'A failure to extend CUSMA or further U.S. tariff escalations would hit Canadian exports and confidence hard'
Canadian employers should brace for at least 18 months of constrained hiring and compensation pressure after Deloitte Canada forecast on Thursday that the national economy will grow just 0.7% in 2026.
This will lead HR leaders to defend headcount approvals and salary budgets against a backdrop of trade uncertainty and above-target inflation before a meaningful recovery to 2% arrives in 2027.
The projections stop short of declaring a recession but describe an economy stagnating under U.S. trade friction, weak business confidence, and the highest inflation reading since December 2023. "In fact, beyond the headline numbers, there's little evidence that a recession is underway," chief economist Dawn Desjardins wrote.
Desjardins noted the contraction is concentrated in trade-exposed sectors — steel, aluminum, and lumber — not spread broadly across the economy. Bank of Canada governor Tiff Macklem and the C.D. Howe Institute's business cycle council have similarly declined to use the label, The Canadian Press (CP) reported.
Earlier this year, Canada entered a technical recession for the first time since the COVID-19 pandemic, according to Statistics Canada (StatCan).
Trade uncertainty weighs on hiring
The largest risk to the outlook remains U.S. tariff policy — and its workforce consequences are most acute in manufacturing, logistics, and energy. CUSMA currently shields an estimated 95% of Canadian goods from U.S. tariffs, according to the Financial Post, but the July 1 renewal deadline is less than a week away with little expectation of a deal. Failure to renew would shift CUSMA to annual reviews; a successful renewal would extend its expiration to 2042, according to CP.
The stakes for employers are significant. The Deloitte report warned that "a failure to extend CUSMA or further U.S. tariff escalations would hit Canadian exports and confidence hard," with the firm's own modelling showing substantial economic output at risk even after trade diversification efforts.
HR leaders in export-dependent industries should expect hiring freezes and contingent-labour reliance to persist until trade clarity emerges. "As we get some clarity on some of these key issues impacting our economy, we do think that we will see business investment accelerate and this will create jobs," Desjardins told CP.
Growth levers: infrastructure, business confidence
Deloitte identifies two potential growth drivers with direct workforce implications. The first is government spending on infrastructure, defence, critical minerals, and resources. Prime Minister Mark Carney's major projects office is aimed at accelerating approvals of nation-building initiatives, creating near-term demand for skilled trades, engineers, and project management talent. Government fixed investment surged 7.3% last year; Deloitte projects a more moderate 3.7% gain in 2026.
The second is restoring business confidence through regulatory reform, including removing interprovincial trade barriers — a persistent obstacle for HR departments managing cross-jurisdictional workforces and credential recognition — and investing in worker re-skilling and AI. "What we're looking for is some of the hurdles to business investment being reduced," Desjardins told the Financial Post.
Inflation at 16-month high complicates compensation
With salary review cycles now running against the highest inflation rate since December 2023, total rewards professionals face growing pressure to close widening gaps between internal pay scales and market rates. Statistics Canada reported Monday that inflation rose from 2.8% in April to 3.2% in May, while Deloitte expects the Bank of Canada to hold its benchmark rate at 2.25% for the rest of 2026 — limiting relief from the interest rate side.
Desjardins said the May increase was concentrated in energy costs and expected to ease, with crude oil having fallen to just below US$70 per barrel on Wednesday after surging above US$100 in late April. Employers managing group benefits programs linked to energy-sensitive cost indices should nonetheless monitor whether the moderation materialises as forecast before finalising mid-year compensation adjustments.
GDP growth in Canada is “expected to strengthen over 2026 and 2027, reaching 1.2% and 1.7% respectively, as the economy recovers from the 2025 trade‑related slowdown triggered by higher US tariffs,” according to a previous report from the Organisation for Economic Co-operation and Development (OECD).
