PBO projects Canada’s GDP growth will slow to 0.9 per cent in 2026

Canada’s economic growth is expected to slow significantly by the end of the year, as U.S. tariffs and Canadian countermeasures continue to pressure the economy, according to a new report by the Office of the Parliamentary Budget Officer.

The report, published on Tuesday, projects Canada’s real gross domestic product growth will slow to 0.9 per cent in 2026 and 1.5 per cent in 2027. The forecasts were downgrades from the 1.1 per cent and 1.6 per cent projected in its previous outlook, published in June.

Growth will pick up in 2028 as businesses and firms adapt to the new U.S. Section 338 tariffs, which imposed 50 per cent levies on $27.6-billion worth of Canadian goods including alcohol, dairy, autos, electronics, chemicals, plastics and sporting goods, among others.

Nominal GDP is now projected to grow by 5.6 per cent in 2026 and 3.4 per cent in 2027. PBO officials noted that nominal GDP growth reflects rising prices, not a more productive economy. Higher prices for Canadian exports during the first half of 2026 — mainly from elevated commodity prices — contributed to the higher projection. The contribution from higher energy prices is projected to decline after 2027 as global energy prices moderate.

The report also expects business investment to pick up in 2028 as business confidence recovers and demand strengthens after the uncertainty surrounding the tariffs fades over time, and the economy is expected to return to its productive capacity by 2030.

The forecasts came after the Canadian economy grew by 3.3 per cent on an annualized basis in the second quarter of 2026, the fastest quarterly expansion since 2023.

“The new U.S. tariffs and Canadian countermeasures weaken the outlook further than we expected in June,” the report read.

“Our projection incorporates all tariff measures in effect as of Oct. 1, 2026, and assumes that U.S. measures remain in place over the projection horizon. This is a status quo assumption rather than a forecast of the outcome of negotiations.”

The report also provided forecasts on other aspects of the economy.

PBO officials expect higher energy prices to keep inflation elevated at 2.8 per cent by the end of 2026 before easing to 2.4 per cent by the end of 2027. Under these assumptions, the Bank of Canada will remain on hold at 2.25 per cent for the rest of the year before hiking rates to 2.75 per cent by mid-2027 to keep inflation expectations anchored.

Higher energy prices have pushed Canada’s inflation rate above the central bank’s two per cent target since May; inflation ticked up to 3.1 per cent in September after hitting three per cent in August.

Labour market forecasts remain soft, with the unemployment rate expected to rise to 6.6 per cent by the end of 2026 and into 2027 before declining to 5.9 per cent by the end of 2031. Slower population growth will continue to constrain the unemployment rate, with fewer people entering the labour market and lower employment showing up mainly as a smaller labour force.

Canada’s unemployment rate edged up to 6.5 per cent in September from 6.4 per cent in August after the economy lost 68,000 jobs, which erased job gains accumulated at the start of the year.

“However, actual outcomes will depend on a range of factors beyond tariff policies, including developments in commodity markets, global economic growth and the pace of business adjustment,” the report noted.

The PBO’s updated economic outlook comes a week ahead of the Bank of Canada’s next interest rate decision and the release of its latest Monetary Policy Report on Oct. 28.

Central bank governor Tiff Macklem has repeatedly said the economic outlook will be revised because global oil prices have remained stubbornly higher than expected since the last MPR in July, and trade tensions have escalated. At the time, officials expected global oil prices to ease to around US$75 per barrel in the third quarter of 2026.

Brent crude traded at around US$108.4 a barrel on Tuesday, while West Texas Intermediate traded at around US$97.44 a barrel.

“There’s no resolution in sight for the conflict in the Middle East with the Houthis now entering the conflict…. Not only are oil prices still high, but there’s an added boost to the prices of things that people actually buy: gasoline, diesel and heating oil,” he told reporters during a call after an International Monetary Fund conference in Bangkok on Saturday morning.

“I expect on the 28th, the outlook for inflation will be quite a bit higher than it was in July.”

Macklem didn’t opine on whether the central bank will hike rates later this month, but he did say other central banks, including the U.S. Federal Reserve and European Central Bank, have started to raise rates due to energy prices pressures.

“We can’t really do anything to affect inflation today or over the next couple of months. We need to look out six months, a year from now. Where do we think inflation is going to be? Is inflation likely to come back down towards our target on its own, or are we going to have to raise interest rates to influence the path, nudge the path for inflation back towards the target?” he said.