The Parliamentary Budget Office has revised its economic growth projections downwards for this year and next due to the impact of new U.S. tariffs and retaliatory measures from Canada. The latest outlook released on Tuesday forecasts a real gross domestic product (GDP) growth of 0.9% for the current year and 1.5% for 2027. These figures represent a decrease from the previously estimated growth rates of 1.1% and 1.6%, respectively, reported in June.
Annette Ryan, the parliamentary budget officer, expressed that Canada is facing a more challenging economic and fiscal future than anticipated earlier in the year. She highlighted that additional trade actions and persistent uncertainty are hindering the country’s economic growth.
Trade negotiations between Canada and the U.S. stalled at the end of August, leading to the imposition of new U.S. tariffs and subsequent Canadian counter-tariffs. As a result of these developments, the PBO now forecasts a budgetary deficit of $63.3 billion for the 2026-27 fiscal year, peaking at $70.2 billion in 2027-28. This represents an increase of $3 billion annually compared to the previous projections, attributed to new spending initiatives outweighing revenue growth.
Ryan emphasized the importance of monitoring the debt-to-GDP ratio as a key indicator of fiscal well-being, noting that it is expected to rise steadily over the next five years. Looking ahead, she emphasized that Canada’s economic and fiscal prospects will be heavily influenced by the effectiveness of recent capital investments in boosting productivity, economic capacity, and overall prosperity.
As part of its assumptions, the PBO anticipates that the Bank of Canada will commence raising its policy rate in early 2027 to maintain stable inflation expectations, reaching 2.75% by the middle of the year. Regarding inflation, the watchdog predicts that elevated energy prices will contribute to an average inflation rate of 2.8% in 2026, which is expected to ease to 2.4% in 2027.