Canada’s economy entered the second half of 2026 with more momentum than many forecasters expected, but Deloitte Canada now sees a much rougher road ahead. The firm has cut its 2027 real GDP growth forecast from 2.0% to 1.6%, a 20% reduction in the expected growth rate, as renewed trade tensions with the United States weigh on exports, hiring decisions and corporate investment.
The downgrade comes with an unusual twist: Deloitte actually raised its 2026 forecast to 0.9% from 0.7% after a stronger first half. The concern is what happens next. New tariffs and import restrictions are expected to work through supply chains gradually, leaving households, manufacturers and exporters facing more uncertainty just as businesses had started preparing for a broader recovery.
The 20% Forecast Cut Does Not Mean Canada Is Heading for a 20% Contraction
The headline number is dramatic, but the distinction matters. Deloitte has not forecast a 20% decline in the Canadian economy. It lowered its expected 2027 real GDP growth rate from 2.0% to 1.6%, meaning the projected pace of expansion is 20% smaller than previously expected. Canada would still be growing under that forecast, just considerably more slowly than Deloitte anticipated in June. At the same time, the firm raised its estimate for 2026 growth from 0.7% to 0.9%, reflecting an economy that proved surprisingly resilient during the first half of the year.
That resilience was visible in the second quarter, when real GDP increased 0.8% from the previous quarter, equivalent to roughly a 3.3% annualized pace. Momentum then cooled sharply. Statistics Canada reported essentially no monthly GDP growth in July, although its preliminary estimate points to a 0.2% increase in August. Deloitte’s 1.6% call for 2027 is also below the Bank of Canada’s July projection of 1.8%, highlighting how much the outlook changed after another round of trade friction emerged late in the summer.
The Trade Shock Is Expected to Become More Visible Late in 2026
One reason Deloitte’s numbers can look relatively healthy for 2026 is timing. The strongest economic performance came before some of the latest trade measures had fully worked through orders, inventories and corporate planning. Deloitte’s forecast was completed on September 9 and incorporated the U.S. Section 338 tariffs introduced on August 22 along with Canada’s retaliatory measures that took effect on September 8. Later U.S. tariff changes beginning September 15 and the September 29 restrictions on selected Canadian imports were not fully incorporated, leaving Deloitte to identify them as additional downside risks.
Exports are consequently expected to weaken sharply as 2026 closes. Deloitte projects exports falling at annualized rates of 0.9% in the third quarter and 5.0% in the fourth after a 15.1% second-quarter surge. Growth of exports for all of 2027 is projected at only 0.3%. Recent trade data already illustrate the imbalance. Canadian merchandise exports dropped 2.3% in July, with shipments to the United States falling 6.6%. At the same time, exports to markets outside the U.S. climbed 7.4% to a record $25.6 billion, showing that diversification is occurring but remains far from a complete substitute for American demand.
The Jobs Picture Is Becoming More Complicated Than the Headline Unemployment Rate Suggests
For workers, the danger from a slower economy rarely arrives everywhere at once. Canada lost 42,000 jobs in August, although the unemployment rate remained at 6.4%. Statistics Canada also found that 24% of unemployed Canadians had been searching for work for at least 27 weeks, above the pre-pandemic average. Industries dependent on U.S. export demand have experienced a somewhat higher average layoff rate than other industries over the past year, an important warning as additional trade restrictions begin affecting production decisions.
There are still contradictory signals. Manufacturing employment increased by 22,000 in August, largely reversing earlier weakness, yet manufacturing output fell 0.9% in July and manufacturing payroll employment had dropped by 7,200 in June. Deloitte expects job growth to cool as companies adjust to weaker exports and uncertainty about U.S. market access. That matters beyond factory gates. A household worried about layoffs is more likely to postpone a vehicle, renovation or vacation, transmitting an export shock into retail and service businesses. Ottawa’s expanded Work-Sharing program has already been used to cushion tariff-related slowdowns, with tens of thousands of workers covered through agreements intended to reduce layoffs.
Business Investment Is Both the Weak Spot and the Biggest Hope for 2027
The most important part of Deloitte’s recovery forecast may be business investment. The firm expects non-residential investment to grow only 1.6% in 2026 as companies delay capacity expansions while they wait for greater clarity about tariffs and U.S. market access. For 2027, however, Deloitte forecasts a much stronger 3.5% increase. That rebound is expected to come partly from major infrastructure and industrial projects moving toward investment decisions, as well as data-centre construction and other capital-intensive projects beginning to translate from announcements into physical spending.
