Canada’s Parliamentary Budget Officer puts a number on the trade war, estimating that measures introduced since June alone have lifted the average United States tariff on Canadian goods from 5.3 to 7.7 per cent, and that the cumulative damage will leave real GDP 1.4 per cent smaller after five years.
OTTAWA, October 20, 2026 Canada’s budget watchdog cut its growth forecast on Tuesday and published, for the first time, a precise estimate of how much of the damage is attributable to tariffs rather than to the rest of a difficult global economy.
The Parliamentary Budget Office released its Economic and Fiscal Outlook for October 2026 alongside a companion assessment note on the economic impact of recent Canada-United States trade measures. Taken together the two documents are the most detailed official accounting yet of what two years of escalating tariffs have cost the Canadian economy, and they land four days before the federal government is expected to begin signalling the contents of Budget 2026.
Real GDP growth is now projected at 0.9 per cent for 2026 and 1.5 per cent for 2027. In June the PBO had forecast 1.1 and 1.6 per cent. The downgrade, the office said, reflects revised tariffs and trade conditions.
Putting a rate on the trade war
The sharper contribution comes from the assessment note, authored by PBO analyst Tim Scholz, which converts the sprawling architecture of proclamations, surtax orders, quotas and remissions into two comparable numbers.
Trade actions introduced since June 2026, the note finds, have increased the trade-weighted average effective United States tariff rate on imports from Canada from 5.3 per cent to 7.7 per cent. Canada’s response to those new American tariffs has increased the equivalent Canadian rate on imports from the United States from 1.6 per cent to 3.0 per cent.
Those figures are worth sitting with. They describe the average charge actually paid across the full basket of bilateral trade, which is a very different thing from the headline rates that dominate political coverage. A 50 per cent tariff applied to a narrow slice of goods produces a modest effective rate. The gap between the two explains why business commentary and macroeconomic data have often seemed to be describing different economies.
The cumulative estimate is more severe. The PBO calculates that the combined Canada-United States trade measures introduced since early 2025 will reduce the level of Canada’s real GDP by 1.4 per cent after five years, measured against a pre-tariff baseline in which the bilateral trading relationship remains at 2024 levels. That is a permanent reduction in the size of the economy rather than a one-year growth effect, and on current output it represents roughly $40 billion in annual activity that will simply not occur.
The office was careful to note the limits of the exercise. Actual trade outcomes reflect a range of factors beyond tariff policies, it said, including commodity prices, global growth and adjustments by exporters. Recent data indicate stronger export performance as of the second quarter of 2026 than a bilateral tariff analysis alone would predict. Canadian exporters, in other words, have been more resourceful than the models assumed.
A fiscal picture pulling in two directions
The fiscal outlook is a study in offsetting forces. Nominal GDP growth, which drives federal revenues, is projected higher than in June at 5.6 per cent in 2026 and 3.4 per cent in 2027, reflecting price increases for oil and commodities. Real growth is down, nominal growth is up, and the revenue line benefits from the latter.
That produced what the PBO calls incremental fiscal room, heavily front-end loaded. The office puts it at $15.5 billion in 2026-27, declining to $3.4 billion by 2030-31. New spending and taxation measures announced since June, however, are estimated to cost an additional $52.6 billion over those five years, rising over the period to $12.9 billion in 2030-31.
The net result is a deficit that improves in the near term and deteriorates later. The PBO projects a 2026-27 deficit of $63.3 billion, better than its June projection. By 2030-31 the deficit is projected at $67.8 billion, a deterioration of $9.5 billion against June. The Canadian Press, reporting on the release, noted that the deficit is projected to peak at $70.2 billion in 2027-28, and that relative to June, deficits are about $3 billion higher per year on average across the 2026-27 to 2030-31 window because new spending measures more than offset stronger revenues.
On the government’s own fiscal anchors the verdict is mixed. The PBO projects that the operating budget anchor will be met in 2028-29, with a surplus of $6.2 billion, following a small projected deficit in 2027-28. The second anchor, a declining deficit-to-GDP ratio, is projected not to be met, with the ratio rising in 2027-28 and, marginally, again in 2029-30. New measures in Budget 2026 could change the timing and profile of either.
