Canada's PBO Cuts Economic Growth Forecast, Citing U.S. Tariffs and Countermeasures
The Parliamentary Budget Office has lowered its real GDP growth projections for 2026 and 2027 due to new U.S. tariffs and Canadian counter-tariffs. The revised outlook forecasts widening federal deficits, elevated inflation driven by energy prices, and an expected Bank of Canada interest rate hike in early 2027.
Canada’s Parliamentary Budget Office (PBO) has downgraded its economic growth forecast, projecting real gross domestic product will expand by 0.9 per cent in 2026 and 1.5 per cent in 2027. These figures are lower than the PBO’s June outlook, which had estimated growth of 1.1 per cent for 2026 and 1.6 per cent for 2027. The office attributes the downward revision to new U.S. tariffs and Canadian countermeasures.
Trade talks between Canada and the United States broke down at the end of August, leading to the imposition of new levies. Under U.S. Section 338, 50 per cent tariffs were applied to $27.6 billion worth of Canadian goods, including alcohol, dairy, autos, electronics, chemicals, plastics, and sporting goods. Canada subsequently introduced counter-tariffs.
Despite the weaker long-term outlook, the Canadian economy grew by 3.3 per cent on an annualized basis in the second quarter of 2026, marking the fastest quarterly expansion since 2023. Nominal GDP is projected to grow by 5.6 per cent in 2026 and 3.4 per cent in 2027, a trajectory that reflects rising prices rather than increased productivity.
Inflation is expected to average 2.8 per cent in 2026 before easing to 2.4 per cent in 2027, driven largely by higher energy prices. Bank of Canada Governor Tiff Macklem noted that global oil prices have remained higher than expected, with Brent crude trading around US$108.4 a barrel and West Texas Intermediate around US$97.44 a barrel. To anchor inflation expectations, the PBO assumes the Bank of Canada will begin raising its policy rate in early 2027, reaching 2.75 per cent by mid-year.
The labour market faces mounting pressure. 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. The PBO expects the unemployment rate to rise further to 6.6 per cent by the end of 2026 and into 2027, before gradually declining to 5.9 per cent by the end of 2031. Slower population growth is expected to constrain the unemployment rate by reducing labour force entry.
On the fiscal front, the PBO projects a federal budgetary deficit of $63.3 billion for the 2026-27 fiscal year, peaking at $70.2 billion in 2027-28. Relative to the June outlook, deficits are $3 billion higher per year on average over the period from 2026-27 to 2030-31, as new spending measures offset stronger revenues. The debt-to-GDP ratio is projected to rise steadily over this five-year horizon.
Looking ahead, business investment is expected to pick up in 2028 as firms adapt to the tariff environment and confidence recovers.