07:16 AM EST, 12/12/2025 (MT Newswires) -- Canada's outlook has a "cloud" hanging over its head, with the future of the United States trading relationship still undetermined, said TD.

U.S. tariffs already in place are having clear impacts on Canada's economy, most obvious in the three straight quarters of businesses cutting back on investments, wrote the bank in its "Canadian Quarterly Economic Forecast" note.

Unfortunately, TD doesn't expect clarity on U.S. market access or a reduction in tariff rates in 2026. The review of the CUSMA trade deal is underway and the bank doesn't know which side of the coin the outcome will land.

It could result in a better or worse situation than Canada's already in. This uncertainty will hold back growth in the economy to another sub-par year in 2026, stated TD.

Not all is downtrodden, pointed out the bank. Residential investment has held up through mid-year as resale activity picked up after a Q1 freeze. Robust growth in rental construction has buoyed housing starts. However, this effect has faded to start Q4, as purpose-built rental construction slowed in October and sales have trended sideways since August.

Canada's labor market has also defied gravity recently. The unemployment rate had risen steadily since mid-2023, but has improved from 7.2% in the summer to 6.5% in November. Given the shifts in Canada's immigration policy, the labor force sees only minimal growth in the coming quarters, which limits the rise in the unemployment rate that would normally be expected given a "very ho-hum" economic outlook, added TD.

The consumer has been more resilient than expected so far in 2025, with patriotic spending domestically helping to buffer the hit to confidence. However, this performance gets harder to sustain next year as the longevity of economic uncertainty takes a toll on consumer confidence and hiring intentions. It will, however, help cap upward pressure on prices stemming from ongoing trade disruptions.

TD agrees with the Bank of Canada's assessment that inflation risks appear balanced. If the economy persists on a modest growth path, the bank expects the BoC to hold its overnight rate at 2.25% for the foreseeable future.

There are upside risks, noted TD. Canada continues its efforts to diversify trade relationships and build out infrastructure. Government spending is a key support to growth over the next two years.

The bank said it has been conservative on how much private investment is unleashed by the federal government's recent efforts in the budget. So, a better-than-expected execution presents an upside risk to the outlook.

The other upside risk is on the trade front. If the CUSMA review goes better than expected and results in a more favorable tariff regime than today, TD could see the dark clouds part on investor sentiment in Canada, brightening the growth outlook.