Ontario: The Heartland Province Bounces Back, but Slower Growth Lies Ahead

Ontario’s economy bounced back faster than initially observed. The revisions changed the story: the Q1 release pointed to two straight quarters of contraction, but the data now show a flat Q1, taking any recession talk off the table. Most of the Q1 upgrade came from household spending, now estimated at +1.6% rather than the +0.4% previously published. Over the first half of 2026, real GDP grew at a 2.2% q/q annualized pace, ahead of roughly 1.6% for the rest of Canada.

Trade and household spending led the Q2 rebound, and both were stronger in Ontario than in the rest of Canada (graph 1). Exports jumped 14.6% annualized, likely reflecting a strong rebound of motor vehicle and parts exports after the early-year slump, while imports rose just 1.6%. A drawdown in business inventories subtracted 5.8 ppts, offsetting the gain from trade.

The domestic picture was also solid. Household consumption rose 4.5% q/q annualized in Q2, with gains in both goods (+4.8%) and services (+4.5%). Residential investment bounced back 9.1% after two steep quarterly declines. Business investment picked up: machinery and equipment surged 31.2% and non-residential structures rose 4.1%, while intellectual property products slipped 2.6%. Government consumption rose 2.4%, although government capital spending fell 11.1%.

Goods-producing industries drove the turnaround. Manufacturing made the largest contribution to growth, rising 8.3% q/q annualized (graph 2). Meanwhile, construction rose 4.1%. Services gains were broad-based, led by information and culture (+5.8%), public administration (+5.8%), wholesale trade (+5.4%) and retail trade (+4.9%). Professional services remained a soft spot, falling 3.2%.

The revised data show Ontario’s economy was much more resilient than previously believed. A downturn has given way to a solid first half, with the province outperforming the rest of Canada. The rebound was also broad-based: households, businesses and trade all contributed, and both goods and services industries expanded.

We expect growth to slow in Q3. There’s still plenty of resilience, as employment External link. kept rising through the summer before edging lower into the fall. But the new round of Section 338 tariffs External link. now covers nearly 10% of Ontario’s US-bound exports and will hit certain industries hard. Retaliatory tariffs will further compound Ontario’s pain, as it’s hit harder than any other province. Higher costs and renewed uncertainty should weigh on exports and business investment, setting up a tougher second half of the year.