Canadian Economy Rebounds Strongly, But US Tariffs Cloud Outlook

Canada's economy staged a stronger-than-expected recovery in the second quarter, expanding at its fastest pace since 2023 as exports surged and household and business spending improved.

Statistics Canada reported on Friday that gross domestic product grew at an annualised rate of 3.3 percent in the three months to June. That followed an upwardly revised 0.3 percent increase in the first quarter.

The revision means Canada avoided a technical recession, commonly defined as two consecutive quarters of economic contraction.

The second-quarter performance was also significantly stronger than the Bank of Canada's July forecast of 2.5 percent annualised growth.

On a quarter-to-quarter basis, the economy expanded by 0.8 percent, compared with revised growth of 0.1 percent in the first three months of the year.

The recovery was supported by a broad improvement in domestic demand, with consumer spending and business investment both strengthening. Exports were another major contributor, rising 3.6 percent - their strongest quarterly increase in more than three years.

The figures suggest Canadian households and businesses had begun adjusting to the economic disruption caused by more than 18 months of US trade measures, which have disrupted North American supply chains and increased costs.

Fresh US tariffs raise uncertainty

Despite the strong quarterly performance, economists warned that the outlook has become considerably more uncertain following Washington's latest tariff measures.

US President Donald Trump this week imposed a new 50 percent tariff on about $20 billion worth of Canadian exports. Ottawa responded with countermeasures targeting US imports.

The renewed trade tensions threaten to weigh on economic activity in the months ahead, particularly as businesses reassess investment and supply chains.

Royce Mendes, managing director and head of macro strategy at Desjardins, said households and companies appeared to have been adapting to trade uncertainty before the latest escalation.

He said the economy entering August in relatively strong condition was encouraging, but warned that the latest protectionist measures had introduced significant uncertainty into the economic outlook.

Michael Davenport, senior Canada economist at Oxford Economics, said the latest GDP figures were broadly in line with expectations but predicted growth would slow in coming quarters.

He pointed to increasing uncertainty over Canada-US trade policy, new bilateral tariffs and a shrinking population as factors likely to constrain economic activity.

The Canadian dollar weakened marginally following the GDP release, falling 0.01 percent to 72.17 US cents.

Consumers and businesses regain momentum

Domestic spending showed a notable improvement during the quarter.

Final domestic demand, which combines consumption and capital spending and is closely watched as a measure of underlying economic strength, increased 1 percent after contracting slightly in the first quarter.

Household final consumption expenditure rose 0.8 percent, its strongest increase in three quarters. Economists attributed the improvement partly to higher wages and increased government benefits.

Business investment also rebounded sharply, rising 2.3 percent after falling 1.3 percent in the first quarter.

It was the first quarterly increase in business investment in about 18 months, with spending on both residential and non-residential structures, as well as machinery and equipment, contributing to the gain.

Government-related gross fixed capital formation, however, continued to weaken. It fell 2.9 percent during the quarter after declining 2.6 percent in the previous three months.

More recent figures indicate that momentum may already be moderating.

GDP increased 0.3 percent in June, slightly ahead of economists' 0.2 percent forecast. However, Statistics Canada's preliminary estimate indicated that economic activity was broadly unchanged in July.

The latest figures therefore provide a mixed picture: Canada entered the second half of the year with stronger momentum, but the renewed trade confrontation with its largest trading partner could make sustaining that growth increasingly difficult.