Canada’s economy is stuck in a period of slow growth because of weak business investment and trade uncertainty, according to a report from Deloitte.
The firm says that although conditions are weak, Canada’s economy doesn’t appear to be in a traditional recession, which can be marked by widespread job losses and broader weakness across the economy.
Deloitte released its summer economic outlook report on Thursday titled Growth on pause – Canada’s economy at a turning point.
The report unpacks several important economic themes, including Canada’s weak labour market, as well as inflation and global supply chain risks stemming from the Iran war, which appears to be subsiding now that a peace agreement has been reached that could see a lasting end to the conflict.
But the biggest issue facing the economy right now, the report says, is the ongoing trade uncertainty, which is weighing on businesses that are hesitant to invest until there is a clearer outlook.
Here’s what the report shows.
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The top risk highlighted in the report was trade uncertainty surrounding the CUSMA (Canada-U.S.-Mexico Agreement), which has been, and is expected to continue, weighing on businesses.
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“Business investment is expected to remain subdued in 2026, with firms largely in a holding pattern as trade uncertainty and the mid-year review of CUSMA weigh on confidence,” the report said.
“Unresolved trade issues with the U.S. remains the leading risk to the outlook. A failure to extend CUSMA or further U.S. tariff escalations would hit Canadian exports and confidence hard.”
The report adds that once there is clarity on CUSMA, that uncertainty would dissipate and “conditions could improve for sectors currently facing high tariffs.”
Under current terms of the agreement, most goods crossing the Canada-U.S. border are free from tariffs, but the sectoral tariffs that remain have had a significant impact on Canada’s economy.
This includes tariffs in place for U.S. imports of Canadian-made steel and aluminum, lumber, automotive and auto parts products, with several businesses like Algoma Steel laying off workers.
“Losing tariff-free access to the U.S. has a substantial impact on our economy,” the report said.
CUSMA is due for a mandatory review on July 1, which could see it renewed under the current terms for another 16 more years, or continue for 10 years under the current terms with annual reviews, or replaced with an entirely new framework.
Canada and Mexico have each pushed for the 16 year extension, while Trump said last week he would be willing to sign the agreement, but would prefer to see it “terminated.”
Until there is more certainty on these trade “frictions,” Deloitte says businesses are mostly taking a wait-and-see approach, which is going to continue slowing down Canada’s economic growth.
In 2025, GDP expanded 1.7 per cent, according to Statistics Canada, and Deloitte says it expects 2026 will see more modest annualized GDP growth of 0.7 per cent.
Speaking at a press conference Thursday, Prime Minister Mark Carney said his government is working to “provide greater certainty” amid the negotiations.
“Despite challenges, Canada maintains the best deal of any major U.S. trading partnership with 85 per cent of our trade remaining tariff-free,” said Carney.
“We’re working with the United States and Mexico to modernize CUSMA to provide greater certainty for workers and businesses and to create lasting prosperity across the continent.”
With the uncertain future of CUSMA, and Canada’s trade dynamics with the U.S. and Mexico as a whole, businesses are taking a wait-and-see approach until there is a clearer picture.
“Business confidence remains low with the review of the CUSMA trade relationship slated for July 1 and limited likelihood that a clear path forward will be easily achieved,” the report said.
“This is not an optimal solution for Canadian businesses but should the effective tariff rate on Canadian goods going to the U.S. remain at today’s relatively low level, a slow recovery in exports is likely.”
Canada’s economy slipped into a technical recession during the six months spanning October 2025 through March 2026, according to the latest GDP data. The report showed business investment had fallen for the fifth straight month.
Several economists, members of the Bank of Canada, as well as Carney were hesitant to describe the economy as being in a recession despite the headline GDP numbers pointing to two back-to-back quarters of declines, which otherwise meets the technical definition of a recession.
The Deloitte report describes these recession claims as “exaggerated.”
“There are several important factors that are weighing on the economy; the ongoing tension with its largest trading partner, rising costs for energy, pressured supply chains and low confidence. This has raised the prospect that the economy has entered a recession,” the report said.
“While the decline in output in the first quarter of 2026 combined with a one per cent drop in Q4 2025 meets one definition of recession, it is not that straight forward. In fact, beyond the headline numbers, there’s little evidence that a recession is underway.”
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