Canada’s budget watchdog trims its growth forecast for 2026 and 2027, puts a permanent 1.4 per cent hole in real GDP down to the tariff war, and projects a $63.3 billion deficit as counter-tariffs work their way through the economy
OTTAWA, October 20, 2026. Canada’s Parliamentary Budget Officer lowered his economic growth projections for this year and next on Tuesday, citing the new round of United States tariffs imposed after bilateral trade talks collapsed in August and the dollar-for-dollar Canadian countermeasures that followed. The downgrade, published alongside a companion note that for the first time quantifies the cumulative drag from nearly two years of escalating trade restrictions, gives Canadian importers, exporters and lenders their most authoritative read yet on what the trade war has cost and what it is likely to keep costing.
The Parliamentary Budget Office now projects real gross domestic product growth of 0.9 per cent in 2026 and 1.5 per cent in 2027. Both figures are lower than the 1.1 per cent and 1.6 per cent the office published in its June outlook. The revision is modest in isolation. Set against the office’s parallel finding that the trade measures introduced since early 2025 will leave the level of Canadian real GDP 1.4 per cent smaller after five years than it would have been had the bilateral relationship stayed at 2024 levels, it describes something more durable than a soft patch.
What the numbers say
The headline revision sits inside the Economic and Fiscal Outlook, October 2026, a baseline projection the office publishes to help parliamentarians gauge economic and fiscal outcomes under current policy settings. The report was prepared by a ten-person team including Jill Giswold, Rolande Kpekou Tossou, Jason Stanton, Mark Creighton, Matt Dong, Marianne Laurin, Matthew McGoey, Ulysse Robert-Lacroix, Tim Scholz and Zachary Vrhovsek.
Nominal GDP growth, by contrast, was revised upward, to 5.6 per cent in 2026 and 3.4 per cent in 2027. The office attributes the divergence to price increases, particularly for oil and other commodities. That split matters more than it might appear. Federal revenues track nominal activity rather than real activity, so Ottawa collects more even as the physical volume of goods and services the economy produces grows more slowly. The result is a fiscal picture that looks better in the near term and worse later on.
The office now projects a budgetary deficit of $63.3 billion in 2026-27, an improvement on its June projection, with the shortfall peaking at $70.2 billion in 2027-28. By 2030-31 the projected deficit of $67.8 billion is $9.5 billion worse than the June outlook. Relative to June, deficits are roughly $3 billion higher per year on average across 2026-27 to 2030-31, as new spending measures more than offset the stronger revenues.
The incremental fiscal room created by higher nominal GDP is front-end loaded. The office puts it at $15.5 billion in 2026-27, falling to $3.4 billion by 2030-31. New spending and taxation measures announced since June are estimated to cost an additional $52.6 billion over the five-year horizon, rising to $12.9 billion in 2030-31. In other words, the room shrinks while the commitments grow.
Cumulative deficits over the next five years are projected at $333.3 billion. Federal borrowing over the same period is projected to rise by $732.9 billion, more than double the accrual-basis deficits, because the government is borrowing to finance loans, capital investments, defence procurement and other financial assets that add to national debt on a cash basis. The federal debt-to-GDP ratio is projected to climb every year, from 40.8 per cent in 2026-27 to 42.6 per cent in 2030-31. Federal debt per capita is projected to rise from $33,436 in 2026-27 to $39,191 in 2030-31, against $29,811 in 2021-22.
On the government’s own fiscal anchors, the office projects that Ottawa will meet its operating budget anchor in 2028-29, with a surplus of $6.2 billion, after a small deficit in 2027-28. It projects the government will miss its second anchor, a declining deficit-to-GDP ratio, with that ratio rising in 2027-28 and again, marginally, in 2029-30. The office’s assessment is blunt: on balance, the two anchors have imposed limited fiscal discipline on government spending and borrowing. Measures still to be announced in Budget 2026 could change the timing and profile of either anchor.
Putting a number on the tariff drag
The companion note, authored by Tim Scholz and published the same day, is the more useful document for anyone trying to price trade risk into a commercial decision. It converts the policy noise of the past twenty months into two effective tariff rates.
Trade actions introduced since June 2026 have raised the trade-weighted average effective United States tariff rate on imports from Canada from 5.3 per cent to 7.7 per cent, the office estimates. Canada’s response has raised the equivalent Canadian rate on imports from the United States from 1.6 per cent to 3.0 per cent. Those are averages across the full bilateral basket, which means they understate the burden on the specific product lines that have been targeted and overstate it on the large share of trade that still crosses the border duty free under the Canada-United States-Mexico Agreement.
The office’s estimate that the combined measures introduced since early 2025 will reduce the level of Canadian real GDP by 1.4 per cent after five years is a level effect rather than a growth effect. It does not mean the economy shrinks. It means the economy ends up smaller than it otherwise would have been, and stays smaller, because capital is allocated to serving a more fragmented market and some trade simply does not happen.
