Key Takeaways
- The Canadian economy expanded rapidly in the second quarter, driven by a strong jump in exports.
- Advance GDP data was flat in July, suggesting fading growth, economists say.
- The economic outlook remains clouded by the escalating trade war with the US, analysts say.
The Canadian economy posted strong growth in the second quarter of 2026, as automobile-driven exports expanded at the fastest pace in three years. But analysts say the escalating US-Canada trade war will likely keep the Bank of Canada in a holding pattern.
Statistics Canada reported a significant acceleration in gross domestic product for the second quarter, growing 3.3% on an annualized basis. Growth was primarily driven by the strongest jump in exports since 2023, led by a 27% increase in exports of passenger cars and light trucks. Strong business investment and household spending further boosted the economy.
The report also included revised data for the previous quarter showing the economy grew 0.3% on an annualized basis, up from the originally reported 0.1% decline. With GDP contracting by 1% in the fourth quarter of 2025, the latest data shows the economy avoided the technical definition of a recession (two consecutive quarters of negative GDP).
July started the latest quarter on a softer note, however, with an advanced reading showing GDP flat for the month.
While second-quarter GDP was solid, economists say the deepening trade rift with the United States has clouded Canada’s economic outlook and the slowdown in July further supports a continued rate pause through year-end. The Bank of Canada has kept interest rates steady since December. Policymakers are due to make their next rate decision on Sept. 2.
Following the GDP report, the S&P/TSX Composite Index ticked 0.47% lower to 36,676.57, while the Morningstar Canada Index fell 0.62% to 6,534.62. The Canadian dollar was down 0.22% to C$1.38 against the US dollar.
Here are excerpts from analyst commentaries on the second-quarter GDP report.
Impressive Growth, but Trade a Dark Cloud
“While impressive overall, there’s not a lot to seriously move the needle bigger picture for the Bank of Canada. The economy was better than the Bank expected in Q2 (they had 2.5%) and appeared to be picking up steam, but the sluggish start to Q3 and the trade flare-up cast a dark cloud over the near-term outlook. One encouraging development, reinforced by the Q2 uptick, is a comeback in business investment, especially for M&E (now up 6.3% y/y).
Still, the Bank of Canada will likely wait and see how the economy handles the latest tariff spat—and how the tussle develops—before judging where rates need to go next. Look for the Bank of Canada 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.”
—Douglas Porter, chief economist at BMO Economics
Q2 GDP Even Better Than Headline Suggests
“The breakdown of second-quarter GDP growth was even better than the solid 3.3% annualized gain might suggest, although the preliminary estimate of unchanged GDP in July and the headwinds from new US tariffs means it is unlikely that this momentum will be sustained.”
—Ariane Curtis, North America economist at Capital Economics
Trade War, July Slowdown Suggest BoC On Hold
“Given the recent escalation of trade tensions with the US, and with monthly data suggesting that the economy was already slowing even before new tariffs hit, today’s release will be viewed as old news and doesn’t change our forecast for the Bank of Canada to remain on hold.”
—Andrew Grantham, senior economist at CIBC Capital Markets
A World Cup Boost
“[The second-quarter growth] was partly due to economic activity surrounding the FIFA World Cup. As a result, it’s no surprise that the flash estimate for July GDP shows no growth occurred during the month, with the tailwind from the World Cup fading.
“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. As a result, the rates market has shown little reaction to confirmation that the second-quarter rebound was stronger than the Bank of Canada had projected in July. Market participants continue to anticipate that central bankers will remain on the sidelines for the rest of the year.”
—Royce Mendes, managing director and head of macro strategy at Desjardins Capital Markets
The Second Half of 2027 Could See Multiple Hikes
“[Despite a strong quarter], the outlook has become more uncertain. Trade tensions between Canada and the US have escalated, and while the latest US tariffs affect a relatively small share of Canadian exports, they are likely to increase uncertainty and delay investment decisions. Canada’s planned retaliation on September 8 is expected to add modest inflationary pressure and could provoke further US trade restrictions.
“In this environment, we expect the Bank of Canada to remain cautious and avoid overreacting to a trade shock whose full economic consequences remain unclear. Assuming tensions eventually stabilize, we continue to expect three rate hikes beginning in H2 2027.”
—Dominique Lapointe, senior director, macro strategy at Manulife Investment Management
New US Tariffs to Weigh on Canada’s Economy
“The problem going forward is that trade uncertainty is back with new US tariffs now imposed, Canadian retaliation due early next month, and the prospect of further escalation hard to dismiss. As we’ve written, the newly imposed duties are likely to shave 0.3 to 0.6 percentage points from growth over the next year. This would still leave growth through 2027 in the mid-1% range, but further escalation risks dragging this figure lower.”
—Andrew Hencic, director and senior economist at TD Economics
