The Canadian economy is expected to see modest growth this year, but the ongoing war in the Middle East and continued trade uncertainty are among the risks to that projection.

Deloitte’s spring economic outlook released Thursday estimated 1.2 per cent growth in 2026, down from last year’s 1.7 per cent gain.

Dawn Desjardins, Deloitte’s chief economist, said Canadian consumers and businesses are still “navigating murky waters” amid a jolt in energy prices due to international conflict, an unclear future for North American trade and structural challenges from slowing population growth.

“We think the first half’s going to be the tougher half for Canada’s economy, but we have downgraded our second half a little bit, too,” Desjardins said in an interview.

“We’re reflecting the fact that we have this highly uncertain environment for Canadian companies and consumers to be operating in.”

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 are still soft as trade uncertainty and slowing domestic demand continue to weigh on hiring. Desjardins cited employment losses in the manufacturing sector that are expected to persist through the first quarter of 2026, while weakness is also expected in educational services and public administration as governments rein in spending and international student arrivals slow.

Deloitte’s forecast also 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.

“There are, I think at this stage, prospects that we will see slower global growth in 2026 because of what’s happening in the Middle East and the impact that these higher energy prices are going to have on global growth,” she said.

“There’s some risk to the inflation outlook. If we continue to see prices for energy rising or remaining very high, that certainly could constrain, globally, consumer and business spending, but also here in Canada.”

Desjardins added that the forecast assumes the energy market disruption will moderate over time. It also banks on Canada retaining tariff-free access to most U.S. goods amid an upcoming review to the Canada-U.S.-Mexico Agreement.

But a “real breakdown in our relationship with the U.S.” could upend those projections.

“That risk is lingering. I’m not sure that it’s as intense as it certainly was (last year), but again, we have to consider this is still our biggest trading partner,” Desjardins said.

“Yes, lots of new free trade agreements are being struck by the government, but … (the U.S.) is where we are sending most of our exports right now.”

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.

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 investments in infrastructure.

Desjardins said ensuring government funds and private investment continue to flow will help cushion external pressures to the domestic economy.

The federal government is aiming to leverage public finances to build out housing, infrastructure and other major projects. Last year, Prime Minister Mark Carney launched a new major projects office to fast-track nation-building proposals and streamline the federal approval process. Some of the projects identified included ports, railways and energy corridors.

Ottawa has also been ramping up its defence spending.

Canada spent $63.4 billion on national defence in 2025, meeting its NATO commitment to spend two per cent of GDP on defence for the first time, the alliance’s annual report said last month. Carney called it the “single largest year-on-year increase in defence investment in generations.”

Desjardins said those efforts “should be sufficient to help businesses look for opportunities to invest in our economy.”

“Now, if we don’t see spending dollars flow from governments who are putting in action some pretty aggressive plans, if the execution does not follow, of course that’s going to be a significant risk to our economic outlook,” she said.

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.

Purpose-built rental construction is also slowing down amid rising vacancies and cooling rent growth.

This report by The Canadian Press was first published April 2, 2026.

Sammy Hudes, The Canadian Press