Canada weathered the first tariff shocks. But Deloitte sees trouble ahead

WASHINGTON, D.C. — The Canadian economy proved more resilient than feared earlier this year.

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Now, while many hope domestic infrastructure and investment projects will help the economy grow and boost its export diversification, the country is likely facing a period of slower growth in the short term.

That’s why Deloitte Canada recently raised its forecast for this year but cut next year’s growth forecast from 2 to 1.6 per cent, a figure that accounts for Canada’s retaliatory tariffs but not the Sept. 15 expansion or the Sept. 29 import bans. To better understand where the economy has proven most resilient, and where future challenges lie, National Post reached out to Deloitte Canada’s Chief Economist Dawn Desjardins for some insights.

This Q&A has been edited and condensed for clarity and length.

Dawn Desjardins: In the second quarter, Canada’s economy really did grow very strongly, and it was pretty broad-based, which I thought was interesting. It wasn’t just the consumer, but it was also the housing market, and we saw business investment pick up. Exports also picked up. So it was really strong growth in that second quarter.

Now, as we are monitoring the third quarter, there is still growth, not nearly as rapid, but still seeing signs of growth.

That’s all to describe how we netted out to get a stronger growth rate for 2026. It really was that lift from the second quarter and the fact that the first quarter, which had initially been indicated to have contracted, actually was positive. So that kind of set the benchmark, and we did end up seeing our forecast being upgraded.

But for 2027, all the events of recent weeks and months certainly suggest that it’s having an impact on Canadian business confidence, Canadian consumer confidence, and we think very likely we will see slowing export activity as we go through the course of 2027. So those factors taken together, it does suggest that we’re in for a period of slower growth in 2027 compared to what we previously thought.

So still growth, but just 1.6 per cent. Previously, we thought 2 per cent.

I think what we’ve seen is that, especially in the most recent data we have, which was for the month of August, we saw actually some strong export activity as exporters tried to sell into the U.S. quicker than they otherwise would have. So they were kind of front-running those tariffs.

Now, as we go forward, of course, they are in place. And so we will see, we think, softer demand for some of Canadian goods sales into the United States, and that’s what’s going to weigh overall on our exports.

We don’t actually have them falling. We just have them going very, very, very slowly. They will be negative, we think, in the next few quarters, but then start to pick up again as supply chains are rearranged, as Canadian companies look for other markets to sell to.

So a lot of it is, in fact, reflecting weaker demand we expect from the U.S. market.

I think we have seen already in August a decline in jobs. It’s likely going to remain a rough outlook for people who are looking for jobs, especially until we get to a period of time where we’re starting to see more business investment pick up.

So right now, I think the fact that we are seeing such a weight on business confidence, businesses today are obviously very concerned about where demand is going to come from. And so right now, I feel like they’re in that kind of perhaps low-hire, low-fire type of environment.

By that, I mean not necessarily looking to expand, but given that we’re seeing such weak immigration growth, probably looking to maybe retain some of the workers. And so you don’t see a lot of movement, I don’t think, in the labour market in the medium term, immediate term. But as we move forward, we do think that we’re going to start to see hiring pick up pace.

And this is going to reflect changes that we’re anticipating to come, whether it’s from public infrastructure investments, so by the public sector, or starting to see some private-sector money move into accompanying some of the investments that we’re seeing put in place by the federal and provincial government.

Right now, what we’re seeing is that our inflation rate is being largely driven by energy prices. So, we have an inflation rate of three per cent right now, at the upper end of the Bank of Canada’s target band.

And when you look below that, prices are rising at a slower clip. If you exclude energy, I think it’s about 2.4 per cent. So just a little bit above the Bank of Canada’s target.

Now, as we move forward, it’s going to depend on how long tariffs stay in place, if companies are going to absorb some of it or … And this is more the retaliatory tariffs on Canadian goods coming into the country. And there, I have to say the overall amount of these retaliatory tariffs, the amount that they’re impacting is relatively contained. It will filter in and probably to other parts of the supply chain, but we don’t have a huge flow-through to consumer prices.

