The latest economic forecast from the Parliamentary Budget Office has been adjusted downward for this year and the next due to the impact of new U.S. tariffs and retaliatory measures by Canada. The revised projections now indicate a real gross domestic product growth rate of 0.9% for the current year and 1.5% for 2027, down from the previous estimates of 1.1% and 1.6% issued in June.
Annette Ryan, the parliamentary budget officer, noted that Canada is facing a more challenging economic and fiscal outlook than anticipated earlier, attributing this to additional trade measures and ongoing uncertainty that are hindering the country’s economic growth.
Trade negotiations between Canada and the U.S. hit a roadblock at the end of August, leading to a new round of tariffs imposed by the U.S. and corresponding counter-tariffs from Canada. The PBO now predicts a budgetary deficit of $63.3 billion for the 2026-27 fiscal year, peaking at $70.2 billion in 2027-28. These deficits are projected to be $3 billion higher annually on average from 2026-27 to 2030-31 compared to earlier forecasts, mainly due to increased spending measures outweighing revenue growth.
Ryan emphasized the importance of monitoring the debt-to-GDP ratio as a key indicator of fiscal health, highlighting that it is expected to rise steadily over the next five years. Looking ahead, the economic and fiscal prospects of Canada will heavily rely on the effectiveness of recent capital investments in boosting productivity, economic capacity, and overall prosperity.
The PBO anticipates that the Bank of Canada will commence raising its policy rate in early 2027 to maintain stable inflation expectations, with a target rate of 2.75% by mid-year. In terms of inflation, the watchdog foresees that higher energy costs will keep the annual inflation rate relatively high in 2026, averaging 2.8%, before moderating to 2.4% in 2027.