Canada’s GDP outlook slashed by 20% over Iran war ‘uncertainty’

The ongoing war in the Middle East has added “another layer of uncertainty” to Canada’s economic outlook, Deloitte Canada said Thursday while cutting its GDP projection for the year by 20 per cent.

While the economy is still expected to grow modestly, the firm’s spring economic outlook now estimates 1.2 per cent growth in 2026, down from the 1.5 per cent estimated in January as well as last year’s 1.7 per cent gain.

Dawn Desjardins, Deloitte’s chief economist, said the “softer” outlook comes as the uncertainty surrounding Canada’s rocky trade relationship with the United States is being compounded by a jolt in energy prices sparked by the U.S.-Israeli war with Iran.

The conflict quickly spread across the wider region and has threatened global oil shipments.

Both consumers and businesses, she said in an interview, are “facing a lot of headwinds.”

“We’ve tried to inject that into our forecast, which means that in the first half of this year, we think we’re likely to see slower growth than we previously anticipated,” she said.

“But we do remain confident that as the year progresses, we’ll see some of that disruptive factor in the Middle East moderate. And we will, we believe, see an agreement with the U.S. and Mexico (on trade) that is quite similar to what we’re having right now. And that will alleviate some of that uncertainty for Canadian businesses.”

U.S. crude oil prices rose above US$110 a barrel on Thursday after U.S. President Donald Trump said in a primetime address the night before that U.S. attacks on Iran will continue, without offering a clear timetable for ending the conflict.

2:20 Business Matters: Oil prices soar following Trump’s national address on Iran war

More than 40 countries held talks Thursday on ways to secure and reopen the vital Strait of Hormuz oil route that has been choked off by Iran, a task Trump made clear will not be led by America.

The average price of gasoline in Canada has risen to more than $1.80 a litre as of Thursday, according to GasBuddy, the highest level in nearly four years.

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Desjardins said higher energy prices will affect supply chain costs and could even restrain business investment, which she noted is not matching government spending at the moment.

“We think this business investment in our forecast starts to improve in the second half of this year,” she said.

“That would be very much at risk if we should see this conflict continue and keep those pressures on energy costs.”

She also warned that, if “significant changes” to the Canada-U.S.-Mexico Agreement on free trade emerge from this summer’s scheduled review — particularly the persistence of high sectoral tariffs — “it could definitely take a significant toll on Canada’s economy.”

Deloitte’s forecast said consumers are likely to remain cautious in anticipation of prolonged elevated energy prices and a softer labour market, resulting in only modest spending growth in 2026.

The report said labour market conditions are expected to stabilize throughout 2026, with the unemployment rate gradually declining to 6.3 per cent by year‑end. The unemployment rate ticked up to 6.7 per cent in February from the previous month, according to Statistics Canada.

Currently, labour market conditions remain soft as trade uncertainty and slowing domestic demand continue to weigh on hiring.

Desjardins noted those conditions depend on industry. Manufacturing, for instance, has been “very, very soft” amid high U.S. tariffs on steel, aluminum and autos, forcing companies to trim their labour costs. Health care, meanwhile, is seeing “significant” job growth, she said.

The report said exports have partially recovered after a sharp second-quarter decline, and continued improvement along with targeted tariff relief will support growth this year. Meanwhile, imports are expected to recover more gradually, resulting in a positive contribution to growth from net trade this year.

1:51 Canada’s GDP grew 0.1% in January

Other factors should also provide some relief, including expectations that the Bank of Canada will hold its key policy rate at 2.25 per cent throughout 2026, along with key government spending on infrastructure.

The housing market recovery will also likely be slower than previously expected, the report said. Activity is expected to cool through 2026, with starts projected to slow to approximately 243,000 units, down from 259,000 in 2025.

It cited elevated construction costs, trade uncertainty and rising inventories of unsold units weighing on builder confidence and discouraging new project launches. The construction slowdown is most affecting condominium builds, with developers pausing projects in major markets like Toronto and Vancouver where presales have plummeted.

“You’re not seeing consumers really confident enough necessarily to take that plunge, maybe waiting it out a little bit to see, will prices actually go down even more?” Desjardins said.

“So we certainly are seeing a housing market that’s really not roaring back the way we might have thought it would because of the reduction in interest rates that we’ve had.”

The bottom line, she said repeatedly, is that efforts to diversify trade away from the U.S. and grow infrastructure and business investment “will take time.”

“We think that in 2027, the prospects for stronger growth are definitely there,” Desjardins said.

“We think with the government executing on some of these ambitious projects that they’re putting in place, as well as Canadian companies getting confident enough to put their money into the economy, that’s going to really set the stage for a strengthening in economic activity. And of course, if we do see that investment happening, there will be demand for labour. And that will help the consumer side of the economy.”

—With files from Global’s Anne Gaviola and The Canadian Press