Canada’s Economic Shift Brings Major Opportunities for Waterloo

That was the headline message of a Waterloo roundtable hosted by EDC last week: “Economic Outlook 2026: Navigating Uncertainty and Building What’s Next,” featuring BDC’s Vice President of Research and Chief Economist, Pierre Cléroux?

In particular, Cléroux noted that Ontario is showing resilience amid volatility, positioning the province as a place where business leaders can find economic opportunity.

“At the end of last year, we were a bit surprised to have growth over 1%,” said Cléroux. “So, what should we expect for 2026?”

We’ve summarized the main points of Cléroux’s discussion that tackle that key question and highlight Waterloo’s unique opportunity.

Three variables will impact the year ahead

1. The free trade renegotiation

The Canada-US-Mexico Agreement (CUSMA) is up for renegotiation this year. For Canada, this agreement facilitates access to markets in the US and Mexico. Negotiations in 2026 will either reduce or entrench the tariffs shaping business investment and export activity in North America, making it one of the key factors to watch. Cautiously optimistic, Cléroux says that he believes a deal will be achieved. “I believe, as an economist, that we will have a deal,” said Cléroux. “[Canada] is also very important to the US. We buy $450 billion of products every year [from the US].”

2. Oil prices

In response to the escalating war in Iran, global oil prices have skyrocketed. Cléroux maintains that higher prices benefit the overall national economy, particularly federal and provincial revenues, because Canada produces more oil than it consumes. In the short term, the impact on Canadian consumers and businesses is manageable.

3. Interest rates

The Bank of Canada’s interest rate sits at 2.25%, with inflation at 2.4% as of March. Cléroux says there is little reason to expect further cuts or hikes. The stability is good news for businesses carrying debt and for consumers whose spending is critical to national growth.

Three structural shifts will reshape the economy over the next five years

1. A shifting world order

As Prime Minister Mark Carney’s speech at the World Economic Forum in Davos underscored, there is a rupture in the world order. The US is moving away from aspects of free trade, intergovernmental organizations and international treaties are being increasingly challenged, and countries are prioritizing national autonomy. Canada needs to continue diversifying its trade partners, and strengthening supply chains, while creating demand in new sectors and markets. Recent trade deals across Asia and Europe suggest this remains a priority for the Canadian government.

2. A tightening labour market

The working-age population is set to decline in Canada over the next five years due to aging populations and new immigration policies, which means the pool of available workers will shrink. Cities with a growing presence of young people and established post-secondary institutions are best positioned to retain a strong workforce.

3. Adoption of artificial intelligence

More than 80% of mid-sized firms in Canada are investing in AI, and 97% of those businesses are already seeing the benefits. It’s no secret that AI is reshaping the way every sector competes in the global economy. Adopting AI can increase productivity, streamline operations and forecast more accurately. “Everyone can benefit from AI,” shares Cléroux, “but you have to invest.”

Waterloo is well-positioned for this economic future

As Cléroux explained, these structural shifts, while daunting, can be opportunities. Few places in the country are better set up to take advantage than the Waterloo region. Here’s why:

• Defence spending

Canada is on track to significantly boost its annual defence spending to approximately $60B, and the federal government is actively working to build a domestic supply chain. Historically, Ontario takes the lion’s share of Canadian defence investment—in 2022, 45% landed in Ontario, Cléroux reports. With Waterloo’s expansive advanced manufacturing sector and burgeoning dual-use industry, our community is well-positioned to attract a significant portion of this new investment.

• A $670B infrastructure pipeline

Beyond defence, a massive wave of public and private capital projects is set to flow through the Canadian economy over the next five to 10 years. Major projects will add $670B in new spending across the country.

Construction and mining will benefit significantly, and manufacturing output in key subsectors, like machinery, steel products and advanced components, is expected to grow significantly. For Waterloo’s industrial base, that’s a long runway of demand.

Plus, Prime Minister Carney recently announced Canada’s first sovereign wealth fund to support nation-building projects across the country, with an initial budget of $25B. “The new Canada Strong Fund will give all Canadians a direct stake in building Canada strong,” he said, demonstrating how the federal government is committed to boosting Canada’s economic potential in 2026 and the years to come.

• Talent availability

The labour market will tighten across Canada, but the Waterloo region is better insulated than most. Our post-secondary institutions (the University of Waterloo, Wilfrid Laurier University and Conestoga College) produce a consistent stream of engineering, tech and skilled trades graduates. According to CBRE, Waterloo’s population of young people in their 20s and 30s is growing faster than any other market in North America. Companies here also have a strong track record of pairing human talent with automation and robotics, which is precisely the productivity model Canadian businesses will need to adopt.

• Investments in AI

One of the best places to invest in AI is right here in the Waterloo area. Our region is home to one of the world’s leading AI research ecosystems. Our depth of expertise, and the pipeline of AI talent it produces, gives Waterloo-based businesses an advantage when it comes to adopting and integrating tools that will define the decade of productivity, efficiency and growth.

What’s next?

Ultimately, Cléroux painted a modest, but optimistic economic outlook for Canada in 2026. The businesses that come out ahead at the end of the year will be those that invest in automation and tech, diversify their market exposure and focus on sectors—defence, construction, manufacturing and AI—where government spending is set to accelerate.

This is good news for the Waterloo community. Our combination of advanced manufacturing, AI expertise and globally minded talent makes it one of the strongest places in Canada to navigate these evolving economic conditions and come out ahead.