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The Canadian economy is anticipated to experience only modest growth this year, with a forecast of 1.2 per cent in 2026, a decline from last year’s 1.7 per cent. According to Deloitte’s latest economic outlook, released on Thursday, various factors including the ongoing Middle Eastern conflict and persistent trade uncertainties pose significant risks to this prediction. Dawn Desjardins, Deloitte’s chief economist, emphasised that both businesses and consumers are grappling with a turbulent economic landscape, driven by fluctuating energy prices and an unclear future for North American trade relations.
Economic Landscape: Navigating Uncertainties
Desjardins noted that the first half of the year is expected to be particularly challenging for Canada’s economy, although adjustments have been made to the projections for the latter half as well. “We’re reflecting the fact that we have this highly uncertain environment for Canadian companies and consumers to be operating in,” she remarked in an interview. The report highlights the current state of the labour market, which remains soft due to slowing domestic demand and trade uncertainties, particularly affecting the manufacturing sector.
Statistics Canada reported a slight increase in the unemployment rate, which rose to 6.7 per cent in February, up from the previous month. Deloitte’s analysis suggests that while the labour market is likely to stabilise by the end of 2026, the unemployment rate is expected to gradually decline to 6.3 per cent. However, the report warns of continued job losses in key sectors, such as manufacturing, educational services, and public administration, largely due to government spending cuts and a decline in international student arrivals.
Consumer Behaviour: A Cautious Approach
With energy prices expected to remain elevated, Canadian consumers are likely to adopt a more cautious approach to spending, leading to only modest growth in consumer expenditure over the coming year. Desjardins pointed to the potential for slower global growth as a result of ongoing conflicts in the Middle East and their impact on energy prices. “If we continue to see prices for energy rising or remaining very high, that certainly could constrain, globally, consumer and business spending, but also here in Canada,” she warned.
Deloitte’s forecast hinges on the assumption that energy market disruptions will eventually stabilise. Furthermore, it relies on Canada retaining tariff-free access to a majority of U.S. goods amidst an impending review of the U.S.-Mexico-Canada Agreement. However, Desjardins cautioned that any significant deterioration in relations with the United States could dramatically alter these projections. “That risk is lingering,” she said, highlighting the importance of the U.S. as Canada’s primary trading partner, despite the government’s efforts to establish new free trade agreements.
Trade and Investment: A Mixed Outlook
The report indicates that Canadian exports have shown signs of recovery following a sharp decline in the second quarter. With targeted tariff relief, this recovery is expected to support overall growth in 2026. Imports, on the other hand, are projected to recover at a more measured pace, which may contribute positively to net trade growth.
Additionally, the Bank of Canada is expected to maintain its key policy interest rate at 2.25 per cent throughout the year, which could provide some stability. Desjardins underscored the necessity of maintaining investment flows from both government and private sectors to buffer against external pressures. The federal government is actively seeking to utilise public finances for major infrastructure projects, which include housing and transportation developments. Prime Minister Mark Carney’s initiative to establish a new office for major projects aims to expedite approvals for nation-building initiatives.
Housing Market: A Slowing Recovery
Despite overall economic projections, the recovery of the housing market is anticipated to be slower than previously estimated. The report forecasts that housing starts will decline to approximately 243,000 units in 2026, down from 259,000 in 2025. Factors such as elevated construction costs, trade uncertainties, and rising inventories of unsold units are contributing to a decline in builder confidence, particularly in major urban centres like Toronto and Vancouver, where pre-sales have seen a dramatic drop.
The slowdown in purpose-built rental construction is also notable, as rising vacancies and stagnant rent growth discourage new developments. Builders are increasingly hesitant to launch new projects, further impacting the housing supply.
Why it Matters
The challenges facing the Canadian economy underscore the delicate balance that must be maintained amidst a backdrop of global uncertainties. With rising energy prices and potential threats to trade relationships, the outlook for Canadian businesses and consumers remains precarious. The government’s ability to stimulate investment and support growth in key sectors, particularly housing and infrastructure, will be crucial in navigating these turbulent times. As Canada strives to build a resilient economy, the emphasis on strategic government spending and fostering strong international partnerships will be paramount in ensuring sustainable growth moving forward.
