National accounts released last Friday show the U.S. economy grew faster than Canada’s in 2025. It was the third straight year of U.S. outperformance and the seventh in the last eight years. Since 2022, U.S. real GDP growth has exceeded Canada’s. Canada’s weaker results are linked to softer consumption, exports and business investment.

Drivers Of The Growth Gap

Canadian household consumption has trailed by about 3% cumulatively since 2022. Export growth has lagged by a similar margin. Business investment rose by more than 10% in the U.S. since 2022 but did not increase in Canada. Residential investment has been broadly comparable between the two countries. Non-housing, private sector business investment in Canada has fallen more than 13% behind the U.S. Trade uncertainty is cited as a factor weighing on Canadian firms. Canadian government spending is expected to rise further in 2026. Even so, consensus forecasts the U.S. growth advantage will widen in 2026, despite stronger Canadian public spending.

Implications For Markets And Policy

The report attributes this to stronger private sector momentum in the U.S. and additional public sector support linked to the OBBB. The article was produced using an AI tool and reviewed by an editor. Given the persistent gap in economic performance where we see the U.S. continuing to outperform, the path of least resistance for the USD/CAD exchange rate appears to be upward. The lack of business investment in Canada, which we observed throughout 2025, undermines the Canadian dollar’s fundamental value. We can find recent data from Statistics Canada showing business capital expenditures in the fourth quarter of 2025 were flat, while the U.S. Bureau of Economic Analysis reported a 2.1% increase for the same period. This economic divergence strongly suggests the Bank of Canada will be forced to maintain a more dovish stance than the U.S. Federal Reserve. A weaker economy with lagging consumption reduces any pressure on the BoC to keep rates high, creating a widening interest rate differential against the U.S. This interest rate spread is a primary driver for currency markets, favoring strategies that bet on a stronger U.S. dollar. For traders focused on equity markets, this trend supports a pairs trading strategy of being long U.S. indices and short Canadian ones. The S&P 500, driven by a more dynamic private sector, is likely to continue outperforming the S&P/TSX 60, which is heavily weighted in sectors sensitive to sluggish domestic investment. We saw this play out in 2025, where the S&P 500 returned over 9% while the TSX struggled to post a 2% gain. We can look back at the 2014-2016 period for a historical parallel, when a similar gap in economic momentum and monetary policy caused the USD/CAD to rally significantly. In the coming weeks, this suggests that buying call options on the USD/CAD exchange rate could offer a defined-risk way to profit from the expected continuation of this trend. Volatility in the pair is likely to pick up as markets price in this widening performance gap. Create your live VT Markets account and start trading now.

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