Canada faces ‘gradual and bumpy recovery,’ KPMG economic outlook says

Canada’s economic outlook for the next few years is being shaped by a mix of modest domestic resilience and external pressures, according to the latest forecast from KPMG. The firm describes the path ahead as a “gradual and bumpy recovery,” a phrasing that captures both the cautious optimism of policymakers and the lingering uncertainty that still haunts many Canadian households. While the projection of one‑per‑cent growth in 2026 may appear modest, it reflects a realistic assessment of how trade tensions, interest‑rate policy and the fledgling AI investment boom are intersecting with long‑standing structural trends such as population growth and regional resource dynamics.

What KPMG’s numbers really mean

The Fall 2026 Economic Outlook from KPMG pins Canadian GDP growth at one per cent for the current year, with a gradual acceleration to 1.8 per cent in 2027 and two per cent in 2028. Those figures sit below the United States’ performance, a gap the report attributes to “business not being as good as in the U.S.” Yet KPMG stresses that the quality of growth – the extent to which it translates into higher wages, stronger public finances and better services – is expected to improve even if the headline rate remains modest.

Importantly, the forecast does not factor in a potential trade agreement with the United States. The firm notes a “thaw in trade tensions looks likely, particularly after the midterms,” but it has chosen not to bake any such development into its baseline scenario because of “past head fakes.” In other words, KPMG is presenting a conservative baseline that can be adjusted upward if a deal materialises, but for now the outlook remains anchored to current realities.

U.S. trade policy as a headwind

The outlook highlights the impact of President Donald Trump’s trade war on Canada’s economy. While the United States is the largest trading partner, heightened tariffs and other protectionist measures have created a “tepid” and “sub‑par” growth environment for Canada in 2026. KPMG’s language suggests that the trade dispute is a primary source of uncertainty, even as the firm acknowledges a “gradual and bumpy recovery” is still possible.

For Canadian businesses that rely on cross‑border supply chains, the trade war translates into higher costs and longer lead times. The report points out that a trade deal could help Ontario and Quebec – provinces that depend heavily on manufacturing – rebound more quickly. Without such an agreement, the outlook for those provinces remains more cautious, underscoring how external policy decisions reverberate through Canada’s regional economies.

The AI investment paradox

One of the most striking contradictions in the KPMG outlook is the role of artificial intelligence. The firm notes that “continued consumer spending, rising investments in AI‑related infrastructure” will help cushion the economy. Yet a parallel analysis from Royal Bank of Canada economists paints a less rosy picture. According to senior RBC economist Claire Fan, AI spending has surged 28 per cent in the first half of 2026, but three‑quarters of the equipment purchased is imported.

This reliance on foreign‑made hardware means that the AI boom is not yet translating into domestic value‑added activity. Fan’s observation that the purchases are largely “computer and peripheral equipment made in other countries” suggests that the sector’s current growth is more about upgrading existing systems than building a home‑grown supply chain. As a result, the anticipated boost to GDP from AI investment remains limited, at least for the short term.

Monetary policy and market volatility

KPMG also flags the broader financial environment as a source of risk. The Bank of Canada’s recent interest‑rate hikes, combined with “bond yields skyrocketing across the world,” have made markets nervous about higher investment in AI and other capital‑intensive projects. Higher borrowing costs can dampen both corporate expansion plans and household consumption, especially in a climate where inflationary pressures are still being felt.

These monetary dynamics are intertwined with the outlook for the Canadian dollar. KPMG projects the loonie to average between $1.40 and $1.42 against the U.S. dollar in the near term, with a modest appreciation expected in the back half of 2027. A stronger currency can help reduce the cost of imported AI equipment, but it also makes Canadian exports less competitive, particularly for resource‑based provinces that rely on price‑sensitive markets.

Regional drivers and diverging fortunes

The outlook underscores the importance of regional variation in Canada’s recovery. The prairie provinces, especially Alberta and Saskatchewan, are expected to be “drivers of regional growth” thanks to higher oil prices, major project investment and the rollout of data centres. These factors combine to give the western economy a more buoyant outlook, even as national growth remains modest.

In contrast, Ontario’s rebound is projected for 2027, while Quebec’s growth is described as “subdued amid soft population growth.” Both provinces have economies heavily weighted toward manufacturing, a sector that is particularly sensitive to trade conditions. Should a U.S. trade deal be secured, KPMG suggests that Ontario and Quebec could see a faster recovery, highlighting the pivotal role of trade policy in shaping provincial fortunes.

Fiscal stimulus and immigration policy

The federal budget for 2026 is slated to provide “modest stimulus” for growth, according to KPMG. While the report does not quantify the size of the stimulus, the language indicates a measured approach that seeks to support the economy without over‑extending public finances. In addition, the budget is expected to “pave the path for higher immigration,” a policy lever that can help offset Canada’s modest natural population growth.

Higher immigration can bolster labour supply, support demand for housing and services, and contribute to a broader tax base. However, the benefits of increased immigration are not evenly distributed across provinces. Regions with strong labour markets, such as the Prairies, may absorb newcomers more readily, while provinces facing slower growth may need targeted policies to ensure newcomers can integrate into the economy effectively.

What Canadians can expect in the coming years

Putting the KPMG forecast into a broader Canadian context, the picture that emerges is one of cautious optimism tempered by external shocks. The projected one‑per‑cent growth for 2026 signals a modest expansion that will likely be felt more in the labour market through steady, rather than rapid, job creation. Consumers can expect continued pressure on housing costs and living expenses, especially as interest rates remain elevated.

Looking ahead to 2027 and 2028, the gradual acceleration to 1.8 per cent and then two per cent suggests that the economy could regain some momentum, particularly if trade tensions ease and the federal stimulus and immigration policies take effect. For Canadians watching Parliament Hill, the key policy levers will be the negotiation of any future trade agreement with the United States, the design of fiscal measures that support innovation without inflating debt, and the management of immigration flows to match labour market needs.

In the meantime, the resilience highlighted by KPMG – driven by continued consumer spending and modest population growth – offers a degree of reassurance. While the AI sector’s contribution to GDP remains limited for now, the ongoing investment in digital infrastructure may lay the groundwork for longer‑term productivity gains. As the loonie steadies and the prairie economies continue to benefit from resource prices, Canada’s recovery may indeed be “gradual and bumpy,” but it is also anchored in a set of fundamentals that could support a more robust expansion in the latter part of the decade.

This article was produced with AI-assisted research and editorial support. Reporting is based on the source material cited below. Sources: Global News Canada; globalnews.ca; Global1.News (12 November 2026).

By Alex Thompson, Staff Writer