The big wildcard, I think, for the inflation outlook right now, there’s a few. One is, how long do energy prices remain elevated at these very high levels?

Also, how are Canadian consumers and Canadian businesses expecting inflation to evolve? Because that’s often, of course, the mechanism, right? They look to see whether or not they think prices are going to go up. Should they be demanding higher wages? And so we start to see even more upward pressure on prices.

So at this stage, we haven’t seen that evolve. We do think the inflation rate will likely start to move lower as we go through 2027. I think one of the factors there is that we are looking for this slower growth than we previously had been anticipating.

And when we look at the futures curve for oil prices, they are gradually coming down. Now, they’re not going back to the $60 level or $65 level of prior to the beginning of the war, but they’re still on a downward trajectory.

So that upward pressure from energy prices, when we look to where they were a year ago, starts to come out of the calculation. It doesn’t mean that prices are necessarily going to go down significantly, but at the same time, they’re going to stop rising. And when we’re there, we’re just using the futures market.

It’s manufacturing where we are seeing a hit, especially in the motor vehicle industry. When we look at things like forestry, lumber, that is getting pretty hard hit.

And then steel and aluminum, again, these are sectors that are being really hard hit by very high tariff levels. And so, to the extent that that’s impacting demand, those are the areas where we are seeing the biggest hit in terms of the economy and jobs.

And when you look across the country, the provincial economies, there it is more central Canada, so Ontario and Quebec, as well as British Columbia. So provinces where we have more of the manufacturing hubs, these are the types of areas where we anticipate we’re going to see a bigger impact.

I think one of the things we are anticipating is that when we look at a lot of the public spending that is going to go on, it is pretty widely dispersed across the whole country, so that could put some mitigants.

But I think when we think about if you are in a city that really is relying on one particular industry, that is going to be incredibly impactful. And so to that extent, yes, I think that there is a risk that certain areas will be. And they are being, I think, more dramatically impacted than the overall national numbers.

I think that’s one of the things that it’s hard. It’s hard to see — because you know that some of these areas are being very badly hit, and if one of their major industries is impacted, it just filters out into demand for services. So it does impact those areas very dramatically.

I think it’s a combination of both, to be honest. I don’t have the exact split, but it certainly is.

When we think about the impact of the uncertainty, of concerns about demand from our largest trading partner for some of our products, it certainly is impacting the way Canadian businesses are thinking about putting money to work, investing.

And so to the extent that they’re just sitting back right now, looking, trying to figure out, “How can I diversify where I’m sending my exports? What’s going to have to accompany that for me to be successful?” as well as, “How can I sell across the country?”

For Canada, of course, we have some barriers to trade across Canada: the provincial trade barriers. And those, when you look through the data and try and model it, do show a pretty substantive impact overall on the economy.

So to the extent that we’re seeing some of these barriers being either reduced or eliminated, if we can have some success on that front as we move forward, it will have a material impact on Canada’s economy.

We’ve run an analysis. It’s a longer-term analysis, but it suggests that Canada’s economy could be 2.4 per cent larger than if those interprovincial barriers remained in place.

So there are substantive gains. And so to the extent that we see some action on removing, just being able to have a more robust domestic market, I think that’ll be helpful over time.

It’s more downside risk to our view. It will continue to have negative impacts. As I said, we haven’t included them in this, but I would say there’s a downside risk there. Should we have additional tariffs apply to our exports, we would revisit our forecast, and it’s the most likely outcome that we would have even slower growth in 2027 than we have in the current forecast.

I think to the extent that we do see governments working to facilitate investment activity, help ease it a bit in terms of some of the constraints that are currently in place, that will be very helpful.

What we have seen from the government is support for businesses that are suffering under the tariffs, that are seeing a significant reduction in demand. We’re also seeing support for Canadian workers who either lose their position or work fewer hours. There are employment benefits they can get now to help them get through this period.