The office’s assessment of the anchors themselves was notably blunt. On balance, it wrote, the two fiscal anchors have imposed limited fiscal discipline on government spending and borrowing.
The borrowing number
Buried below the deficit figures is the number most likely to matter to anyone pricing Canadian risk. The PBO anticipates that federal borrowing will grow significantly faster than deficits, which are measured on an accrual basis. Over the next five years cumulative deficits are projected to total $333.3 billion. Federal borrowing over the same period is projected to rise by $732.9 billion, as the government borrows 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, which the PBO describes as the traditional measure of fiscal sustainability, is projected to rise every year of the forecast, from 40.8 per cent in 2026-27 to 42.6 per cent in 2030-31. Per capita federal debt is projected to climb from $29,811 in 2021-22 to $33,436 in 2026-27 and $39,191 by 2030-31.
For importers and exporters the relevance is indirect but real. A fiscal track of that shape constrains how much further tariff relief, remission generosity and sectoral support Ottawa can extend without trade-offs elsewhere, at precisely the moment when steel, forestry, autos and agriculture are all queuing at the same door.
What businesses are reporting
The PBO numbers arrived one day after the Bank of Canada published its Business Outlook Survey for the third quarter of 2026, and the two documents fit together unusually well.
The survey, released on October 19 as volume 23.3, found that overall business sentiment improved on average in the third quarter after deteriorating in the second. The balance of opinion on future sales sits above its historical average. The headline improvement, however, carries a significant caveat about timing. Interviews ran from August 6 to September 2, and roughly three quarters of them took place before Canada-United States trade talks broke down on August 21.
The firms surveyed after the breakdown told a different story than those surveyed before it. Export outlooks weakened after the collapse and are lower than before it, with firms citing the new American tariffs on some goods and the Canadian counter-tariffs. More firms reported that trade tensions had raised their costs and prices.
On investment the bank was direct. Renewed tensions have further dampened investment intentions, and the drag has returned to levels seen in late 2025 and early 2026. Some firms are cutting investment in Canada or shifting it abroad, particularly in steel and autos. Trade tensions and related uncertainty, the bank wrote, are weighing on the plans of several firms. Hiring intentions were soft overall, with most firms planning to keep headcounts unchanged.
On prices the mechanism is visible in the data. Roughly half of firms plan to pass on some or all of the cost increases tied to tariffs and to the Middle East conflict. The share reporting higher costs exceeded the share reporting higher selling prices, which the bank reads as evidence that tariff costs are only partly being passed through, with competitive pressure absorbing the remainder in margin. One-year-ahead inflation expectations rose in September alongside tariffs and higher oil prices, though they have not returned to the peaks seen in early 2025 or April 2026.
The bank’s summary line was unambiguous. The new tariffs and counter-tariffs, it said, are putting upward pressure on costs, prices and inflation expectations.
The survey’s composite indicator came in at -0.33, improved from -0.38 in the prior quarter but still well into negative territory.
The small business view
The Canadian Federation of Independent Business published its own quarterly projection on October 15, and it points in the same direction. CFIB estimates third quarter GDP growth at 2.0 per cent and expects a slowdown to 1.4 per cent in the fourth quarter, attributing the deceleration to trade uncertainty and high fuel costs.
The federation’s pricing data is more granular than the Bank of Canada’s. Most businesses expect to pass at least some tariff-related costs to customers. Twenty-eight per cent plan to pass through the full amount. Eighteen per cent have not yet decided how to handle it.
Simon Gaudreault, CFIB’s chief economist and vice-president of research, framed the result as a response to weak demand rather than opportunism. Many businesses have been dealing with soft demand and weak sales, he said, so it is no surprise that some firms are looking to adjust their prices. He also warned against reading the headline numbers too confidently. Aggregate data, he said, is currently masking a tale of mixed business fates, reflecting an economy where businesses face different realities and challenges.
