase in leverage at these companies.”

Zandi said bond issuance for the 10 largest AI companies will record US$120 billion this year, which dwarfs the amount of borrowing that was done during the dot-com bubble.

“If they do fall short of investors’ expectations and their stock prices suffer, their debts could quickly become a problem,” he said in a post on X on Dec. 7. “Borrowing by AI companies should be on the radar screen as a mounting potential threat to the financial system and broader economy.”

The Bank of Canada also outlined this problem in its last monetary policy report. As the U.S. economy has become heavily dependent on demand and investment in AI, policymakers warned that a significant reassessment of the potential of those investments could mean a sharp correction in the stock market.

“A correction could hurt consumer confidence in the United States and in many other countries, including in Canada,” the report said. “This, in turn, could lead to a widespread economic downturn.”

There is no market turmoil yet, but there are signs that some of the overly optimistic AI trade is unwinding.

Shares for Oracle Corp. were trading at US$197.99 as of Dec. 29, down from a high of US$328.33 in September, amid lower quarterly earnings than expected due to significant spending on data centres.

A worsening job market

Canada’s job market was resilient in 2025 despite all the tariff uncertainty, with the jobless rate falling from its peak of 7.1 per cent in September to 6.5 per cent in November. The country added 181,000 jobs during that time period.

However, economists say there is reason to be skeptical about the headline unemployment rate and there are signs of an increasingly weak job market.

They say the R8 unemployment rate, which is Statistics Canada’s broadest measure of

labour underutilization and includes discouraged workers, those waiting for recall/new jobs and involuntary part-timers, continues to hover near nine per cent. This is the highest it’s been since September 2008, which was during the height of the global financial crisis. 

The Bank of Canada has said the job market in trade-sensitive sectors remains weak and economy-wide hiring intentions continue to be subdued.

“Just in general, the trade situation is a looming risk for the Canadian economy, and that definitely filters into the labour market,” Brendon Bernard, a senior economist at Indeed Canada, said. “The risks are more of a drag on growth in the longer term.”

He said the trade impact on the labour market could be less of an acute shock currently, but something that creeps into it over time.

Job vacancies have continued to decline and the rate at which workers are switching jobs has also slowed in recent years. The introduction of AI is also having an impact on job growth, particularly for entry-level positions, which will be something to watch in 2026.

“We are in a potentially new technological era where these higher-paying entry-level positions are the most vulnerable to AI automation,” Bernard said. “We have seen the share of folks in their 20s working in those jobs slip a little bit in the past year.”

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