Canada: Outstanding Real GDP Growth in Q2 is Old News

The increase in real GDP in Q2 2026 was led by a rebound in exports, which posted the largest quarterly advance since Q1 2023. The sharpest move higher was in exports of passenger cars and light trucks, which corresponded with a rebound in Canadian auto production following declines in the prior two quarters. Real imports rose much more modestly, providing a very minor offset to the contribution to growth coming from net exports (graph 1). A reduction in inventories also played an offsetting role to the export boost in the second quarter.

Real investment also moved higher in Q2. Residential construction advanced most, following two consecutive quarterly declines. Business investment was also higher, as investment in engineering structures posted a solid bounce after retreating in the prior two quarters. Businesses also invested more in machinery and equipment, notably computer and computer peripherals.

Not to be outdone, real household spending gained ground for the third consecutive quarter. The ongoing decline in Canada’s population combined with the bounce in headline growth contributed to an increase in per capita real GDP in the quarter. As a result, real GDP per capita has now regained most of the ground lost since 2022 (graph 2).

While the strong advance in Q2 real GDP is unambiguously good news, it’s important to not give it too much importance. The solid contribution from household consumption can in part be linked to substantial federal transfers External link. to low- and middle-income households. The surge in health care External link. hiring also points to public policy playing an important role in driving recent labour market activity. World Cup External link. spending no doubt padded growth further in the second quarter. And with some of this momentum sustained into July, we expected External link. Q3 to see a respectable growth print too just last week.

But all this data came before the recent escalation in trade tensions between the US and Canada. By our estimate External link., tariffs and counter tariffs as currently enacted or proposed could cut real GDP growth from around 2% q/q annualized to closer to 1% in Q3 and Q4, respectively. This is the downside risk to inflation that the Bank of Canada had been emphasizing, counterbalancing the upside risk coming from high energy prices. However, the Bank’s job is further complicated by retaliatory tariffs, which will not only slow real GDP and employment growth but will also boost domestic inflation. Given this context, we have maintained our view that the Bank of Canada is likely to remain on the sidelines until 2027.