Deloitte Canada

has downgraded its growth expectations for Canada in 2026, forecasting

gross domestic product

(GDP) will rise by 1.2 per cent this year, compared to its previous forecast in January of 1.5 per cent.

The downgrade comes as the global economy reels from the impacts of the

United States

–

Israel

war on

Iran

.

In addition, risks associated with the upcoming review of the Canada-U.S.-Mexico Agreement (

CUSMA

), a deal that has so far shielded Canada from most of U.S. President

Donald Trump

’s

tariffs

, were also considered.

“We have had to revise down our forecast for 2026 … because of this layered impact,” chief economist Dawn Desjardins said. “Not only the (CUSMA) review, which has been coming for quite a lot of time, but also the war in the Middle East and the impact this has had both on energy prices, but as well as on financial market volatility.”

Peter Routledge

, head of the Office of the Superintendent of Financial Institutions (OSFI), Canada’s top banking regulator, said at an event earlier this week that a month ago he would have thought the Canadian economy did a lot better than most had feared. The outlook looked good as well, with Canada looking to monetize its resources.

“The war in the Middle East is the wrench,” he said. “We’re seeing volatility in markets today and we’re going to see it continue.”

Desjardins said Canadians are likely going to see higher levels of

inflation

in the near term due to the rising energy prices. But she said the inflation pressures will likely be contained because “in general, the economy is running at a lacklustre pace and labour conditions are soft.”

This combination is going to allow the

Bank of Canada

to hold the policy rate at 2.25 per cent throughout the volatile period, she said.

Deloitte’s forecast is based on the assumption that most Canadian goods exports will continue to avoid tariffs and that the CUSMA review will pass without major alteration. It also retained the industry-specific tariffs, “which opens the door to a stronger outcome should they be removed.”

In addition, the report said the government’s aggressive policy to create additional free trade agreements with other global partners also provides some upside for exports.

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• Email: nkarim@postmedia.com