That observation deserves emphasis. A 0.9 per cent national growth rate is an average drawn from a steel sector shedding hundreds of jobs in Hamilton, a forestry sector closing mills across four provinces, an oil and gas sector enjoying strong commodity prices, and a services economy largely insulated from tariffs altogether. The aggregate is accurate and tells you very little about any individual firm.
How the economy got here
The current effective rates are the product of a fast-moving 2026.
On July 20, President Trump signed three proclamations under Section 338 of the Tariff Act of 1930, imposing 50 per cent tariffs on specific categories of Canadian goods including autos, alcohol and dairy, with no exemption for goods that comply with the continental trade agreement. After a deadline extension and a late round of negotiation, tariffs of 50 per cent took effect on about $20 billion in United States dollars of Canadian goods on August 22, covering some dairy, alcoholic beverages, cement and hockey equipment, after talks collapsed before a midnight deadline. Prime Minister Mark Carney attributed the breakdown to late changes in the American proposed terms.
Ottawa responded on August 25 with a package of targeted countermeasures and support. The counter-tariffs, effective September 8, applied rates of 15, 25 or 50 per cent matched dollar for dollar and rate for rate against the American measures, covering products accounting for $27.6 billion in imports from the United States. Steel and aluminum products previously subject to a 25 per cent counter-tariff moved to 50 per cent, alongside furniture and apparel. Appliances, certain dairy products and some steel and aluminum derivatives drew 25 per cent. Remaining listed goods drew 15 per cent. Existing counter-tariffs, including those on autos, remained in place.
The same announcement carried $7.5 billion in support, on top of nearly $25 billion already provided since the American tariffs began. It included $1.5 billion more for the Regional Tariff Response Initiative, a new $500 million Business Development Bank of Canada liquidity stream with targeted programs for forestry, steel and aluminum, $2 billion more for the Canada Strong Diversification Fund, and a $3.5 billion suite of rapid response supports for workers and employers including a new Worker Retention and Retraining Program.
Finance and National Revenue Minister Francois-Philippe Champagne said at the time that when the United States asked too much and offered too little, Canada chose to stand up for Canadians. Industry Minister Melanie Joly said Canada would not merely respond to change but shape it. Dominic LeBlanc, the minister responsible for Canada-United States trade, said the focus was on building strength at home.
The counter-tariff regime has since been softened in practice. Trade analysts noted in early October that remission orders have blunted Ottawa’s counter-tariffs on 629 American goods, a reminder that the effective Canadian rate of 3.0 per cent calculated by the PBO already reflects substantial administrative relief.
Where the damage concentrates
National averages are the wrong unit of analysis for a tariff conflict that has been deliberately targeted. The American measures were built around Section 338 proclamations covering autos, alcohol, dairy, cement and sporting goods, and Section 232 actions on steel, aluminum, copper, timber and lumber. Canada’s counter-tariffs mirror that structure across steel, dairy, appliances, agricultural equipment, pulp and paper and electronics.
The consequence is that exposure maps onto geography with unusual precision. Southern Ontario carries the autos and steel exposure. British Columbia, northern Ontario, Quebec and New Brunswick carry the forestry exposure. The Prairies carry the agricultural equipment and canola exposure, compounded by the separate Chinese measures on Canadian farm products. Atlantic Canada carries a mix of seafood, pulp and manufacturing exposure.
This is why the Bank of Canada’s observation that aggregate sentiment improved while export outlooks weakened is not a contradiction. A services economy and a strong commodity complex can carry national numbers while tradeable goods manufacturing contracts underneath them. CFIB’s Simon Gaudreault made the same point when he warned that aggregate data is masking a tale of mixed business fates.
For the sectors on the wrong side of that split, the PBO’s 1.4 per cent permanent output reduction understates the local effect by a wide margin. A national figure that averages a sector running flat against a sector contracting by double digits is accurate and useless to the firm in the second category.
The monetary policy overlay
The inflation findings in the Business Outlook Survey matter for reasons beyond the survey itself. Tariffs present central banks with the least convenient combination of effects: they raise prices while reducing output. The conventional response to one is the opposite of the conventional response to the other.
