Canada’s Economy Hits Pause Button as Trade Tensions Keep Businesses on the Sidelines

Canada’s economy is navigating a difficult stretch, caught between sluggish business investment and the persistent cloud of trade uncertainty but don’t call it a recession just yet.

That’s the central message from Deloitte’s latest summer economic outlook, released Thursday, which paints a picture of an economy that’s stalled rather than collapsed. The report, titled Growth on pause – Canada’s economy at a turning point, acknowledges the headwinds but stops short of sounding the alarm bells that a traditional recession would warrant.

The single biggest drag on the Canadian economy right now isn’t inflation, isn’t the housing market, and isn’t even consumer spending. It’s uncertainty specifically, the kind that comes from not knowing what the future of Canada’s most important trade relationship looks like.

The Canada-U.S.-Mexico Agreement, better known as CUSMA, is due for a mandatory review on July 1, and businesses across the country are essentially frozen in place until they know which way it goes. The options on the table range from a clean 16-year renewal to an entirely new framework and U.S. President Donald Trump has signalled he’d prefer to see the deal “terminated” altogether.

That kind of ambiguity doesn’t sit well with boardrooms. Deloitte found that business investment is expected to stay muted throughout 2026 as companies adopt a wait-and-see posture, reluctant to commit capital until the trade picture becomes clearer.

“Unresolved trade issues with the U.S. remains the leading risk to the outlook,” the report noted, warning that a failure to extend CUSMA or further tariff escalations from Washington would hit Canadian exports and business confidence hard.

Right now, roughly 85 per cent of Canada’s trade with the U.S. remains tariff-free a point Prime Minister Mark Carney was quick to highlight at a press conference Thursday. But the sectoral tariffs that do exist are doing real damage. Canadian steel, aluminum, lumber, and automotive products are all subject to U.S. import tariffs, and companies like Algoma Steel have already begun laying off workers in response.

Technically speaking, Canada did slip into a recession during the six months between October 2025 and March 2026, with GDP contracting for two consecutive quarters. But Deloitte argues that framing is misleading.

“Beyond the headline numbers, there’s little evidence that a recession is underway,” the report said, describing some of the recession talk as “exaggerated.” Unlike a textbook recession which typically brings widespread layoffs and broad-based economic deterioration Canada’s current slowdown is more concentrated, driven largely by trade-related anxiety rather than a fundamental breakdown in economic activity.

Carney, the Bank of Canada, and several leading economists have similarly pushed back on the recession label, even as the GDP figures technically checked that box.

For the full year, GDP grew 1.7 per cent in 2025 according to Statistics Canada. Deloitte expects that figure to shrink to just 0.7 per cent annualized growth in 2026 modest by any measure, but a far cry from a full-blown economic crisis.

Deloitte’s outlook isn’t entirely grim. The firm sees a potential rebound if and when trade clarity arrives. The Iran conflict, which had been stoking global supply chain concerns, appears to be winding down following a peace agreement removing at least one external pressure point from the equation.

And if CUSMA does get resolved in a way that preserves Canada’s trade access, Deloitte suggests the uncertainty premium that’s been dragging on business confidence could lift relatively quickly, with export activity staging a gradual recovery.

For now, though, the economy remains in a holding pattern. Businesses aren’t panicking they’re waiting. And until Ottawa and Washington find common ground on trade, that patience could continue to cost Canada dearly in lost investment and stunted growth.

Carney said his government is committed to reaching a resolution. “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,” he said Thursday.

Whether that certainty arrives before further damage is done remains the defining question hanging over Canada’s economy heading into the second half of 2026.