The Parliamentary Budget Office has adjusted its economic growth forecast downwards for this year and the next due to the impact of new U.S. tariffs and retaliatory measures from Canada. The revised outlook released on Tuesday by the federal budget watchdog now predicts a real gross domestic product growth of 0.9% for this year and 1.5% for 2027, lower than the previous estimates of 1.1% and 1.6% issued in June.
Annette Ryan, the parliamentary budget officer, stated in a news release that Canada is facing a more challenging economic and fiscal outlook than previously projected. Factors such as additional trade measures and ongoing uncertainty are putting pressure on the country’s economic growth.
Trade negotiations between Canada and the U.S. collapsed at the end of August, leading to a new round of tariffs imposed by the U.S. and retaliatory tariffs from Canada. The PBO also anticipates a budgetary deficit of $63.3 billion for the 2026-27 fiscal year, peaking at $70.2 billion in 2027-28. These deficits are expected to be $3 billion higher annually on average over the period of 2026-27 to 2030-31 compared to the previous projections, mainly due to increased spending measures outweighing stronger revenues.
According to Ryan, the PBO emphasizes the importance of the debt-to-GDP ratio as a key indicator of fiscal health, which is projected to increase steadily over the next five years. The long-term economic and fiscal outlook of Canada will heavily rely on the effectiveness of recent capital budget investments in enhancing productivity, economic capacity, and overall prosperity.
The PBO assumes that the Bank of Canada will begin raising its policy rate in early 2027 to maintain stable inflation expectations, reaching 2.75% by mid-year. In terms of inflation, the watchdog anticipates that higher energy prices will contribute to an elevated annual inflation rate of 2.8% in 2026, followed by a slight decrease to 2.4% in 2027.