Middle East Conflict Deepens Uncertainty, Slows Canada’s Economic Outlook: Deloitte

Canada’s economic outlook has taken a cautious turn as global tensions in the Middle East add fresh uncertainty, according to Deloitte Canada’s latest spring forecast. The firm has lowered its 2026 GDP growth projection to 1.2 per cent, a notable drop from its earlier estimate of 1.5 per cent and below last year’s 1.7 per cent expansion.

Dawn Desjardins, Deloitte Canada’s chief economist, attributed the softer outlook to a combination of rising geopolitical risks and ongoing trade friction with the United States. She explained that escalating conflict involving the U.S., Israel, and Iran has driven up global energy prices, creating ripple effects across supply chains and business confidence.

The situation has intensified concerns over global oil flows, particularly as disruptions threaten key shipping routes. Oil prices surged past US$110 per barrel following signals from U.S. leadership that military actions against Iran could continue without a clear end in sight. Meanwhile, international discussions involving over 40 countries are underway to secure the Strait of Hormuz, a crucial artery for global energy transport.

These developments have already begun to impact Canadian consumers. Gasoline prices have climbed above $1.80 per litre, reaching levels not seen in nearly four years. According to Desjardins, such increases are likely to dampen consumer spending and place additional pressure on businesses facing higher operating costs.

“The economy is dealing with multiple headwinds at once,” she said, noting that both households and companies are adjusting to a more uncertain environment. While growth is expected to remain modest in the early part of the year, Deloitte anticipates some stabilization later in 2026 if geopolitical tensions ease.

Trade uncertainty remains another critical factor. Canada’s economic relationship with the United States continues to face challenges, particularly in sectors like manufacturing, where tariffs on steel, aluminum, and automobiles have weighed heavily. Desjardins warned that any major changes to the Canada-U.S.-Mexico trade agreement during its upcoming review could further strain economic performance.

Business investment, which has lagged behind government spending, is expected to recover gradually in the second half of the year. However, this improvement depends heavily on energy prices stabilizing and geopolitical risks subsiding.

On the labour front, conditions remain uneven. While industries such as healthcare are experiencing strong job growth, manufacturing continues to struggle, leading to workforce reductions. The unemployment rate, which rose to 6.7 per cent in February, is projected to ease slightly to 6.3 per cent by the end of 2026.

Consumer behaviour is also expected to remain cautious. Deloitte predicts only modest spending growth as households contend with higher living costs and a softer job market.

The housing sector, once expected to rebound more strongly, is now forecast to recover at a slower pace. Housing starts are projected to decline to around 243,000 units in 2026, down from 259,000 the previous year. Elevated construction costs, unsold inventory, and weaker buyer confidence particularly in major cities like Toronto and Vancouver are contributing to the slowdown.

Despite the near-term challenges, Deloitte remains optimistic about the longer-term outlook. The firm believes that ongoing government infrastructure investments and efforts to diversify trade beyond the U.S. could lay the groundwork for stronger growth by 2027.

Desjardins emphasized that rebuilding momentum will take time, but increased business investment and improved confidence could eventually drive job creation and strengthen consumer activity.

For now, however, Canada’s economic path remains closely tied to global developments, with geopolitical tensions and trade dynamics continuing to shape the country’s growth trajectory.