Canada's economy grows 3.3% in Q2, erasing recession talk before the tariff hit

Canada's economy grew at its fastest pace in more than three years in the spring. Statistics Canada reported on Friday that real gross domestic product rose 0.8% in the second quarter, or 3.3% at an annualized rate, the strongest showing since early 2023.

The agency also revised first-quarter growth up to 0.1% from 0.0%, about 0.3% annualized instead of a slight contraction. That revision effectively ended the debate over whether Canada had slipped into a technical recession.

The numbers vs expectations

The 3.3% annualized pace came in slightly below economists' expectations but well above the Bank of Canada's forecast of 2.5% for the quarter.

Business investment rose, ending five straight quarterly declines, with purchases of computers and peripherals up 16.7%. On a per capita basis, real GDP rose 1.0% as Canada's population declined for a third consecutive quarter. The household saving rate rose to 3.7%.

• Exports: +3.6%, the largest increase since the first quarter of 2023, led by a 27.0% jump in passenger cars and light trucks
• Imports: +0.3%, after +3.1% in the first quarter
• Household consumption: +0.8%, with more spending on services and vehicles and less on gasoline and food
• Residential investment: +2.5%, after two quarterly declines
• Inventories: a $17.0-billion drawdown that subtracted 1.3 percentage points from growth

What economists said

BMO chief economist Doug Porter called it a "solid result," noting that "we had almost no growth in the prior four quarters combined." He estimated first-half growth at a bit below 2% annualized, closer to the underlying trend. Charles St-Arnaud of Servus Credit Union said the momentum "could help the Canadian economy absorb the shock of the latest round of U.S. tariffs."

Why the outlook is cooler

The good news is backward-looking. Monthly GDP rose 0.3% in June, but Statistics Canada's early estimate for July points to essentially flat activity, with the end of the FIFA World Cup expected to weigh on the month. Capital Economics' Ariane Curtis said "we can't get too excited about the outlook," and most economists expect a slowdown in the third quarter.

The trade war is the main reason. Fifty per cent U.S. tariffs on a range of Canadian goods took effect on Aug. 22, and Canada's counter-tariffs start Sept. 8. Inventory drawdowns and population decline also mean part of the headline strength may not repeat.

What it means for you

For borrowers, the key date is Sept. 2, when the Bank of Canada makes its next rate decision. The policy rate has been held at 2.25% for six straight decisions, and LSEG data showed markets pricing nearly 99% odds of another hold. Porter said strong growth would normally point toward hikes, but tariff headwinds argue for patience.

If you have a mortgage renewal coming up, the message is that rates are not expected to move much in the near term in either direction. For investors, a stronger economy entering a trade shock is a cushion, not a guarantee. This is general information, not personalized advice.

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