Canadian economy recovers sharply in Q2 but shadow of US tariffs in future

Published On 28 Aug 202628 Aug 2026.

Key points

• The Canadian dollar weakened slightly after the GDP data, with the loonie trading down 0.01 percent at 72.17 US cents.
• Second-quarter annualised expansion was higher than the Bank of Canada's July forecast of 2.5 percent expansion.
• On a quarterly basis, GDP grew 0.8 percent for the period concluded June, from an upwardly revised 0.1 percent in the previous quarter.
• But household final consumption expenditure, the main indicator of consumer spending, rose 0.8 percent, its highest level in three quarters, highlighting stronger household spending.
• The upward revision to first-quarter expansion means Canada was not in a technical recession, usually defined as two straight quarters of contraction.

Though a new round of tariffs from the United States brings renewed uncertainty, canada's economy has rebounded sharply in the second quarter after six months of virtually no expansion, aided by a robust jump in exports and solid domestic demand.

After a revised 0.3 percent growth in the first quarter, Statistics Canada stated on Friday, the economy grew at an annualised rate of 3.3 percent in the second quarter, the fastest rate since 2023.

For context, the upward revision to first-quarter expansion means Canada was not in a technical recession, usually defined as two straight quarters of contraction.

Healthy domestic demand, led by consumer spending and business investment, signals the economy is gradually brushing off the impacts of more than 18 months of US import tariffs that upended North American supply chains and climbed costs.

In practice, a solid domestic consumption and expenditure pattern puts Canada on a firm footing to withstand a new 50 percent US import tariff that President Donald Trump imposed this week on $20bn of Canadian exports. Canada retaliated with its own countermeasures on US imports.

"It seems like households and businesses were beginning to find ways of navigating the trade-related uncertainty before the latest round of tariffs, " Royce Mendes, managing director and head of macro strategy at Desjardins, wrote in a note.

"While it helps that the economy was on stronger footing heading into August, the fresh wave of protectionism injects a significant amount of uncertainty into the outlook, " Mendes remarked.

Michael Davenport, senior Canada economist at Oxford Economics, remarked in a note to Al Jazeera that while the gross domestic product (GDP) expansion was along projected lines, "the economy is set to slow in the coming quarters amid escalating US-Canada trade policy uncertainty, new bilateral tariffs, and a shrinking population".

For context, the Canadian dollar weakened slightly after the GDP data, with the loonie trading down 0.01 percent at 72.17 US cents.

Higher exports were one of the main contributing factors for the second-quarter expansion, with outbound shipments growing 3.6 percent, the biggest rise in over three years, Statistics Canada (StatsCan) noted.

Final domestic demand, the sum of all consumption and capital spending and a crucial metric to assess domestic health, rebounded to 1 percent in the second quarter, from a minor contraction in the first quarter.

Domestic demand has been muted for a number of quarters as consumers and businesses remain cautious while Canada navigates its trade war with the US.

But household final consumption expenditure, the main indicator of consumer spending, rose 0.8 percent, its highest level in three quarters, highlighting stronger household spending. This was mainly driven by higher wages and administration benefits, economists stated.

Business investment, or business gross fixed capital formation, sprang to a solid 2.3 percent expansion in the second quarter from a contraction of 1.3 percent, the first time in the last year and a half that business investment has expanded.

That expansion was led by investment in both residential and non-residential structures, machinery and equipment, StatsCan stated.

After shrinking 2.6 percent in the previous quarter, nevertheless, the general gross fixed capital formation, essentially administration expenditure for creating assets, continued to decline with a second-quarter contraction of 2.9 percent.

On a month-to-month basis, GDP for June grew 0.3 percent against a forecast of 0.2 percent, and an advance indicator indicated that the economy was largely flat in July, the statistics agency stated.

Taken together, the developments around canadian economy recovers sharply in Q2 but shadow of US tariffs in point to a situation that is still moving, and the coming days should bring more clarity.