The Canadian economy is projected to experience modest growth in 2026, with an estimated growth rate of 1.2 per cent. This is a decrease from the previous year's growth rate of 1.7 per cent, as highlighted in Deloitte's spring economic outlook released on April 2, 2026. Key factors influencing this outlook include the ongoing war in the Middle East, persistent trade uncertainty, and structural challenges posed by slowing population growth.
Dawn Desjardins, Deloitte’s chief economist, noted that Canadian consumers and businesses are navigating through "murky waters," largely due to fluctuating energy prices resulting from international conflicts. This uncertainty, coupled with an unclear future for North American trade, is contributing to a cautious economic environment.
Desjardins pointed out that the first half of 2026 is expected to be particularly challenging for Canada's economy, and even the second half has been slightly downgraded in forecasts. The overall atmosphere remains uncertain, affecting both consumer confidence and business operations.
According to the report, labour market conditions are projected to stabilize throughout 2026, with the unemployment rate expected to decline gradually to 6.3 per cent by the end of the year. In February, the unemployment rate rose to 6.7 per cent, as reported by Statistics Canada. The labour market remains soft, with trade uncertainty and a downturn in domestic demand adversely impacting hiring trends.
Desjardins underscored the continuing employment losses expected in the manufacturing sector, as well as in educational services and public administration, as governments cut back on spending. She mentioned that international student arrivals are also slowing, exacerbating these employment challenges.
Consumer caution is likely to persist in 2026 due to high energy prices and a weaker labour market, resulting in limited growth in spending. Desjardins emphasized that global economic prospects are dimmed by events in the Middle East, predicting that elevated energy prices could stifle consumer and business spending both globally and in Canada.
Deloitte’s forecast assumes that disruptions in the energy market will ease over time. It also hinges on Canada maintaining tariff-free access to the majority of U.S. goods amid a forthcoming review of the Canada-U.S.-Mexico Agreement. However, any substantial breakdown in relations with the U.S. could pose significant risks to these projections.
Desjardins remarked that while new free trade agreements are being established, the U.S. remains Canada's primary export market. The report indicated that Canadian exports have begun to recover after experiencing a sharp decline in the second quarter, and further improvements, along with targeted tariff relief, are expected to support growth in 2026. Meanwhile, imports are anticipated to recover more gradually, positively contributing to growth from net trade.
Additional aspects that may provide some relief include expectations that the Bank of Canada will maintain its key policy interest rate at 2.25 per cent throughout 2026, alongside significant government investments in infrastructure. Desjardins stated that ensuring a continuous flow of government funds and private investments is crucial for buffering external pressures on the domestic economy.
The federal government is pursuing public finance strategies to enhance housing, infrastructure, and major projects. Prime Minister Mark Carney has initiated a new major projects office aimed at fast-tracking nation-building proposals and simplifying the federal approval process. Identified projects include ports, railways, and energy corridors.
Furthermore, Canada is ramping up its defense spending, having invested $63.4 billion in national defense in the year 2025, thereby meeting its NATO commitment to spend 2 per cent of GDP on defense. This was described as the “single largest year-on-year increase in defense investment in generations” by Carney.
Desjardins indicated that these efforts should motivate businesses to seek opportunities for investments in the economy. However, she cautioned that if government spending does not translate into actionable initiatives, it might significantly jeopardize the economic outlook.
The recovery of the housing market is also projected to be slower than anticipated, with construction starts expected to decline to approximately 243,000 units in 2026, down from 259,000 in 2025. Factors such as elevated construction costs, trade uncertainties, and rising inventories of unsold units are impacting builder confidence and deterring new project launches. The slowdown in construction is particularly noticeable in condominium developments, with major markets like Toronto and Vancouver experiencing a pause in projects due to plummeted presale activity.
Moreover, purpose-built rental construction is also slowing as vacancies rise and rent growth cools. Overall, the economic environment for Canada in 2026 appears to be characterized by significant challenges stemming from both domestic factors and international issues.
