Deloitte slashes 2027 economic outlook by 20% as trade tensions worsen

A new report released Tuesday from Deloitte says the Canadian economy performed better than expected so far this year, but that momentum is losing steam as worsening trade tensions between Canada and the U.S. led the firm to change its outlook for 2027.

The firm dropped its economic growth projection for next year by 20 per cent, warning that it expects recent trade flare-ups “to become more pronounced in 2027.”

Deloitte’s fall economic outlook report, titled Weathering change: Canadian businesses navigate renewed uncertainty, was released Tuesday, and on the same day a U.S. import ban on Canadian alcohol, dairy products and motorcycles took effect.

GDP is projected to rise a total of 1.6 per cent next year, according to Deloitte’s estimates, which is a downward revision by 0.4 per cent from its last report.

“Canada’s trade outlook has deteriorated following the renewed escalation in trade tensions with the United States,” said Dawn Desjardins, chief economist at Deloitte Canada, who authored the report.

“Canada’s economy will face challenges in maintaining its recent upward momentum.”

This also follows several new waves of U.S. tariffs, including 50 per cent duties on hundreds of Canadian goods, as well as Canada’s “dollar-for-dollar” reciprocal counter-tariff measures.

“Amid the persistent threat and implementation of tariffs by Canada’s largest trading partner, household and business confidence remain subdued,” said Desjardins in the report.

“For consumers, concerns about job security and the prospect of higher prices may further dampen spending.”

The report’s projections for how Canada’s economy will perform took into account the first wave of 50 per cent U.S. tariffs under Section 338 that started on Aug. 22, as well as Canada’s reciprocal tariffs that began on Sept. 8.

However, the timing of the report’s research meant the Sept. 15 changes to the Section 338 50 per cent tariffs, which added more products while removing others, and the more recent import ban on Canadian alcohol, dairy products and motorcycles, were not factored into Deloitte’s projections.

The report says these additional measures that were not included in Deloitte’s calculations “represent a downside risk to the forecast” and are expected to drag on the economy.

Here’s what Deloitte expects over the next few months and into next year.

These newly implemented tariff measures, Deloitte says, will likely have a delayed effect on Canada’s economy, and 2026 is still expected to be positive overall because of the momentum built through the first half of the year.

According to the report, the Canadian economy will grow by an estimated 0.9 per cent in 2026, which was revised upward by 0.2 percentage points from Deloitte’s summer report.

The report highlights a sharp uptick in Canadian exports this year, strong business investments in machinery and equipment, as well as gains in the job market and a decline in the unemployment rate. At the same time, Deloitte says specific sectors “continued to struggle” from the impacts of U.S. tariffs.

Manufacturing has seen some of the most consistent job losses since the trade war began last year, and most recently led steelmaker Stelco to lay off 350 workers, according to the union.

In sectors where there is weaker hiring or shrinking workforces, Deloitte says consumers will take a hit from tariffs.

“Households will not be immune to the economic ramifications of the new rounds of tariffs with job growth expected to slow. This will work to suppress household spending into next year,” said Desjardins in the report.

Although there was some economic weakness to start the year that sparked some debate about whether or not the economy was in a technical recession, those worries were eased after GDP numbers for the first quarter were revised higher and the second quarter saw a 3.3 per cent annualized gain in GDP.

But new tariff measures are expected to lead to a gradual decline in Canada’s exports over the next few months as many businesses in both the U.S. and Canada face higher costs and uncertainty.

“Many firms are stuck in a wait-and-see mode as tariff exposure and uncertainty over future U.S. market access cause some firms to postpone capacity expansions,” said Desjardins in the report.

Deloitte says business investment in 2026 will increase by 1.6 per cent, and although many businesses will likely pull back on plans to expand into 2027 amid tariff and trade uncertainty, the economy as a whole will likely still show positive business investment growth because of two factors.

One, AI data centre projects that are currently in the works are set to advance to the construction phase next year, including Meta’s in Alberta and Bell’s in Saskatchewan. Both, however, continue to face significant opposition from voters amid pushback to expanded data centre construction.

Second, 2027 is set to see some investment decisions through the federal government’s Major Projects Office become finalized.

But the economy may still be on shaky ground, as Deloitte says, “the economy remains vulnerable to renewed trade tensions.”

Higher oil prices and retaliatory tariffs are also raising the risk of pushing up inflation in Canada, but Deloitte says that likely won’t have much of an impact this year beyond what consumers pay at the pump.

This is also one of the reasons Deloitte says the Bank of Canada will likely keep its benchmark interest rate on hold at 2.25 per cent for the rest of 2026.

But, as many as four potential interest rate hikes are expected next year.

“Despite an economy under pressure from this new round of tariffs and non-existent population growth, the Bank of Canada’s next move is likely to be a hike,” said Desjardins in the report.

“The Bank will remain on the sidelines this year as it monitors how the economy responds to the latest trade tensions before beginning a gradual hiking cycle in 2027 when four rate hikes are anticipated.”

Interest rate hikes can lead to more expensive mortgages and other loans for consumers and businesses, and Deloitte says the housing market is likely going to cool off over the next few months and “remain unfavourable” into next year.

The report says economic uncertainty will weigh on consumers, who may push back big purchases like a home.

In addition, rising bond yields are expected to make some mortgages more expensive, and unsold condo inventory will mean less new construction, which could lead to fewer available homes to purchase.

“Further complicating the outlook is elevated inflation risks. The longer energy prices stay high and tariffs remain in place, the greater the risk of pass-through to other goods,” said Desjardins in the report.