Energy-driven inflation keeps the Bank of Canada on hold at 2.25% through 2026
Talk of a Canadian recession is overblown even though the economy just met the technical definition, Deloitte Canada said in its summer outlook released Thursday, forecasting growth of 0.7 percent this year before a rebound to 2 percent in 2027.
"We do think that we will see business investment accelerate and this will create jobs," Desjardins, the firm's chief economist, told BNN Bloomberg, adding that growth depends on resolving the key issues weighing on the economy.
Desjardins said two factors will decide the outlook.
Canada needs largely tariff-free US market access, with steel and aluminum the likely exceptions, and government policy must lift business sentiment by easing interprovincial trade barriers and backing major projects.
Unresolved trade issues with the US remain the biggest risk, the report said.
CUSMA is nearing its July 1 renewal deadline, and as BNN Bloomberg reported, the deal expires in 2036, a renewal would push that to 2042, and a failure to renew would trigger annual reviews for up to 10 years.
For markets, the central call is patience.
The Bank of Canada will hold its policy rate at 2.25 percent through the rest of 2026, according to the report, with gradual increases resuming in 2027 as growth gathers pace and the overnight rate reaching 3.25 percent by the end of next year.
The hold rests on the view that inflation is energy-driven rather than broad based.
StatCan reported Monday that annual inflation jumped to 3.2 percent in May from 2.8 percent in April, the highest headline rate since December 2023, per BNN Bloomberg, yet excluding energy it stood at 1.8 percent in April.
"When we look at the inflation data, the headline rate is relatively high at 3.2 percent, but beneath the surface it's largely being driven by energy prices," Desjardins said, adding that easing prices leave the Bank room to stay on hold.
Persistent energy inflation is the swing factor.
Such conditions would push inflation "beyond energy into other parts of the economy," Desjardins said, forcing a more aggressive response from the Bank of Canada.
The firm does not treat that as its base case.
Crude dipped just below US$70 on Wednesday after climbing above US$100 a barrel in late April, BNN Bloomberg reported, and Desjardins expects the decline to continue.
Bank of Canada governor Tiff Macklem said Tuesday he is not seeing evidence of generalized inflation, according to the same outlet.
Deloitte rejected the recession label even as StatCan's data met it.
The economy posted a second consecutive quarterly decline in real GDP in the first quarter, BNN Bloomberg reported, but the firm sees the weakness as narrow rather than systemic.
"In fact, beyond the headline numbers, there's little evidence that a recession is underway," Desjardins said in the report, noting that only tariff-hit sectors such as steel, aluminum and lumber are contracting while most industries keep growing.
Macklem has similarly downplayed the term, and the CD Howe Institute's business cycle council said it remains too soon to apply it, per BNN Bloomberg.
Investment is the key constraint, not consumer demand.
Firms are sitting on the sidelines until trade conditions clear, Desjardins told BNN Bloomberg, though they hold substantial liquidity on their balance sheets.
Software spending stands out as a bright spot, she added, signalling productivity gains.
Investment should improve in 2027 as measures to unlock private capital and streamline project approvals pull forward deferred spending.
"The real opportunity for growth will come from the combination of governments pushing forward with infrastructure investment, spending on defence, critical minerals and resources," the report said, citing tax incentives, fewer internal trade barriers, reskilling and AI as keys to unlocking private dollars.
Prime Minister Mark Carney's agenda includes infrastructure investment and a major projects office to speed reviews of nation-building projects, BNN Bloomberg reported.
Housing will stay a drag, with residential investment falling 2.6 percent in 2026 and housing starts easing to roughly 249,000 units from 259,000 in 2025, according to the report. Large markets diverge, Desjardins said.
"In large cities like Toronto and Vancouver, we continue to see significant weakness in the condominium market, and that doesn't appear to be easing," she said, though she pointed to firmer demand elsewhere and a recovery slower than most expected.
Household consumption will slow to 1.6 percent this year from 2.4 percent in 2025, the report said, while employment gains drop to 85,000 from nearly 300,000.
The unemployment rate should average 6.5 percent this year before declining in 2027, driven more by slower population growth than hiring.
The first-quarter surprise also raised questions about the numbers themselves.
