Canada's economy posts fastest growth in three years
Tomas Kauer 
Canada’s economy grew by 3.3 per cent on an annualized basis in the second quarter of 2026, marking the fastest quarterly expansion since 2023.
Statistics Canada also released revised data for the first quarter of 2026, showing the economy actually grew by 0.3 per cent.
Previously, the agency reported annualized real gross domestic product had contracted by 0.1 per cent in that quarter, which had marked two consecutive quarters of negative GDP growth, meeting the technical definition of a recession.
“This corroborated our view and pretty much every other economist that Canada was not in a recession in the first quarter of 2026,” said Randall Bartlett, deputy chief economist with Desjardins Group.
Growth in the second quarter was mainly driven by higher exports, business capital investment and household spending. On an annualized basis, exports were up by 15.1 per cent while business capital investments and household spending grew by 9.5 per cent and 3.32 per cent, respectively.
Economists were expecting the strong showing after a string of data released showed signs the economy was rebounding from a slow start to the year.
“The Canadian economy entered the latest period of trade disruption at a stronger starting point, though we don’t expect the second quarter rebound to repeat,” said Abbey Xu, an economist at RBC Economics.
“This was roughly in line with our expectations and base case forecast, which was 3.4 per cent growth in the second quarter.”
Economists, however, don’t expect the momentum to be sustained.
Statistics Canada’s flash estimates for July suggest real GDP was unchanged for the first time in four months, following 0.3 per cent month-to month growth in June.
Bartlett said the flat print in July wasn’t unexpected because a lot of the economic stimulus in June was temporary. The FIFA World Cup drove up consumer spending in June, and the federal government transferred $3.1 billion as part of the Canada Groceries and Essentials Benefit that month.
However, he said the recent escalation of the trade tensions between Canada and the U.S. has added more uncertainty into the economy. U.S. President Donald Trump’s threats to implement Section 338 tariffs in July may have held businesses back from capital investment and hiring.
Bartlett noted that Canada could see job losses by the end of the year if the trade war escalates, potentially pushing up Canada’s unemployment rate from 6.4 per cent in July to seven per cent by the end of the year.
“We just think (the Section 338 tariffs and Canada’s counter-tariff threat) are going to exacerbate this, in terms of keeping business investment and hiring on the sidelines,” he said.
“If the counter-tariffs are realized, it’s just going to exacerbate the weakness in the Canadian economy. And we could see growth closer to a one per cent annualized pace in the second half of the year, as opposed to two per cent which we were forecasting just a little over a week ago.”
Desjardins doesn’t expect Canada to be plunged into a recession as a result of the trade war, but it could slow economic growth and soften the labour market.
He noted that much of the funding announced as part of a stimulus package for impacted businesses on Tuesday was just an expansion or extension of existing programs and isn’t likely to give the same lift that businesses received at the beginning of the COVID-19 pandemic.
Any boost will not be carried forward to the third quarter of 2026, nor will it be a tailwind toward the end of the year and into 2027, he said.
“The report on second-quarter real GDP is kind of old news, to be totally honest. It’s kind of in the rearview mirror now. All of the thinking and energy for businesses and consumers are all going into what’s next, and I think that rightly should be the focus,” he added.
However, economists said there is still room for cautious optimism.
Xu said consumer spending remained resilient in the second quarter, even though consumer prices kept rising. Canada’s labour market has also shown signs of improvement after wage growth increased by 3.4 per cent year-over-year in June and the unemployment rate ticked down in May, June and July.
She doesn’t expect Friday’s data to be enough to pull the Bank of Canada from the sidelines next week because the second quarter rebound reduces the need for more monetary support while stable underlying inflation argues against the need for higher interest rates.
“We don’t think that those tariffs are enough to change the broader policy view. We still have the bank on hold for the rest of 2026,” Xu said.
Risk remains though that growth could slow due to the trade war, and inflation could rise because of Canada’s counter tariffs.
“The Bank of Canada is now going to have to contend with a stagflationary shock coming from the trade war, where growth is going to be slower, unemployment rate higher, and inflation more elevated than it would be otherwise,” Bartlett said.
“Because those retaliatory tariffs won’t be implemented until after the coming Bank of Canada meeting, it can’t necessarily evaluate what the implications are in its rate decision because they may not happen.”
• Email: ptran@postmedia.com
