**
The ongoing conflict in the Middle East has cast a shadow over Canada’s economic outlook, prompting Deloitte Canada to revise its GDP growth forecast for the year downward by 20 per cent. The consulting firm now anticipates a modest growth rate of 1.2 per cent for 2026, a decrease from previous estimates of 1.5 per cent made earlier this year and 1.7 per cent from last year. Chief Economist Dawn Desjardins highlighted that this “softer” projection is largely influenced by the volatile trade relations with the United States, exacerbated by rising energy prices linked to the escalating U.S.-Israeli conflict with Iran.
Rising Energy Prices and Economic Headwinds
Desjardins pointed out that both consumers and businesses are grappling with significant challenges. The uncertainty surrounding Canada’s trade dynamics with its southern neighbour is compounded by surging energy costs resulting from geopolitical tensions. She stated, “We’ve tried to incorporate these factors into our forecast, expecting slower growth in the first half of this year than previously thought.”
Despite the current difficulties, Desjardins expressed cautious optimism, suggesting that as the situation in the Middle East stabilises, it could lead to a more favourable trade agreement with the U.S. and Mexico. This agreement, she believes, would help alleviate some of the prevailing uncertainties facing Canadian enterprises.
Canada’s Fuel Prices Hit Four-Year High
Recent developments have seen U.S. crude oil prices surge past $110 per barrel following President Donald Trump’s announcement of ongoing military actions in Iran. This spike in oil prices has had a direct impact on Canadian consumers, with average gasoline prices now exceeding $1.80 per litre, marking the highest levels in nearly four years, according to GasBuddy.
Desjardins warned that these elevated energy prices could strain supply chain costs and potentially hinder business investments, which are lagging behind government spending. She expressed hope that business investment would improve in the latter half of the year but acknowledged this outlook is at risk should the conflict in the Middle East persist and energy costs remain high.
Concerns Over Trade Agreements and Employment
The Deloitte report raises concerns about potential alterations to the Canada-U.S.-Mexico Agreement during the scheduled review this summer. Desjardins indicated that if significant changes occur, particularly regarding high sectoral tariffs, they could have a detrimental impact on the Canadian economy.
Consumer behaviour is also expected to reflect caution, with spending growth remaining modest as individuals brace for sustained high energy prices and a cooling labour market. Employment conditions are projected to stabilise, with the unemployment rate gradually declining to 6.3 per cent by the end of the year, although it ticked up to 6.7 per cent in February, as reported by Statistics Canada.
Desjardins noted that the labour market’s performance varies by sector. The manufacturing industry remains particularly vulnerable due to the ongoing high tariffs on steel, aluminium, and automobiles, whereas healthcare is experiencing notable job growth.
Mixed Outlook for Exports and Construction
Deloitte’s forecast indicates a partial recovery in exports following a sharp decline in the second quarter, with anticipated improvements and targeted tariff relief supporting growth this year. Conversely, imports are expected to recover more gradually, contributing positively to net trade growth.
The construction sector, however, faces its own set of challenges. The housing market is projected to see a slower recovery than previously expected, with new housing starts forecasted to drop to approximately 243,000 units in 2026, down from 259,000 in 2025. Factors contributing to this slowdown include high construction costs, ongoing trade uncertainties, and an increase in unsold inventory, which have dampened builder confidence.
Why it Matters
The interplay of geopolitical tensions and economic factors significantly impacts Canada’s economic landscape. As uncertainties loom over trade agreements and energy prices, Canadian businesses and consumers face a challenging environment. The ability of the Canadian government and businesses to navigate these complexities will be crucial in fostering economic resilience and growth in the coming years. With the potential for stronger growth anticipated by 2027, the focus must remain on strategic investments and diversification of trade, which could ultimately enhance Canada’s economic stability.