The office is careful to flag that actual outcomes have so far been better than a pure tariff calculation would suggest. Trade results reflect commodity prices, global growth and adjustments by exporters, and recent data indicate stronger export performance as of the second quarter of 2026 than a bilateral tariff analysis alone would predict. Part of that strength reflects front-loading, as buyers on both sides of the border pulled orders forward ahead of announced effective dates. Front-loading borrows from future quarters rather than creating new demand.
How the latest round came about
The current escalation dates to the summer. In July, the United States administration signalled its intention to impose additional tariffs on a range of Canadian products, invoking Section 338 of the Tariff Act of 1930, a provision that permits duties of up to 50 per cent on imports from countries found to discriminate against American commerce. The administration pointed to provincial decisions to pull American alcoholic beverages from liquor shelves, to Canadian tariffs on some American vehicles, and to Canada’s dairy tariffs and tariff-rate quotas as the discrimination at issue.
Negotiations broke down on August 21. The United States measures took effect on August 22, applying 50 per cent duties to roughly $27.6 billion in Canadian goods, including categories with no obvious connection to the dairy, auto or alcohol complaints, among them hockey sticks and cement. Energy, potash products already subject to Section 232 tariffs, fish and certain critical minerals were carved out.
Ottawa announced its response on August 25 and brought it into force on September 8. Canada matched the American action dollar for dollar and rate for rate, applying tariffs of 15, 25 and 50 per cent to $27.6 billion of imports from the United States, drawn from the same product space the American Section 338 and Section 232 measures target. Steel and aluminum products moved from 25 to 50 per cent, joined at that top rate by furniture, clothing and apparel. Appliances, cheese and certain steel and aluminum derivatives were set at 25 per cent. Existing countermeasures, including those on autos, remained in place, as did the federal tariff remission framework for exceptional relief requests.
Alongside the countermeasures, the federal government announced $7.5 billion in new and enhanced support, building on close to $25 billion delivered since the tariffs began. The package includes $1.5 billion through the Regional Tariff Response Initiative delivered by the regional development agencies, $500 million in liquidity support under the Business Development Bank of Canada’s Pivot to Grow program with targeted streams for forestry, steel and aluminum, $2 billion through the Canada Strong Diversification Fund for shovel-ready capital maintenance projects, and $3.5 billion in rapid response supports for workers and employers that extend employment insurance flexibilities and create a Worker Retention and Retraining Program. The minimum revenue threshold for tariff-related Business Development Bank programs was lowered to $1 million.
What Ottawa and the provinces are saying
Finance and National Revenue Minister Francois-Philippe Champagne framed the August decision in terms of refusal rather than retaliation. “When the United States asked too much and offered too little, we chose to stand up for Canadians,” he said when the countermeasures were announced.
Jobs and Families Minister Patty Hajdu struck a similar note. “Canada has what the world wants, and we will not allow any nation to determine our future,” she said. Industry Minister Melanie Joly said the measures were designed to protect jobs, strengthen key industries and secure supply chains. Dominic LeBlanc, President of the King’s Privy Council and the minister responsible for Canada-United States trade, said the countermeasures would support affected workers, farmers, families and businesses.
The political framing has held up better than the economic one. The budget office’s figures make clear that matching American tariffs rate for rate is a policy with a domestic cost, since the Canadian effective tariff rate on American goods has nearly doubled, from 1.6 per cent to 3.0 per cent, and Canadian buyers pay that.
Business sentiment and the Bank of Canada
The budget office’s revision landed a day after the Bank of Canada published its quarterly Business Outlook Survey, which carried a similar message with an important timing caveat.
The survey found that business sentiment improved on average in the third quarter, with firms reporting better sales outlooks than in the second quarter as the drag from trade tensions and Middle East geopolitical uncertainty eased. But roughly three-quarters of the interviews took place before the August breakdown in talks and the announcement of the new Canadian counter-tariffs. Interviews ran from August 6 to September 2.
Firms surveyed after the breakdown cited the new American tariffs and the Canadian countermeasures as factors weighing on their outlooks. “The tariffs are also dampening business sentiment, weakening outlooks for exports and investment, and putting upward pressure on costs and prices,” the bank said in its report. Inflation expectations have risen alongside the new tariffs and the recent increase in energy prices.
About half of firms said they planned to keep passing some or all cost increases on to customers, in several cases citing somewhat improved demand and an effort to recover margin compressed in earlier quarters. At the same time, more companies than in the previous quarter reported that competitive pressure limits their ability to raise prices, which is the margin squeeze that shows up later in employment decisions rather than in prices. Business investment intentions eased slightly but remained robust.
A companion survey of consumer expectations, also conducted mostly before the breakdown, found long-term inflation expectations rising to match short-term expectations, a shift central bankers watch closely because it signals that households have stopped treating price pressure as temporary. Consumers reported better financial health than in the previous quarter, though high prices and economic uncertainty continue to weigh.
Both surveys land ahead of the bank’s October 28 interest rate decision and monetary policy report. The policy problem the tariff war creates for the central bank is the familiar one with supply shocks: the measures push prices up and output down at the same time, so there is no single rate setting that addresses both.
