Canada’s budget watchdog cuts its growth forecast, puts the five-year cost of the tariff war at 1.4 per cent of output and as many as 185,000 jobs, and warns that Ottawa will miss one of its own fiscal anchors
OTTAWA, Oct. 21, 2026
Canada’s Parliamentary Budget Officer has cut her growth forecast for this year and next, attributing the downgrade to the escalation of the tariff conflict with the United States, and has put a number on the long-run cost of the dispute: an economy roughly 1.4 per cent smaller after five years and employment as much as 185,000 lower than it would otherwise have been.
The October economic and fiscal outlook, released in Ottawa on Tuesday, Oct. 20, projects real gross domestic product growth of 0.9 per cent in 2026 and 1.5 per cent in 2027. Both figures are down from the June outlook, which had 1.1 and 1.6 per cent respectively.
“Canada faces a more challenging economic and fiscal outlook than we projected in June,” Parliamentary Budget Officer Annette Ryan said in the release accompanying the report. She added that “additional trade measures and ongoing uncertainty are weighing on growth in real output.”
For the trade community, the report is the first comprehensive official accounting of what the August and September escalation has actually done to the Canadian economy, and the numbers in it will shape the argument over remission, relief and diversification for the rest of the fiscal year.
The tariff arithmetic
The most directly useful figures in the outlook are the two effective tariff rates the office tracks.
The trade-weighted average U.S. tariff rate applied to Canadian imports has risen to 7.7 per cent, from 5.3 per cent at the time of the June outlook. Canada’s equivalent rate on goods arriving from the United States has nearly doubled, to 3.0 per cent from 1.6 per cent.
Those averages conceal enormous variation. A CUSMA-compliant good outside every special program still enters the United States duty free, while a product caught by the Section 338 proclamations pays 50 per cent regardless of its origin status. Steel, aluminum and autos carry their own Section 232 rates. A 10 per cent duty applied under the Trade Act sits on a broad swath of Canadian goods and can stack on the Section 338 duty where Section 232 does not already apply.
The practical significance of the average is that it is the number that drives the macroeconomic model. Moving the trade-weighted rate from 5.3 to 7.7 per cent in four months is a substantial shock to a trading relationship worth roughly a billion dollars a day, and the output and employment estimates in the report follow from it.
The long-run scenario
The headline long-run figure is a counterfactual rather than a forecast, and the distinction is worth stating precisely because it is so often lost in the retelling.
The budget office modelled an economy in which the bilateral trade measures in place through Oct. 1, 2026 remain permanently, and compared it to a hypothetical economy in which bilateral trade conditions had stayed where they were in 2024. The gap between the two after five years is about 1.4 per cent of real GDP.
On employment, the same exercise produces a peak shortfall of 0.9 per cent, or as many as 185,000 positions, reached six quarters after the simulated shock is applied. Because the model applies all the measures at once at the start of an artificial timeline, that six-quarter mark is not a date on the calendar. It is a feature of the simulation, not a deadline.
Nor does the figure describe announced layoffs. It is a projection of the difference between two modelled paths, and it does not identify any particular worker, firm or sector. Several Canadian outlets have reported the number without that qualification, and trade advisers fielding questions from clients this week should be prepared to draw the distinction.
The office also offered a note of qualified optimism. It observes that businesses appear to be adapting faster than its simulations suggest, and it expects growth to strengthen from 2028 as investment and exports recover, on the assumption that tariff uncertainty fades even if American duties remain in place.
The fiscal picture
The fiscal half of the report is in some respects more awkward for the government than the growth downgrade.
The deficit for 2026-27 is projected at $63.3 billion, which is actually lower than the June estimate, helped by stronger nominal GDP. Nominal growth is running well ahead of real growth, at 5.6 per cent this year and 3.4 per cent next, lifted by inflation and by higher oil and commodity prices. Nominal GDP is the tax base, so a high-inflation, low-growth economy flatters the current-year fiscal numbers while doing nothing for living standards.
Beyond the current year the picture darkens. The deficit is projected to peak at $70.2 billion in 2027-28 and to stand at $67.8 billion in 2030-31, which is $9.5 billion higher than the June projection for that year. Cumulative deficits over the five-year horizon total $333.3 billion, and federal borrowing is projected to rise by $732.9 billion over the same period. Deficits average roughly $3 billion a year higher than in June across the projection, because new spending more than offsets the stronger revenue.
The debt-to-GDP ratio rises from 40.8 per cent in 2026-27 to 42.6 per cent in 2030-31. The budget office is blunt that it will, in its words, rise steadily over the five-year horizon.
On the government’s own fiscal anchors, the verdict is split. The office projects that Ottawa will meet its operating budget anchor in 2028-29, with a $6.2 billion surplus on that measure, but will not meet its commitment to a declining deficit-to-GDP ratio. Ryan was careful to flag what the first of those results does and does not mean: “A balanced operating budget anchor should not be interpreted as a balanced fiscal position.”
