Canada’s economy was surging in Q2. Now, it braces for new tariff headwinds

OTTAWA – Fresh data from Statistics Canada on Friday suggests the economy was growing at a healthy clip in the second quarter and rumblings of a recession earlier in the year might have been overblown.

But economists warned that any momentum the economy had last quarter will be tested by a new wave of tariffs and trade uncertainty.

Real gross domestic product rose 3.3 per cent on an annualized basis in the second quarter, StatCan said. That was the fastest quarterly pace of growth since early 2023 and topped the Bank of Canada’s call for 2.5 per cent growth in the quarter.

BMO chief economist Doug Porter said in an interview that 3.3 per cent is a “solid result.” A typical quarterly figure over the past 20 years would see the economy growing at around two per cent annualized, he noted.

“Just to put it in perspective, we had almost no growth in the prior four quarters combined. So it really did look like the Canadian economy was breaking out of its funk over the spring,” Porter said.

Exports jumped 3.6 per cent in the second quarter, led by a rebound in shipments of passenger cars and light trucks. Auto production had declined in the previous two quarters, StatCan said.

Spending was up among households, businesses and governments in the quarter. One of the few drags on growth was from businesses drawing down their inventories — selling what’s on the shelf rather than adding to their stockpiles.

Back in May, StatCan reported a marginal annualized decline in first-quarter GDP — a second straight quarterly drop that fuelled some debate over whether Canada was in a recession.

But that quarterly contraction was erased as part of the agency’s regular revisions on Friday. StatCan now says that GDP in the first quarter was actually slightly positive at 0.3 per cent annualized.

Porter recalled that, even in May, many economists were urging against using the recession label to describe a quarterly decline that could easily be revised away in future reports.

“I really want to pound the table here and just say that all that talk about a technical recession three months ago has been washed away from history,” he said.

Taken together, Porter said growth in the first half of the year is now a bit below two per cent on an annualized basis. He thinks that’s closer to the real underlying trend.

But most economists weighing in Friday cautioned that the economy is likely heading for another slowdown in the third quarter.

StatCan said real GDP was up 0.3 per cent in June but its early estimates for July call for flat growth in the month. The end of the FIFA World Cup, which helped fuel activity in June, is expected to take some steam from GDP figures in July, Porter said.

New 50 per cent U.S. tariffs on a range of Canadian goods meanwhile went into effect on Aug. 22, after a push to avoid the new duties collapsed at the last minute. Canada’s planned retaliatory measures are set to start Sept. 8.

Ariane Curtis, senior North America economist at Capital Economics, said in a note to clients Friday that new tariff headwinds from the U.S. suggest strong momentum from the second quarter won’t carry over into the third.

“We can’t get too excited about the outlook given the latest preliminary estimate suggests that GDP was unchanged in July, as the FIFA World Cup boost went into reverse,” she said.

Porter agreed that the re-escalating trade war will sour the growth outlook in the third quarter, though he said there were some bright spots in the second quarter data that could persist.

Signs of life in the resale housing market are now adding to growth, Porter said, and he doesn’t expect the trade war to dampen that activity much.

Another positive development was an increase in business capital investment in the second quarter — snapping a streak of five consecutive quarterly declines. Firms buying up the kinds of processing units used in data centres was one factor pushing investment higher, StatCan said.

“It did look like business investment was really beginning to turn the corner. I think it’s a little too early to wave the flag just yet, but you’ve got to start somewhere,” Porter said.

The second-quarter GDP report marks the final major data release before the Bank of Canada’s next interest rate announcement on Sept. 2. The central bank has held its benchmark interest rate steady at 2.25 per cent in six consecutive decisions.

Financial market odds for an interest rate hold next week stood at nearly 99 per cent as of Friday at noon, according to LSEG Data & Analytics.

Porter said that, putting the trade war aside, the strong second-quarter result would normally have the Bank of Canada leaning toward rate hikes.

But with headwinds from a reignited tariff dispute set to drag on growth for the rest of the year, he argued the central bank should instead signal a bias toward lower rates, not higher.

Porter said his call is still for the Bank of Canada to remain on hold into 2027.

Charles St-Arnaud, chief economist at Servus Credit Union, said in a note to clients that the solid second-quarter results show the economy had momentum as it closed the first half of the year, “which could help the Canadian economy absorb the shock of the latest round of U.S. tariffs.”

“It also doesn’t change our view that the (Bank of Canada) is expected to leave its policy rate unchanged for an extended period, as it evaluates the economic impact of the latest round of tariffs,” he said.

This report by The Canadian Press was first published Aug. 28, 2026.