Deloitte’s fall outlook says GDP will grow 1.1 per cent in 2025 and 1.6 per cent in 2026.Jesse Winter/The Globe and Mail
Canada’s path to firmer economic growth is coming into sharper view, but it runs along a narrowing route through Washington.
After months of sluggish activity under U.S. tariffs, the economy is expected to rebound in 2026 as lower interest rates and federal spending take hold – provided the carve-outs that keep most exports tariff-free survive, a new economic outlook from Deloitte Canada shows.
The country’s gross domestic product will grow 1.1 per cent in 2025 and 1.6 per cent next year, gaining momentum from falling borrowing costs, infrastructure spending and rising business investment, according to projections from Deloitte’s fall economic outlook. But without those exemptions for key exports – a premise the accounting firm itself calls “ambitious” – GDP could instead fall 2.5 per cent below Deloitte’s 2030 baseline projection, the level of output expected if all assumptions hold.
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That risk, combined with a weak labour market and subdued housing, makes the recovery uncertain, even if unemployment – now at 7.1 per cent – is unlikely to climb much higher, Deloitte said in its report published Monday.
“It’s not a huge growth story,” Dawn Desjardins, Deloitte’s chief economist, said in an interview ahead of the report’s release. “But we’d anticipate navigating through this period and laying the groundwork for stronger growth ahead.”
The forecast hinges on Canadian officials’ ability to preserve exemptions on key exports in a tense standoff with the Trump administration – a test made sharper now that Ottawa and Washington are entering the review process of the United States-Mexico-Canada Agreement on free trade. Deloitte leaves political outcomes out of its forecast, Ms. Desjardins said, focusing instead on factors it expects to evolve – such as lower interest rates and steadier household financing. “If you put in things you don’t necessarily have a line of sight on, your forecast gets whipped around.”
Deloitte’s forecast also models out the hit if carve-outs were lost. “It’s damaging to both sides of the border,” Ms. Desjardins said. “Our view is that this will be maintained. But it’s uncertain, and the impact if we lose them is not pleasant.” The USMCA review will cover more than tariffs, opening the door to changes in rules of origin, labour and digital trade that shape Canada’s access to its largest market at a time when growth depends heavily on it.
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Pent-up housing demand and lower borrowing costs could act as stabilizers. Manufacturers, meanwhile, have been cushioned by Canada’s relatively low average tariffs compared with peers. But interprovincial trade barriers and limited export capacity mean Canadian companies can’t always move goods to market quickly or cheaply, while complex approval processes make it costly and slow for businesses to put new capital to work, Ms. Desjardins said.
In the second quarter of this year, research from the C.D. Howe Institute shows, U.S. machinery and equipment investment reached nearly $12,800 a worker annually compared with $4,100 in Canada – about 32 cents on the dollar.
“If governments are saying, ‘We’re going to reduce triple approval processes,’ that removes a hurdle for companies to put their money to work,” Ms. Desjardins said. “So, when you look at it from that perspective, you say, okay, something has to change.”
The report adds to a series of recent forecasts pointing to modest growth through 2026, while stressing how much that outlook depends on trade policy and household resilience. Earlier fears included a recession, unemployment climbing above 8 per cent, and the loss of tariff exemptions under USMCA – a combination that would have deepened the downturn and delayed recovery by years.
Benjamin Reitzes, a strategist at the Bank of Montreal, said after Friday’s GDP report that it’s too soon to assume Canada will keep its exemptions. “That uncertainty is weighing on business leaders and policy-makers. There’s no way to know. We have to wait and see how USMCA renegotiations evolve next year as the review process gets under way.”
The country’s GDP grew by 0.2 per cent in July, slightly better than the advance estimate and the first increase in four months, Statistics Canada reported. But the gain overshadowed the uneven nature of the recovery: Mining output rebounded 1.4 per cent and manufacturing rose 0.7 per cent after sharp declines earlier this year, but tariff-exposed steel production slumped another 19 per cent and retail trade contracted 1 per cent. Services edged up 0.1 per cent as housing activity and transportation gains outweighed declines in retail and recreation.
In a report published last week, the Organization for Economic Co-operation and Development projected Canada’s growth will slow to about 1 per cent in 2025 before improving modestly the following year. Forecasts from Royal Bank of Canada, Toronto-Dominion Bank and BMO also anticipate a gradual recovery by 2026, but they all warn that much depends on how Canada navigates the USMCA review.
“There’s lots to be done, and none of it is easy or quick,” Ms. Desjardins said. “But if the conditions move in the right direction, Canada can finally get on a stronger growth path.”