There are signs that Canadian firms still want to invest when conditions make sense. Statistics Canada reported stronger business capital investment in the second quarter, including a 2.3% increase in engineering structures. Spending on computers and computer peripherals jumped 16.7%, helped by imports of high-powered processing equipment associated with data centres. The Bank of Canada’s second-quarter Business Outlook Survey similarly found investment intentions remained relatively strong, although hiring intentions were below their historical average. That creates an important divide: companies may still spend on automation, computing and productivity while remaining cautious about adding employees. Deloitte’s 2027 forecast therefore depends not just on promised capital, but on enough projects actually reaching construction and operating stages.
Slower Hiring Could Turn a Trade Problem Into a Consumer and Housing Problem
Canadian households have helped keep the economy moving even as trade tensions increased. Deloitte expects household spending to rise roughly 2.1% in 2026, supported by earlier job gains and fiscal measures, but sees growth slowing to about 1.4% in 2027. The reason is straightforward: weaker employment growth, uncertainty about job security and higher borrowing costs can make households far more reluctant to commit to major purchases. Consumers do not need to lose their jobs for spending to weaken. The possibility of unemployment can be enough to delay a new vehicle, furniture purchase or home move.
Housing is particularly sensitive to that combination. Deloitte expects residential investment to decline in 2026 and recover only slightly in 2027 as higher financing costs, economic uncertainty and inventories of unsold condominium units restrain new construction. That slowdown carries a longer-term cost. CMHC warned in September that Canada still needs roughly 417,000 to 469,000 housing starts per year through 2036 to restore affordability to pre-pandemic levels. A trade-driven slowdown that discourages builders today could therefore collide with Canada’s existing housing shortage years later, even if weaker near-term demand temporarily takes some pressure off prices.
Ontario and Quebec Carry More Trade Risk Than the Western Provinces
The national forecast hides major regional differences. Deloitte expects Alberta to post the strongest provincial growth in 2026 at about 2.0%, followed by Saskatchewan at 1.8%. Large energy, infrastructure and data-centre investments provide those economies with sources of growth that are less directly tied to the same manufacturing trade channels affecting central Canada. That does not make Western Canada immune to weaker U.S. demand, but it gives some provinces a larger domestic investment pipeline to lean on.
Ontario faces a more difficult mix because of its concentration of automotive production, steelmaking and interconnected North American manufacturing supply chains. Deloitte forecasts approximately 1.0% Ontario growth in 2026 and 1.6% in 2027. Quebec is projected to grow only about 0.9% this year, with aluminum and manufacturing facing significant external pressures. These differences matter for workers because a national unemployment rate can conceal much sharper pain in individual industrial communities. An assembly plant slowing production in southern Ontario or an aluminum producer confronting reduced U.S. access can have an outsized effect on nearby suppliers, restaurants, trucking companies and municipal tax bases.
Interest Rates Could Make the 2027 Recovery Even Harder to Navigate
Trade weakness would normally strengthen the case for easier monetary policy, but Canada is facing an uncomfortable complication: inflation has remained above the Bank of Canada’s 2% target. Statistics Canada reported that the Consumer Price Index was up 3.0% year over year in August. Energy costs and tariffs create the possibility that inflation remains sticky even while economic growth weakens. The Bank of Canada held its overnight rate at 2.25% on September 2, explicitly noting both elevated energy prices and renewed Canada-U.S. trade tensions.
Deloitte expects the Bank to remain at 2.25% through the end of 2026 before potentially raising rates four times during 2027, taking the policy rate to 3.25%. That is Deloitte’s forecast rather than a commitment from the central bank, and changing inflation or growth data could alter the path substantially. It nevertheless illustrates the squeeze facing the economy: exporters need investment and households need confidence, yet higher rates would make mortgages and corporate financing more expensive. There is upside if trade tensions ease, non-U.S. exports continue expanding and major projects proceed. But Deloitte’s revised forecast makes clear that the 2027 rebound is no longer something businesses can simply assume will arrive on schedule.
