Canadian Economy Faces ‘Gradual and Bumpy Recovery’ Over Next 3 Years, KPMG Report Says

Canada’s economy “faces a gradual and bumpy recovery” over the next three years, according to a new economic outlook report that cites resilient consumers and adaptation to U.S. tariffs as contributing to projected growth of 1 to 2 percent.

Accounting firm KPMG said in its Nov. 11 report that it forecasts GDP growth of 1 percent this year, 1.8 percent next year, and 2 percent in 2028, with “resilient” consumer spending, rising investments, adaptation to tariffs, and “modestly stronger population growth” supporting those figures.

It noted the “risks to growth are roughly balanced,” although it expects output to remain roughly 1 percent below its pre-2025 trend.

The accounting firm described publishing an economic review as “nerve-wracking,” because geopolitical turmoil makes predictions difficult. However, it said it has learned that businesses are adapting to these issues, reinforcing one of the key principles guiding its outlook.

The firm said it continues to see positive earnings growth as firms adjust to tariffs and lean into areas where demand is emerging, such as artificial intelligence and related infrastructure.

Another factor is that “consumers continue to spend,” the report said. KPMG said that spending is why the International Monetary Fund believes the global economy will grow to 3.1 percent in 2026 and 3.4 percent next year, while the accounting firm’s U.S. office expects America’s growth to hit 2.4 percent this year and 2.6 percent next year.

The report said that while business “is not as good” in Canada as in the United States, the accounting firm believes the Canadian economy “will see a gradual and bumpy recovery,” even though “the starting point is not the best.”

KPMG said trade tensions and a decline in immigration have caused Canada’s economic growth “to slow substantially” this year, while the latest data “have been soft.” It also said the economy “will grow at a tepid annual average” pace of 1 percent this year and “be sub-par in the back half” of this year, as U.S. tariffs and retaliatory measures affect trade-exposed sectors.

The report noted that while other “challenges will dent growth,” KPMG was “cautiously optimistic” that Canada’s economy would experience more positives than negatives over the next couple of years. This included projected GDP growth of 1.8 percent next year and 2 percent the year after.

Aside from the continued strength of consumer spending, KPMG said it is optimistic because of the rising investment spurred by high commodity prices, major projects proceeding, demand for AI and related infrastructure, continued adaptation to tariffs, an eventual stabilization of exports to the U.S., and a “modest increase in population growth.”

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

Ontario’s economy is also expected to rebound in 2027 following a sluggish 2026, as pressures from weak manufacturing activity and slowing population growth ease. Meanwhile, economic gains in British Columbia and Quebec are expected to remain subdued because of slower population growth.

Work on the Trans Mountain pipeline is expected to add roughly 90,000 barrels per day of export capacity in early 2027, while Enbridge pipeline improvements should provide additional capacity later that year, KPMG said. However, the forecast warns that Canada’s ability to increase production will remain constrained by pipeline capacity.

The Canadian oil industry also faces challenges from the widening price discount on Western Canadian Select crude compared with the U.S. benchmark West Texas Intermediate, said the report. The discount has increased to approximately US$30 per barrel, compared with a historical average of roughly US$15.

Refinery outages, competition from Middle Eastern producers, and increased Venezuelan oil shipments to the United States have widened the gap. The forecast expects the discount to narrow as refinery maintenance concludes and Middle Eastern tensions potentially ease.

Meanwhile, Canadian inflation is forecast to average 2.8 percent in 2026 before declining to 2.1 percent in 2027 and 1.6 percent in 2028, KPMG said. Those projections assume oil prices fall from approximately US$95 per barrel in the fourth quarter of 2026 to US$80 by the end of 2027.

The report noted that a more comprehensive trade agreement could increase economic output by approximately 0.7 percent compared with the baseline forecast, while reducing the effective U.S. tariff rate on Canadian goods to roughly 3 percent.

However, the report identifies a major global financial market downturn as its greatest downside risk. Potential triggers include disappointing earnings from major technology companies, concerns about debt financing for artificial intelligence infrastructure, another surge in energy prices, or a European debt crisis.

Although the authors consider such a downturn unlikely, they warn that the risks have increased and could reinforce one another.

Despite these uncertainties, the report expresses cautious optimism about Canada’s economic prospects, predicting a turning point toward stronger growth in early 2027. It acknowledges that insufficient tax and regulatory reform, along with the departure of some entrepreneurs, remain challenges, but points to growing business confidence, major investment initiatives, and Canada’s relatively stable economic policies.

“It will take time, and the upcoming data may not look pretty, but we see a turning point towards higher growth early next year,” the report added. “Go long on Canada, but be patient.”