Shoppers browse items for sale at Toronto’s Eaton Centre on Boxing Day.Sammy Kogan/The Canadian Press
John Rapley is a contributing columnist for The Globe and Mail. He is an author and academic whose books include Why Empires Fall and Twilight of the Money Gods.
Despite being buffeted by Donald Trump’s trade war, the Canadian economy proved resilient in 2025. Although some sectors faced real hardship, the economy as a whole managed to eke out a modest gain and employment recovered from earlier in the year – a contrast to what’s happening south of the border, where unemployment is now rising.
Will 2026 bring more of the same, or will the economy finally succumb to external pressures?
Most forecasters are currently feeling pretty rosy about 2026 and expect Western economies to continue growing, if tepidly. The reasons for their optimism are clear. Stock markets across the world had a runaway 2025, so investors are feeling rich and companies are flush with cash.
At the same time, the Chinese and Japanese governments keep pouring stimulus money into their economies, which will stir demand there, while the U.S.’s One Big Beautiful Bill will kick in, providing Americans with larger-than-usual tax refunds next spring. So, it looks like good news all round.
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Mind you, when sentiment is as unanimous as it is now, contrarians worry that’s just the sort of sign a top has been reached, and the downward slide is about to begin. Pride, after all, goes before a fall.
As Yogi Berra famously said, prediction is difficult, especially about the future. The most we can do is identify what potential headwinds or tailwinds might arise, then make a calculated guess on likely outcomes.
And as we start a new year, there are three hot spots in the world economy that are likely to have an outsized impact on where things go next. These are Japan, China and the U.S.
Two evident downsides to the upbeat scenario are inflation, which remains a concern in several developed economies, and debt, which keeps rising across the West. And at the moment, both are producing potentially serious risks in Japan. If they get worse, they’ll affect the world.
Interest rates on government debt there have been rising sharply as investors worry that the country’s central bank may be losing control of a rising inflation rate. Meanwhile, the scale of debt, not just in Japan but across developed economies, means that there’s a lot of competition for borrowing.
Because Japanese institutional investors are big players in global bond markets, and historically have been reliable buyers of Canadian government bonds, they have helped to lower interest rates around the world.
But with returns now steepening at home, there’s less incentive to invest abroad. Were Japanese investors to reduce their buying of foreign securities, interest rates elsewhere would likely get dragged up.
Meanwhile, in China, economic growth has been slowing, and in recent months investment has begun to fall. Were this evidence of a shift toward greater consumption, it would amount to a short-term slowdown that would put the country on a more long-term sustainable path.
But so talismanic has the 5-per-cent annual growth target become to the Chinese leadership that it may respond by boosting investment further next year.
If so, this would cause difficulties for the rest of the world. Given than China just ran its first trillion-dollar trade surplus with the world, further exports would mean an even bigger tide of inexpensive Chinese products hitting the world market. While that would help keep inflation and interest rates down, it would potentially devastate manufacturers already facing a trade war with the U.S.
If, on the other hand, China were to finally get serious about raising the consumption share of the economy, which the government keeps saying it plans to do, it would produce a big boost of spending in the world economy. So, we’ll need to watch China carefully, because what Beijing decides to do will affect all of us.
Finally, and most importantly for us, there’s the U.S. Most forecasters expect the American economy to continue growing, because they assume that the government will go all out to stimulate it ahead of the midterm elections. Nevertheless, several potential pitfalls could lie ahead, any one of which would upend things.
Much still rides on expectations of an AI breakthrough, but if one fails to materialize next year, the AI bubble could burst. Equally, with cryptocurrencies finishing 2025 in a downtrend, the risk of a crash is rising. If one happened, it would almost certainly reverberate through markets and the economy.
The growing divisions with the MAGA movement could also lead to a resurgence of anti-tech populism in next year’s elections, on both the left and right. Crucially, inflation could rebound, driving up interest rates. That would in turn sink markets and weaken the economy.
So, there’s a lot to look out for in the new year. Given the relative fragility of the Canadian economy at the moment, 2026 will probably be an anxious year for economy-watchers.