PUBLISHED June 28, 2026
Growth Set to Slow as Tariffs Are Treated as Permanent
According to the Parliamentary Budget Office’s Economic and Fiscal Outlook for June 2026, the Canadian economy grew by 1.7 percent in 2025, with a weakened outlook thereafter. Treating the current tariff environment as permanent, the PBO now projects real GDP growth of 1.1 percent in 2026 and 1.6 percent in 2027 — down from 1.3 percent and 1.8 percent respectively in its September 2025 outlook. Parliamentary Budget Officer Annette Ryan noted that the baseline outlook is broadly in line with the government’s own Spring Economic Update, though stress testing shows considerable uncertainty surrounding the path ahead.
A Bumpy End to 2025 Sets the Stage
Growth was uneven in the second half of 2025, expanding by 2.4 percent in the third quarter before contracting by 0.6 percent in the fourth. The economy entered 2026 with persistent trade uncertainty and slower population growth weighing on the near-term outlook. Business investment continues to lag as firms postpone expansion plans amid heightened uncertainty, while non-energy exports remain subdued, constrained by ongoing US tariffs — a combination that has pushed the PBO’s medium-term growth estimate below where it stood just months earlier.
Energy Prices Provide a Fiscal Silver Lining
The Middle East conflict has pushed energy and commodity prices higher in early 2026, and while this complicates the inflation picture, it has a notable upside for government finances. After accounting for historical revisions, nominal GDP — the broadest measure of the government’s tax base — is projected to be, on average, $19.5 billion higher annually over the 2026 to 2030 period compared to the September outlook, reflecting elevated commodity prices and their effect on the GDP deflator rather than stronger underlying real economic activity.
Inflation is projected to average 2.6 percent in 2026, as higher commodity prices offset downward pressure from excess supply and easing shelter costs. With the economy operating below its productive capacity and inflation driven primarily by transitory energy and exchange rate effects rather than strong demand, the Bank of Canada is projected to hold its policy rate at 2.25 percent through 2026 — an additional year of monetary stimulus compared to the September projection. As supply disruptions from the Middle East conflict ease, the PBO expects the Bank to gradually raise its rate, reaching 2.50 percent in mid-2027 and its estimated neutral level of 2.75 percent by the end of 2027.
Inflation is projected to average 2.6 percent in 2026, as higher commodity prices offset downward pressure from excess supply and easing shelter costs. With the economy operating below its productive capacity and inflation driven primarily by transitory energy and exchange rate effects rather than strong demand, the Bank of Canada is projected to hold its policy rate at 2.25 percent through 2026 — an additional year of monetary stimulus compared to the September projection. As supply disruptions from the Middle East conflict ease, the PBO expects the Bank to gradually raise its rate, reaching 2.50 percent in mid-2027 and its estimated neutral level of 2.75 percent by the end of 2027.
PBO projects the budgetary deficit to increase from $36.3 billion (1.2 percent of GDP) in 2024-25 to $72.0 billion (2.2 percent of GDP) in 2025-26, as modest revenue growth is outpaced by growth in expenses, largely reflecting new measures announced in Budget 2025 and the Spring Economic Update 2026. Combined, these measures amount to $68.4 billion in net new spending over the 2025-26 to 2030-31 period. Assuming no further new measures are introduced and existing temporary measures sunset as scheduled, the deficit is projected to decline to $58.2 billion by 2030-31.
Due to persistent budgetary deficits averaging 1.8 percent of GDP over the projection horizon, the federal debt-to-GDP ratio is anticipated to increase from 41.3 percent in 2025-26 to 42.5 percent in 2030-31. The debt service ratio — public debt charges relative to total revenues — is projected to climb from 10.6 percent in 2025-26 to 13.1 percent by 2030-31, while per-capita public debt charges rise from $1,288 to $1,885 over the same period, reflecting both low population growth and a rising debt stock.
The federal deficit-to-GDP ratio is projected to decline over the medium term to reach 1.5 percent by 2030-31, consistent with the government’s first fiscal anchor of a declining deficit-to-GDP ratio. However, PBO’s stress testing — drawing on decades of Canadian economic and fiscal history, including recessions, financial crises, and oil price crashes — estimates that the likelihood of the deficit-to-GDP ratio declining in every single year over the 2026-27 to 2030-31 period is less than 1 percent, underscoring just how sensitive this trajectory is to economic shocks along the way.
PBO projects the budgetary deficit to increase from $36.3 billion (1.2 percent of GDP) in 2024-25 to $72.0 billion (2.2 percent of GDP) in 2025-26, as modest revenue growth is outpaced by growth in expenses, largely reflecting new measures announced in Budget 2025 and the Spring Economic Update 2026. Combined, these measures amount to $68.4 billion in net new spending over the 2025-26 to 2030-31 period. Assuming no further new measures are introduced and existing temporary measures sunset as scheduled, the deficit is projected to decline to $58.2 billion by 2030-31.
Due to persistent budgetary deficits averaging 1.8 percent of GDP over the projection horizon, the federal debt-to-GDP ratio is anticipated to increase from 41.3 percent in 2025-26 to 42.5 percent in 2030-31. The debt service ratio — public debt charges relative to total revenues — is projected to climb from 10.6 percent in 2025-26 to 13.1 percent by 2030-31, while per-capita public debt charges rise from $1,288 to $1,885 over the same period, reflecting both low population growth and a rising debt stock.
The federal deficit-to-GDP ratio is projected to decline over the medium term to reach 1.5 percent by 2030-31, consistent with the government’s first fiscal anchor of a declining deficit-to-GDP ratio. However, PBO’s stress testing — drawing on decades of Canadian economic and fiscal history, including recessions, financial crises, and oil price crashes — estimates that the likelihood of the deficit-to-GDP ratio declining in every single year over the 2026-27 to 2030-31 period is less than 1 percent, underscoring just how sensitive this trajectory is to economic shocks along the way.