The report also assumes the Bank of Canada begins raising its policy rate in early 2027, reaching 2.75 per cent by the middle of that year. Inflation is expected to average 2.8 per cent in 2026, driven by higher energy prices, before easing to 2.4 per cent in 2027. For importers, the combination of a rising policy rate and persistent inflation in traded goods is an unfamiliar one, and it complicates the usual assumption that a weaker growth outlook will bring cheaper financing.
How the economy got here
The outlook is the first since the collapse of the Canada-U.S. negotiations at the end of August, and the sequence of events in the intervening weeks explains most of the revision.
Talks broke down on Aug. 22. Prime Minister Mark Carney suspended negotiations, describing the American side’s late demands as unreasonable, and called the new tariffs a miscalculation. Washington’s Section 338 proclamations, signed July 20 and delayed by 72 hours, took effect at 12:01 a.m. Eastern time that same day, imposing 50 per cent duties on more than 550 subheadings of the U.S. tariff schedule covering close to US$20 billion in Canadian exports, with no exemption for CUSMA-originating goods.
Canada responded on Sept. 8 with countermeasures matching the American structure at 15, 25 and 50 per cent on a list covering $27.6 billion in U.S. imports. Steel and aluminum moved to 50 per cent from 25, with furniture, clothing and apparel added at the same rate; appliances, cheese and certain metal derivatives came in at 25 per cent. Existing counter-tariffs on American vehicles stayed.
Washington escalated the same day, with five further proclamations that adjusted the covered product lists as of Sept. 15, removing rock salt and cement while adding all-terrain vehicles and further dairy lines, and converted duties into outright import prohibitions for a defined set of alcoholic beverages, whey and molasses products, non-alcoholic beer and large-displacement motorcycles as of Sept. 29.
Alongside all of this, the softwood lumber file moved again. Following the U.S. Commerce Department’s latest administrative review, the B.C. Lumber Trade Council said in mid-October that Canadian softwood now faces combined import taxes of close to 35 per cent, a figure confirmed at 34.75 per cent in trade press reporting.
Separately, the first joint review of CUSMA on July 1, 2026 did not produce the 16-year extension that business groups in all three countries had sought. The agreement remains in force through at least July 1, 2036, but the parties now move to annual reviews beginning in 2027, and the U.S. Trade Representative opened a comment process in October ahead of the next one.
Reactions
The budget office does not make policy recommendations, and the political reaction to its outlook has broken along predictable lines, with the government pointing to the relative strength of the current-year deficit and opposition parties to the rising debt ratio and the missed anchor.
The more substantive reaction has come from business organizations, which have seized on the employment figure.
The Canadian Federation of Independent Business estimates that 53,112 small firms are directly affected by American tariffs, Canadian counter-tariffs or both, comprising 13,160 exporters and 45,414 importers. Corinne Pohlmann, the federation’s executive vice-president for advocacy, has argued that federal programs “continue to exclude about half of the small business community,” and that “programs that only help a few thousand businesses are unacceptable when tens of thousands need support.” The group has asked for a Small Business Tariff Relief program providing up to $70,000 to affected firms able to show they paid or absorbed the duty, a dedicated desk to speed remission decisions, and a cut in the small business corporate tax rate to 6 per cent from 9 per cent retroactive to the start of this year.
The federal support architecture announced in August is already substantial: $7.5 billion on top of nearly $25 billion previously committed, including $1.5 billion more for the Regional Tariff Response Initiative, a $500 million liquidity stream through the Business Development Bank’s Pivot to Grow program with the minimum revenue threshold lowered to $1 million, $2 billion through a new Canada Strong Diversification Fund aimed at shovel-ready capital maintenance at tariff-affected businesses, $3.5 billion in rapid response supports for workers and employers, and new flexibilities in the Large Enterprise Tariff Loan facility. Finance Minister François-Philippe Champagne framed the package in plain terms when it was announced: “When the United States asked too much and offered too little, we chose to stand up for Canadians.”
The gap the federation points to is between the size of that package and the number of firms able to reach it.
Reading the numbers against the labour market
The employment projection in the outlook should be read alongside what has actually happened in the labour market, which is a less dramatic but more immediate story.
Statistics Canada reported that employment fell by 68,000 in September and that the unemployment rate rose to 6.5 per cent. Employment nonetheless remained 95,000 higher than a year earlier. A large decline in public sector employment accounted for a meaningful share of the monthly drop, so the September figure is not a clean reading of tariff damage.
That ambiguity is characteristic of this phase of the trade conflict. The August merchandise trade data showed Canadian exports to the United States surging, with the bilateral surplus reaching $11.2 billion, as exporters front-loaded shipments ahead of the new duties. Front-running inflates the data in one month and depresses it in the next, and several quarters will pass before the underlying trend is legible.
For analysts, the practical consequence is that the budget office’s scenario is currently the best available estimate of the steady-state cost, and the monthly data are currently the worst available guide to it.
What it means for importers and exporters
The outlook is not a trade compliance document, but four implications follow from it for firms on both sides of the border.