What it means for importers and exporters
For Canadian businesses, the practical content of Tuesday’s documents is the effective tariff rate rather than the GDP forecast.
Canadian exporters to the United States now face an average effective rate of 7.7 per cent, up from 5.3 per cent before June. The average conceals enormous dispersion. Goods that qualify for preferential treatment under the Canada-United States-Mexico Agreement and fall outside the Section 338 and Section 232 lists continue to enter duty free. Goods on the 50 per cent lists face a rate that is, for most products, prohibitive. The commercial task is no longer forecasting an average. It is confirming, line by line and at the tariff-classification level, which side of that divide each shipment falls on, and whether the certification of origin on file will survive scrutiny if the entry is reviewed.
Canadian importers of American goods face the mirror image. The effective Canadian rate has risen from 1.6 per cent to 3.0 per cent, with 15, 25 and 50 per cent bands applied to specific lists covering steel, dairy, appliances, agricultural equipment, pulp and paper, electronics, furniture, clothing and apparel. Firms that treated the original 25 per cent steel and aluminum countermeasure as a manageable cost should recheck their exposure, because much of that category moved to 50 per cent on September 8. The federal remission framework remains available for exceptional relief, and remission applications are evidence-driven: a firm that can document the absence of a Canadian or non-American source, or contractual commitments entered before the measures were announced, is in a materially better position than one making a general affordability argument.
Three operational points follow from the budget office’s analysis.
First, front-loading is finished as a strategy. The office notes that export performance has run ahead of what tariff analysis alone would predict, and part of that is inventory pulled forward. Businesses that built buffer stock ahead of the August and September effective dates are now working through it. The quarters ahead will show the tariff effect without that cushion, which is one reason the office expects growth of only 0.9 per cent this year.
Second, the 1.4 per cent level effect is a planning assumption, not a forecast of recovery. The office is projecting that a measurable share of the bilateral trade relationship does not come back even after five years of adjustment. For firms deciding whether to requalify a supply chain, open a non-American distribution channel or move finishing operations across the border, that framing argues against waiting for a settlement.
Third, financing conditions matter as much as tariff rates. The office projects federal borrowing rising by $732.9 billion over five years, far faster than the accrual deficits, and a debt-to-GDP ratio climbing every year of the projection. Heavier federal issuance in a period of elevated inflation expectations tends to show up in the term structure, and most tariff-affected firms are borrowing to bridge working capital. The support package addresses liquidity directly through the Business Development Bank streams and the Regional Tariff Response Initiative, and the lowered $1 million revenue threshold brings smaller firms into scope.
Where the damage is concentrated
National averages conceal a highly uneven distribution. The effective tariff rate of 7.7 per cent is an aggregate across a bilateral goods relationship worth well over $900 billion a year, most of which still moves duty free. The firms inside the targeted lists are not paying 7.7 per cent. They are paying 50.
Steel has absorbed the most visible damage. Hamilton-based Stelco, now owned by Cleveland-Cliffs, has cut hundreds of jobs as American tariffs on steel persist, and the ownership relationship has made the dispute unusually public, with the American parent’s chief executive publicly blaming Canadian trade policy for the layoffs and urging Ottawa to block offshore imports. Canadian steelmakers have offset some of the pain by redirecting tonnes into domestic demand, helped by federal and provincial procurement preferences and by Canada’s own tightened import controls, but domestic consumption cannot absorb the volume that previously crossed the border.
Beverage alcohol and dairy sit at the other end of the spectrum. Both were named in the American discrimination findings, both face the full 50 per cent rate, and both export into a market where no alternative of comparable scale exists. Wine producers in British Columbia and Ontario, already dealing with a small American footprint, have found export channels closing with little notice.
The housing market is transmitting the shock in a way that is easy to miss in trade statistics. Residential construction costs in Canada have risen with the counter-tariffs on American building products, while home prices have fallen hardest in the dozen or so Canadian cities most exposed to American trade action, which are disproportionately manufacturing centres in southern Ontario and Quebec. That combination, higher build costs and falling resale values, discourages new supply precisely where employment is weakest.
Manufacturing sales have held up better than expected, with metal and chemical producers leading recent gains, which is consistent with the budget office’s observation that exports have outperformed what tariff analysis alone would predict. The caution is the same one the office applies: some of that is inventory movement rather than underlying demand.
The outlook
The budget office’s projection is explicitly a baseline under current policy settings, not a prediction about negotiations. Talks between Ottawa and Washington have not formally resumed since the August 21 breakdown. The 2026 review of the Canada-United States-Mexico Agreement remains the structural event that will determine whether the current rates are a peak or a floor.
For now the numbers describe an economy absorbing a shock rather than one in crisis: growth that is positive but thin, a deficit that improves this year and worsens later, business sentiment that was recovering until the measures landed, and an export sector that has outperformed the models while running down inventory. The question the next two quarters will answer is how much of that outperformance was real and how much was timing.