Canada Missed Its CUSMA Deadline. Now Its Economy Is “On Pause”

Canada’s economy has slipped into what Deloitte calls being “on pause,” with the mandatory July 1 review of the Canada-United States-Mexico Agreement having passed without a clear resolution, leaving businesses across the country’s most trade-exposed sectors unable to plan with any confidence, according to Global News’ reporting on the Deloitte assessment.

A Technical Recession, Officially Disputed

The economic backdrop into which the CUSMA review has landed is already fragile. Canada’s GDP data show a technical recession spanning October 2025 through March 2026, with business investment falling for five consecutive months, per Deloitte’s report as covered by Global News. Several Bank of Canada officials, along with Prime Minister Mark Carney, have pushed back on the recession framing, with Deloitte itself describing the claims as “exaggerated” even while acknowledging that the headline numbers, a one percent GDP drop in the fourth quarter of 2025 followed by a first-quarter 2026 decline, technically meet the standard definition.

Deloitte’s report identifies the core problem plainly: “unresolved trade issues with the U.S. remains the leading risk to the outlook,” warning that a failure to extend CUSMA or further American tariff escalation would hit Canadian exports and confidence hard. The firm now expects 2026 GDP growth of just 0.7%, down from 1.7% in 2025.

What CUSMA’s Review Actually Means

The stakes of the review are structural, not just cyclical. Under its current terms, CUSMA could be renewed for another 16 years under existing terms, extended for 10 years with annual reviews, or replaced entirely, according to Global News’ reporting. Canada and Mexico have both pushed for the longer, more stable extension, while President Trump has said he would be willing to sign the agreement but would “prefer to see it terminated,” a comment that has done little to settle business planning.

The Bank of Canada has held its policy rate steady at 2.25% through the middle of 2026, citing both the trade uncertainty and a separate inflationary pressure from the Iran war’s effect on oil prices, according to the central bank’s own rate announcement. The Bank’s April forecast projects GDP growth of just 1.2% in 2026, rising gradually to 1.6% in 2027 and 1.7% in 2028, contingent on exports and business investment resuming along what the Bank describes as “a lower trajectory” than pre-tariff projections assumed.

The Regional Damage Is Uneven

Not every part of Canada is being hit equally. RBC Economics research shows that manufacturers of steel, aluminum, copper, motor vehicles and parts, and softwood lumber have borne the brunt of US trade actions, concentrating the economic pain in Ontario and Quebec, which face the highest effective tariff rates on exports to the US, both exceeding 6%, according to RBC’s year-one tariff assessment. By contrast, provinces with smaller exposure to those industries, including Newfoundland and Labrador, New Brunswick, Alberta, Saskatchewan, and Prince Edward Island, face effective tariff rates below 1%.

There is evidence of adaptation underway. Canada’s merchandise exports to non-US economies rose 17% year-over-year in the twelve months to January 2026, even as exports to the US fell 10% over the same period, RBC’s data shows. The federal government has set a goal of doubling non-US exports by 2035, backed by infrastructure spending and new trade-diversification programs, though RBC notes that shifting supply chains and building new trade relationships outside the US “is a lengthy process” that cannot offset near-term losses.

Where the Upside Case Comes From

Not every recent analysis is downbeat. A separate RBC assessment argues that Canada’s resource base, agriculture, energy, and critical minerals, is increasingly well positioned to meet growing global demand for AI infrastructure and defense spending, representing what the bank’s economists call “a moment for Canada to invest in itself,” according to RBC’s separate outlook note. That report points to five specific positives: most Canadian exports remain exempted from the broadest US tariff increases, monetary policy retains flexibility, government net debt levels remain relatively low compared with other advanced economies, and both federal and provincial governments have signaled willingness to provide additional fiscal support if needed.

TD Economics strikes a similarly cautious-but-not-dire tone, forecasting real GDP growth accelerating from 2025’s “anemic” 0.7% pace to 1.3% in 2026 and 1.8% in 2027, contingent on the CUSMA talks not deteriorating further, according to TD’s quarterly forecast. TD’s baseline assumes the tariff status quo holds, a 10% rate on non-CUSMA-compliant goods alongside sector-specific Section 232 tariffs, while flagging that new Section 301 tariffs on forced-labor violations, set to take effect in late July and covering 60 countries, add a fresh layer of complexity just as the CUSMA question remains unresolved.

The Structural Shift Ahead

Bank of Canada officials have framed the moment as something bigger than a cyclical downturn. In a recent address, the central bank described the economy as being “at a crossroads,” warning that if Canada fails to restructure around new trade relationships, “productivity and GDP growth do not recover,” and the country becomes a less attractive place to invest, according to the Bank of Canada’s own address. Roughly half of the GDP shortfall attributable to US tariffs comes from reduced potential output rather than simple cyclical weakness, the Bank’s own projections show, a distinction that matters because potential-output damage does not automatically reverse once trade tensions ease.