First, plan on the rates, not on the resolution. The budget office’s base case assumes American duties remain in place even as uncertainty fades. The absence of scheduled talks, reported by CBC News on Oct. 20 on the basis of sources who said no agreement is expected before the Nov. 3 U.S. midterm elections, supports that assumption. Companies building 2027 budgets on an expectation of relief are building on a forecast that Canada’s own fiscal authority does not share.
Second, watch the cost of carry. A policy rate rising to 2.75 per cent by mid-2027, combined with duty outlays on goods that have not yet been sold, changes the working capital calculation for importers materially. Duty is payable on entry; margin arrives on sale. Firms that financed tariff payments cheaply in 2025 should re-run the arithmetic.
Third, use the remission and support channels that exist. The Canadian counter-tariff framework retains a remission process under section 115 of the Customs Tariff for exceptional relief, and the Regional Tariff Response Initiative threshold has come down to $1 million in revenue. An importer paying 25 per cent on American appliances or cheese has a domestic avenue available now.
Fourth, treat diversification as a financing criterion rather than a slogan. The Canada Strong Diversification Fund and the Strategic Response Fund through which it is administered are explicitly oriented toward reducing single-market exposure, and Canada’s recent agreements with Indonesia and the United Arab Emirates, along with talks with the Philippines, Thailand, India and Mercosur, give that orientation substance. Firms seeking capital support this year should expect to be asked where their next market is.
Sector by sector
The aggregate figures in the outlook flatten differences between industries that are, on the ground, very large.
Metals have held up better than the headline duty rate would suggest. Quebec’s aluminum smelters have proved more resilient than forecast through 2026, helped by a tight global supply picture that has given Canadian metal alternative buyers and supported prices. The industry’s structural advantage is simple and durable: the United States does not have the smelting capacity to replace Canadian aluminum, and building it would take years and enormous quantities of cheap power. That does not make the duties costless, but it does mean the burden has fallen more heavily on American buyers than the tariff schedule implies.
Forestry is in a different position. The softwood file predates the current conflict by four decades and runs on its own legal track through the U.S. Commerce Department’s administrative reviews rather than through presidential proclamation. With combined duties now near 35 per cent, the pressure on British Columbia and Quebec mills is cumulative rather than sudden, and it compounds a weak North American housing market.
Agriculture and food processing carry the most awkward exposure, because they sit at the intersection of the two disputes that generated the Section 338 findings. Canadian dairy policy is named in one of the proclamations, and Canadian cheese is among the products carrying the 50 per cent duty into the United States, while Canadian counter-tariffs put 25 per cent on American cheese coming the other way. Processors with integrated cross-border operations are paying on both legs.
Automotive is the sector where the gap between current cost and potential cost is widest. Existing Canadian counter-tariffs on American vehicles remain in force, and Section 232 duties apply on the American side, but the threatened 50 per cent duty on autos and auto parts scheduled for Jan. 1, 2027 is of a different order. The integrated North American vehicle supply chain, in which components cross the border repeatedly before final assembly, is the part of the relationship least able to absorb a duty of that size.
Aerospace has had a reprieve. The president threatened in September to bar Bombardier from the U.S. market, but took no action against the company when the September proclamations were signed, and said in Kansas on Oct. 19 that he did not intend to hurt the manufacturer, citing its 1,500 employees in Wichita. Civil aircraft covered by the WTO Agreement on Trade in Civil Aircraft were excluded from the Section 338 lists from the start.
The provincial dimension
A feature of this trade conflict that has no real precedent is the degree to which provincial measures have been cited as justification for federal American action.
Eight of ten provinces continue to restrict sales of American alcohol through their liquor boards. Saskatchewan announced an additional 50 per cent levy on U.S. alcohol on Aug. 27, and that measure was among the Canadian actions cited in the September American proclamations as evidence that Canada had not removed the practices at issue. Ontario and Quebec restrict American suppliers in public procurement, and several other provinces apply preferences for Canadian suppliers.
Ontario retains tools it has used once and could use again. A 25 per cent surcharge on electricity exports to the United States was imposed in March 2025 and suspended within a day, but it remains available, and the province has explored restricting nickel exports.
The result is a negotiation in which Ottawa is asked to deliver changes that fall within provincial jurisdiction, while provinces respond to tariff damage concentrated in their own industries. It is an arrangement that complicates any settlement, and it is one reason the budget office’s assumption of persistent measures is reasonable even if political conditions in Washington change.
The road ahead
Three events will shape the next revision of these numbers. The U.S. midterm elections on Nov. 3 will determine whether the political conditions for a settlement change. The federal budget will reveal how much additional fiscal room Ottawa will commit to tariff relief, against a debt ratio the budget office already expects to rise every year through 2030-31. And Jan. 1, 2027 is the scheduled start date for a threatened 50 per cent American duty on autos and auto parts, a measure that would reach a sector several times larger than everything Section 338 currently touches.
The budget office’s forecast does not include that auto measure. If it arrives on schedule, the next outlook will be worse than this one.