The Bank of Canada’s data suggests the pass-through is partial. The share of firms reporting higher costs exceeded the share reporting higher selling prices, which means tariff costs are being split between consumers and corporate margin, with competitive pressure determining the division. That is good news for headline inflation and poor news for business investment, since compressed margins are the precursor to the capital spending reductions the survey also documented.
One-year-ahead inflation expectations rose in September alongside tariffs and higher oil prices, though they remain below the peaks of early 2025 and April 2026. The PBO’s nominal GDP upgrade, driven by oil and commodity prices, points in the same direction. Firms planning price and wage settlements through 2027 should assume a cost environment that stays elevated without the demand conditions that would normally justify passing it through.
What it means for importers and exporters
The PBO’s effective rate figures are the most useful planning numbers to come out of Ottawa this year, and they should reframe how Canadian firms think about their exposure.
An average effective rate of 7.7 per cent on exports to the United States means that most Canadian goods still cross at or near zero, while a minority cross at punitive rates. Firms should therefore stop reasoning about the trade war at the national level and model it at the tariff line level. The question is not what the tariff environment is doing to Canada. It is whether a specific product, under a specific classification, with a specific origin and content profile, falls inside or outside the covered lists.
On the import side, the 3.0 per cent average Canadian rate carries the same lesson in reverse, with an added complication. Because remission orders now cover hundreds of American goods, the surtax a Canadian importer actually owes may differ substantially from the surtax order on its face. Importers who built landed-cost models in September should revalidate them against current remission coverage, and those paying surtax on goods that have since been remitted should examine their refund position.
Three operational priorities follow. First, classification discipline, because the entire system now turns on tariff line coverage rather than country of origin alone. Second, remission tracking as a live process rather than a one-time check, given how frequently coverage has changed. Third, contract review, specifically on who bears tariff risk, since the effective rates on both sides have now moved three times in four months.
For firms making capital decisions, the Bank of Canada’s finding that investment is shifting abroad, particularly in steel and autos, is the signal to watch. The PBO’s 1.4 per cent permanent output loss is not primarily a story about trade flows. It is a story about investment that gets made somewhere else.
Reading the numbers against the rhetoric
There is a gap worth naming between how the trade conflict is discussed and what the PBO’s measurements show, and importers and exporters are better served by the measurements.
The political vocabulary of the past year has been maximal. Fifty per cent tariffs, retaliation, economic warfare, suspended negotiations. The effective rates tell a quieter story: an average American charge on Canadian goods of 7.7 per cent, and an average Canadian charge on American goods of 3.0 per cent. Those are meaningful numbers and they have real costs, but they are not the numbers implied by the headlines.
Two mechanisms explain the gap. The first is coverage. The high rates apply to targeted product lists rather than to trade as a whole, and continental agreement compliance still clears a large share of bilateral flows at zero even where it does not clear the targeted lists. The second is administrative relief. Remission orders have blunted Canada’s counter-tariffs across 629 American goods, and the American side has run its own exclusion and refund processes.
The practical lesson for Canadian firms is that the tariff environment rewards precision and punishes generalisation. Companies that have invested in classification work, origin documentation and remission tracking are paying materially less than companies that assumed the headline rates applied to them and priced accordingly. The PBO’s finding that second quarter exports outperformed what bilateral tariff analysis alone would predict is, in part, a measurement of that adaptation.
It also means the risk is asymmetric in an uncomfortable direction. An effective rate built on narrow coverage and heavy remission can rise quickly if either changes. A single proclamation adding product lines, or a remission order allowed to lapse, moves the effective rate far more than a change in headline percentages would.
What comes next
Budget 2026 is the immediate marker. The PBO has explicitly flagged that new measures could change the timing and profile of both fiscal anchors, and the office’s judgment that the anchors have imposed limited discipline is an unusually direct challenge to publish a credible plan.
Beyond that, the joint review of the continental trade agreement remains the structural question that the tariff arithmetic cannot settle. The PBO’s baseline assumes current policy settings. Everyone involved understands that current policy settings are the least likely outcome.