So if you’re working 40 hours one week and then you’re suddenly cut down to 30, there is a government program that can help you move through that transition. So that is definitely going to ease some of the burden, but not totally offset it.

So, yes, getting infrastructure spending in place — we know that building infrastructure takes a long time, so the immediate impact, it’ll build momentum over time. But starting, getting the permitting done, getting the workers in place, starting the whole project. So it does all take time. There’s a process involved in that.

So that’s one thing. I think, yes, we see government programs that are trying to help in the short term and then looking further to invest over the medium term and to get Canada’s competitiveness up. So those will reap benefits over time.

But one of the things they can’t do necessarily is definitely restore confidence among Canadian businesses. So Canadian businesses who are worried, and when you look at surveys, it seems that’s what they’re saying: “We’re worried about where we’re going to be selling our goods to. We’re worried about developing new supply chains. How can we do that?”

So there’s still this overhang, I think, of a softness in confidence by Canadian businesses that I think that is sort of the part that, although governments are doing things and the central bank has so far maintained the policy rate at two-and-a-quarter per cent, these are certainly positives, but it really is seeing some of the movement, getting this underway, that’s what I think is going to be the turnaround for Canadian businesses.

And Canadian businesses looking to put money to work, I think they want to really see things moving forward, and that in itself should help restore confidence.

I think it could certainly return. It’s such a volatile and uncertain backdrop. So yes, if there was relief in terms of having the Canada, U.S., Mexico free trade agreement completely in place, I think that would be a pretty good lift in terms of confidence measures as well as a lift in terms of export growth.

But I think it has been very volatile. And so when we think about over the past while, all of the tariff fight, that has really, I think, created such uncertainty for Canadian businesses that it is keeping them a bit on their back foot as they try to assess what are the real prospects of growth as we move forward.

I think to the extent we do see movement in terms of some of these big projects, and we do start to see hiring associated with that and a general sense that Canadian consumers and businesses are more optimistic, that certainly would be a reason to upgrade.

And of course, any changes in our relationship in a positive way with our largest trading partner, that would also see us upgrade that forecast.

I think the main concerns is, A, that we do see energy prices remain or continue to climb, because that does have a serious impact, of course, on households and their balance sheets and what they have available to spend on other goods and services.

An escalation, of course, in terms of tariffs that damage other parts or continue to damage certain parts of our economy.

Of course, these are always things — they are downside risks to our view right now simply because there are external factors that we really can’t control.

So we’re trying to look inward and saying, “Okay, how can we make our economy more competitive? How can we draw in capital investment? How can we make our economy more self-sufficient by having a domestic economy across the whole country that is barrier-free?”

So there’s a few things happening, but again, a lot of them take time.

I think when we look as recently as the second quarter, the fact that we did see such strong resilience in the economy — it was much stronger than we had been anticipating, and I think others were anticipating.

And the fact that it was relatively broadly based: strong consumer spending, business investment picking up, and a housing market that looked like it was on the road to recovery.

Now it has slowed subsequently, but nonetheless, it does show that there is still some momentum in the economy. There is still some activity happening, and that very strong growth rate did show that even under conditions of great uncertainty, the Canadian economy was continuing to grow.

It’s very, very, very hard to say. I think one of the things when we think about diversifying, we do need the infrastructure for that to happen. That takes time.

So this sense that yes, we’re going to build or expand ports, pipelines, railways, things to get our goods to other areas of the world in a more expedient and cost-effective way. So those things are all positive movements, and I think it will support the idea that there are other markets that we may be trying to build relationships with.

But again, none of that happens very quickly. So I don’t know exactly when the pickup is going to occur. We do have conditions improving in the latter part of 2027.

Generally, it’s just this idea that we’re all kind of rowing in the same direction towards economic growth. I think once people believe that, then that’s when we’ll start to see this improvement.

National Post

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