Deloitte forecasts Canada’s economic growth will slow to 1.2% in 2026 amid Iran war, trade uncertainty

Deloitte projects Canadian real GDP growth of 1.2% in 2026, down from a 1.7% gain last year. The unemployment rate is expected to gradually decline to 6.3% by year-end (it was 6.7% in February), the Bank of Canada is assumed to hold its policy rate at 2.25% through 2026, and housing starts are forecast to cool to ~243,000 units from 259,000 in 2025. Key downside risks include higher energy prices from the Middle East conflict, ongoing U.S. trade uncertainty that could threaten tariff-free access, persistent manufacturing job losses, and the possibility that planned federal infrastructure and defence spending (national defence $63.4bn in 2025) fails to materialize as expected.

Analysis

Canada’s policy push into nation‑building and defence creates a lean trade: infrastructure and midstream assets will capture the bulk of discretionary capital even if core domestic demand stays flat. Pipelines, ports and rail benefit from project financing that is less cyclically linked to consumer spending — that converts episodic fiscal flows into multi‑year, fee‑like cashflows that often re‑rate on certainty of revenue rather than GDP growth.

The weakest link will be sectors whose cashflows rely on presales and high leverage: condo developers, speculative rental projects and adjacent construction suppliers. Slowing starts lower builder bargaining power, which compresses margins for cement, steel and equipment suppliers, and produces concentrated regional credit stress that can amplify losses at residential lenders and construction finance units within broader banks.

Two dominant macro catalysts will determine dispersion: the path of global energy prices and the outcome of North American trade friction. A sustained energy uplift quickens capex into corridors and raises midstream take or pay recoveries within quarters; a trade breakdown produces a step‑function export shock that hits manufacturing orders and regional logistics demand over months. Volatility in either axis creates attractive entry points for asymmetric option structures.

Consensus is too binary: it treats Canada as either “recovering” or “recessing,” but the real story is cross‑sectional polarization. Positioning that is long durable, contractually backed cashflows (infrastructure, defence services) and short speculative, leverage‑dependent residential exposure will likely outperform a market‑wide beta trade if the government executes even a portion of planned capital projects.

Key Decisions for Investors

• Long ENB (Enbridge) or TRP (TC Energy) — 6–12 months. Size 3–5% NAV, buy on a <=3% intraday pullback. Rationale: midstream fee‑like cashflows and project optionality; target +20% upside conditional on sustained energy price premium, stop at -12% to limit pipeline/regulatory execution risk.
• Pair trade: Long XEG (Canadian energy ETF) / Short XRE (Canadian REIT ETF) — 3–6 months. Relative‑value trade aiming for 10–20% divergence as energy capex re‑rates and residential activity stays weak. Use equal notional sizing to neutralize market beta; unwind if XEG underperforms XRE by >8% within 4 weeks (signaling regime change).
• Buy USD/CAD put spread (long USD) or UUP call spread as a 3–6 month hedge against trade escalation. Small cost (<1% of NAV) to cap downside from a CAD shock; payoff kicks in if risk‑off or trade actions weaken CAD by 2–4% — protects export‑exposed shorts and levered domestic credit positions.
• Long CAE (defence/aviation training) — 9–18 months via outright or 12–18 month call‑buy. Expect re‑phasing of defence budgets to lift contracted training and aftermarket; asymmetric upside if multi‑year contracts accelerate, limited downside if procurement is delayed (use 15% trailing stop).