Economists see signs the rebound is already losing steam
Canada’s economy rebounded more strongly than expected in the second quarter, but economists are questioning how much of that momentum can carry into the rest of the year as trade tensions intensify.
Real gross domestic product rose at a 3.3 per cent annualized pace in the second quarter, the fastest quarterly expansion since 2023. Statistics Canada also revised first-quarter GDP to show growth of 0.3 per cent, reversing an earlier contraction and removing what had appeared to be two consecutive quarters of economic decline.
The rebound was stronger than the Bank of Canada had anticipated—its most recent forecast had called for second-quarter growth of only 2.5 per cent. Even so, economists largely viewed the latest figures as confirmation of a recovery that had already been taking shape rather than a signal that the outlook has materially improved.
CIBC senior economist Andrew Grantham said the stronger quarter points to a somewhat smaller amount of excess capacity in the economy, but developments since June are likely to matter more for monetary policy.
“Impressive, but what comes next (is) more important,” Grantham wrote.
Growth appears to have moderated since the end of the quarter. Statistics Canada’s preliminary estimate showed GDP was unchanged in July, while early tracking for the third quarter is closer to the Bank of Canada’s 1.5 per cent forecast.
That slowdown is arriving alongside another escalation in trade tensions with the United States, complicating the outlook for both growth and inflation.
Capital Economics senior North America economist Ariane Curtis said the underlying composition of second-quarter growth was stronger than the headline number suggested. However, she cautioned against extrapolating that performance into the coming months.
“Nonetheless, while the strong gain in June provides a decent handover to the third quarter, we can’t get too excited about the outlook given the latest preliminary estimate suggests that GDP was unchanged in July, as the FIFA World Cup boost went into reverse,” Curtis said.
June GDP rose 0.3 per cent, partly reflecting economic activity surrounding the FIFA World Cup. With that temporary boost fading, economists are now looking more closely at whether domestic demand can hold up against weaker external conditions.
“The second quarter bounce-back has landed as expected,” TD Bank director Andrew Hencic said. He estimated that growth averaged roughly 1.8 per cent annualized over the first half of the year, although swings in trade flows made the underlying trend more difficult to assess.
The bigger risk now comes from the renewed tariff dispute.
“The problem going forward is that trade uncertainty is back with new U.S. tariffs now imposed, Canadian retaliation due early next month, and the prospect of further escalation hard to dismiss,” Hencic said.
TD estimates the new duties could reduce economic growth by 0.3 to 0.6 percentage points over the next year. Growth through 2027 could remain in the mid-one per cent range, although a further escalation in trade restrictions would increase the downside risk.
Desjardins economist Royce Mendes similarly argued that the economy entered the latest trade dispute in a stronger position than it had been earlier in the year: “While it helps that the economy was on stronger footing heading into August, the fresh wave of protectionism injects a significant amount of uncertainty into the outlook.”
That uncertainty appears to be limiting the impact of the GDP surprise on expectations for interest rates. Rates markets showed little reaction to the second-quarter result and continue to anticipate that the Bank of Canada will remain on hold through the remainder of 2026, according to Mendes.
BMO chief economist Douglas Porter also said the latest figures were unlikely to materially alter the central bank’s near-term stance. Although the second quarter was stronger than expected, the flat July estimate and latest tariff measures point to a more difficult second half.
“The third quarter is thus off to a tougher start, and it won’t get easier in August and September with the wave of downbeat headlines,” Porter said.
For the Bank of Canada, the key question is increasingly how tariffs affect both sides of its mandate: whether they weaken economic activity enough to justify lower rates or add enough inflationary pressure to keep policy restrictive.
“Look for the BoC to be on hold into 2027. That posture could last well into next year depending on how the trade backdrop unfolds and just how growth and inflation respond to the tariffs and counter-tariffs,” Porter said.
