Canada’s economy is facing a fresh layer of uncertainty as a new war in the Middle East sends commodity prices sharply higher, creating both opportunities and risks for the country, according to a new Farm Credit Canada analysis.
Written by FCC principal economist Krishen Rangasamy, the analysis says the broader backdrop remains weak. Canada’s economy grew just 1.7% in 2025, its poorest performance since the pandemic recession of 2020, as exports fell for the first time in five years under pressure from the ongoing U.S. trade war. Domestic spending helped cushion the blow last year, but that support appears less certain in 2026 as consumers face a softer labour market, slower population growth, and rising debt burdens.
At the same time, the jump in oil, gas and other commodity prices could provide some relief. Higher prices generally benefit Canada by lifting nominal GDP, improving government revenues and supporting investment in resource-producing sectors. Provinces such as Alberta, Saskatchewan, and Newfoundland and Labrador could be among the main beneficiaries if the rally is sustained.
But the gains come with clear drawbacks. Higher fuel and fertilizer costs could add to inflation and squeeze households and parts of the farm economy. That leaves the Bank of Canada in a difficult position. While policymakers cannot do much about a supply-driven shock, they will be watching closely for signs that higher energy costs begin feeding into broader inflation expectations, wages, and business pricing.
For now, the outlook suggests the Bank of Canada is likely to keep interest rates on hold for the next several months, even as headline inflation edges higher. Longer-term bond yields, however, could remain elevated, which would keep pressure on housing and consumer spending.
The Canadian dollar has also strengthened somewhat since the conflict began, though analysts still expect it to trade mostly in a range of 72 to 74 U.S. cents through 2026.
Overall, the commodity surge is seen as a mixed blessing for Canada: supportive for revenues and resource investment, but a potential drag on broader growth if inflation and borrowing costs remain high.
Read the entire FCC analysis here:
https://www.fcc-fac.ca/en/knowledge/economics/commodity-price-surge-affect-canada
