Canada faces ‘gradual and bumpy recovery,’ KPMG economic outlook says

The Canadian economy is facing a “gradual and bumpy recovery” over the next couple of years, KPMG’s economic outlook said.

The Canadian economy is forecast to grow at one per cent in 2026, with GDP growth ramping up to 1.8 per cent in 2027 and two per cent in 2028, KPMG’s Fall 2026 Economic Outlook said.

“Business is not as good as in the U.S., but our view is that the Canadian economy will see a gradual and bumpy recovery,” the report said.

The KPMG forecast does not account for the possibility of a trade deal with the U.S.

“A thaw in trade tensions looks likely, particularly after the midterms, but we have not baked it in given past head fakes,” it said.

Growth in 2026 is expected to be “tepid” and “sub-par” with U.S. President Donald Trump’s trade war weighing on Canada.

However, continued consumer spending, rising investments in AI-related infrastructure, Canadian “adaptation” to U.S. tariffs and “modest” population growth will mean a resilient Canadian economy, the forecast said.

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“While that may not be eye-popping growth, our expectation is that the quality of Canada’s growth will improve,” it said.

So far, however, AI investment has failed to spur economic growth in Canada, analysis shows.

Analysis from Royal Bank of Canada (RBC) economists says they don’t expect rising AI investments to add to Canada’s GDP growth in the same way as in the United States.

Claire Fan, a senior economist with RBC, said Canada is beginning to invest more in AI infrastructure, but those investments are being made in computer and peripheral equipment made in other countries.

Over the first half of 2026, these purchases surged 28 per cent, according to national accounts data.

However, Fan said 75 per cent of this equipment is imported from outside of Canada.

2:21 Business Matters: Canada’s economy picks up the pace to grow at 3.3% in Q2

The economy is still facing headwinds, the KMPG report said, with markets being nervous about higher investment in AI, the Bank of Canada raising interest rates and bond yields skyrocketing across the world, including here in Canada, KPMG said.

The federal budget for 2026 will provide some “modest stimulus” for growth and pave the path for higher immigration, it added.

The prairie provinces are expected to be drivers of regional growth, with Alberta and Saskatchewan benefiting from higher oil prices, major projects investment as well as data centre build out.

Ontario’s economy is expected to rebound in 2027, but growth in Quebec will “remain subdued amid soft population growth.”

The economy in Ontario and Quebec, which rely heavily on manufacturing, could rebound faster in the event of a trade deal.

The Canadian dollar is expected to average between $1.40 and $1.42 compared to the U.S. Dollar in the near term, with the Loonie expected to pick up steam in the back half of 2027.