‘Modest downturn’: Deloitte expects downturn for Canada’s economy in Q2, Q3

Dawn Desjardins, Chief Economist at Deloitte Canada shares her perspective on the impact of the trade war on Canada's economy.

A new report predicts Canada’s economy to slow during the second half of the year and says it could stall further if Canada loses some tariff exemptions.

Deloitte released an economic outlook Wednesday outlining how U.S. trade policies could impact Canada’s economy. Deloitte said it is forecasting a “modest downturn” during the second and third quarter of the year, with gross domestic product shrinking 1.1 per cent and 0.9 per cent respectively. However, stronger growth at the end of last year and the beginning of 2024 will keep 2025 growth in positive territory with a 1.2 per cent gain, the report said.

“All of that uncertainty is really what we think is going to be driving this period of really slow economic activity, because when you look at the tariffs and their impact, certainly that is real and on certain sectors it’s going to be really quite difficult, but as long as our goods exports are compliant with our free trade agreement with the U.S., that can alleviate some of that pressure,” Dawn Desjardins, the chief economist at Deloitte Canada and an author of the report, said in an interview with BNNBloomberg.ca.

Inflation is expected to move toward the upper end of the Bank of Canada’s target range before easing back to two per cent toward the end of the year, the report said. Companies could be able to absorb some of the higher prices caused by tariffs over the short term, however pressure to profit margins will eventually result in higher prices.

“So, I really think that at the end of the day, we’re talking about an extremely uncertain environment,” Desjardins said, adding that the federal election has provided some level of clarity.

“At the end of the day, what we’re thinking is that we are now operating where both businesses and consumers have real concerns, and so we think they’ll pull back on spending.”

Even without a worsening tariff situation, the report said it anticipates a 0.9 per cent decline in non-residential business investment this year.

“The weakness really is going to be a slowing in consumer spending activity, and it’s going to be accompanied by a pullback in business investment,” she said.

In March, U.S. President Donald Trump exempted Canadian and Mexican goods covered by the United States-Mexico-Canada Agreement (USMCA) from 25 per cent tariffs.

However, Desjardins said in the report that its possible the current carve outs for USMCA compliant goods are eliminated, which would cause Canada to lose preferential access to U.S. import markets. If that were to take place, Canada’s real gross domestic product (GDP) would be “permanently lower by around three per cent by 2030,” the report notes.

“In that case, it will be a much more significant hit…all of our trade will likely see even a more strenuous pullback by businesses, and that will ripple through to the consumer, so we’ll see job losses, and we will see consumers pull back,” she said.

“So, what we’re saying here is that is the risk. Our base case assumption is that that does not materialize. But you have to acknowledge that there’s lots of risks out there.”

As Canada’s economy faces risks from tariffs, the report notes the crisis could be a catalyst for change. The report recommends some areas to focus on including enhancing productivity, diversifying away from U.S. dependency, simplifying processes for permits and regulation and eliminating internal trade barriers.