Canada’s Growth Forecast Fell After the Tariffs Arrived
Canada’s budget watchdog now expects the economy to grow by only 0.9% in 2026. A few months ago, it expected 1.1%.
Canada’s budget watchdog now expects the economy to grow by only 0.9% in 2026. A few months ago, it expected 1.1%.
That drop may look small. It is not small when it comes from a trade fight with the country that buys most of what Canada sells.
Canada’s Parliamentary Budget Office revised its outlook and now projects real GDP growth of 0.9% in 2026 and 1.5% in 2027. Its June forecast put growth at 1.1% and 1.6%. Parliamentary budget officer Annette Ryan said, “Canada faces a more challenging economic and fiscal outlook than we projected in June.”
She also said, “Trade measures and uncertainty are weighing on growth.”
The cause is not abstract. After trade talks broke down in late August, President Donald Trump imposed 50% tariffs on about $20 billion worth of Canadian goods. Canada responded with counter-tariffs on a similar value of American products.
Trump had said on Truth Social, “I paused the 50% tariffs for a short period.” The pause did not become peace. The tariffs took effect after negotiations failed.
Prime Minister Mark Carney rejected the American offer. “They asked too much and offered too little,” he said.
A familiar kind of damage
This has a precedent. In 2018, the United States placed tariffs on Canadian steel and aluminum, calling them a national-security matter. Canada retaliated against American goods. The dispute was eventually resolved, but businesses spent months dealing with higher costs, disrupted supply chains, and unclear rules.
The pattern holds here. Tariffs raise the price of imported inputs. They make cross-border planning harder. They push firms to delay investment because nobody knows whether the rules will change next month.
The pattern also breaks in one important way. The 2018 metals dispute was narrow. This conflict covers a broader set of goods and has produced retaliation from both sides. Canada is not merely absorbing American policy. It is responding in kind.
That makes the economic question harder. A tariff can protect a particular industry. It can also raise costs for manufacturers, retailers, and consumers who depend on imported parts or goods. The PBO’s warning is that the combined effect reduces the country’s real output.
What the numbers say
The PBO now expects growth to slow in 2026 before improving in 2027. But even the improved 2027 figure, 1.5%, is below the office’s earlier estimate of 1.6%.
The fiscal effects follow. The PBO projects a $63.3 billion federal deficit in 2026-27. It expects the deficit to peak at $70.2 billion in 2027-28. Relative to June, deficits are projected to average $3 billion higher each year through 2030-31.
That does not mean tariffs alone created every dollar of those deficits. The PBO says new spending measures also outweigh stronger revenues. But a weaker economy gives a government less room. Lower growth means lower expected revenue. Higher trade costs can also feed inflation, which affects households and businesses.
The PBO also estimated that trade measures in place since early 2025 could shrink the economy by about 1.4% over the medium term if they become permanent. That is a conditional estimate, not a fixed outcome. It depends on whether the measures stay in place and how firms adapt.
The negotiation problem
There are signs that talks have not stopped. Carney said discussions with Washington had gained “a slight, slight intensification,” though Canada’s position had not changed.
The United States has also made some adjustments. Recent reporting says the Trump administration added exemptions for certain Canadian agricultural machinery and industrial goods, while adding other products to the tariff list. Those changes show that the policy is still moving.
Movement is not the same as resolution. Trump has also threatened to raise tariffs on Canadian cars, trucks, auto parts, and steel to 50% on New Year’s Day.
For Canadian firms, that uncertainty may be as damaging as the duties themselves. A company can sometimes absorb a known cost. It is much harder to plan a factory schedule, sign a supply contract, or hire workers when the tariff rate could change within weeks.
What could come next
The precedent suggests three possible paths.
The first is negotiation. Both governments have reasons to seek a deal. The United States has signaled interest in resolving the dispute, and Canadian officials say dialogue continues. A narrower agreement could reduce some duties while leaving other measures in place.
The second is a longer standoff. If tariffs persist, Canadian exporters will keep looking for other buyers, and Canadian consumers may pay more for some goods. The PBO’s medium-term estimate gives a sense of the risk if the measures become permanent.
The third is partial relief without a full settlement. That may be the most likely path, based on the recent exemptions and continuing talks. It would reduce pressure in some sectors but leave the underlying conflict unresolved.
I read the revised forecast as a warning about cost, not only about politics. Canada and the United States have one of the world’s largest trading relationships. When that relationship becomes a bargaining tool, the bill does not stay in Ottawa or Washington. It reaches factories, farms, stores, and household budgets.
The next test is whether the two governments can turn recent contact into durable rules. If they cannot, the 0.9% forecast may be less a temporary setback than an early reading of a slower economy.