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

Canada’s economy rebounded sharply in the second quarter, growing at an annualised 3.3 percent rate – the fastest pace since 2023 – after a modest 0.3 percent rise in the first quarter. The revised figure means the country avoided a technical recession, which would require two consecutive quarters of contraction, according to Statistics Canada.

The growth was driven by a surge in exports and a rebound in domestic demand, with consumer spending and business investment showing resilience amid a new wave of U.S. tariffs. The United States imposed a 50 percent tariff on $20 billion of Canadian goods this week, prompting Canada to retaliate with counter‑tariffs on U.S. imports. Economists say the strong domestic footing may help cushion the economy, but the protectionist measures add uncertainty to future forecasts.

On a quarterly basis, GDP rose 0.8 percent in the period ended June, up from an upwardly revised 0.1 percent in the prior quarter. The Bank of Canada had projected 2.5 percent growth for the quarter, making the actual 3.3 percent annualised rate higher than expected. The Canadian dollar weakened slightly after the release of the data, trading at 72.17 U.S. cents – a 0.01 percent decline.

Exports grew 3.6 percent, the largest increase in more than three years, according to Statistics Canada. Domestic demand, measured as the sum of consumption and capital spending, rebounded to a 1 percent gain in Q2 after a small contraction in Q1. Household final consumption expenditure – the main driver of consumer spending – rose 0.8 percent, its strongest level in three quarters, largely driven by higher wages and government benefits.

Business investment, or gross fixed capital formation, expanded 2.3 percent in Q2, reversing a 1.3 percent contraction in Q1 and marking the first positive growth in investment in a year and a half. Investment gains were led by spending on residential and non‑residential structures, machinery and equipment. In contrast, overall gross fixed capital formation, which includes government spending on asset creation, contracted 2.9 percent in Q2 after shrinking 2.6 percent in the previous quarter.

On a month‑to‑month basis, GDP for June grew 0.3 percent, slightly above the 0.2 percent forecast. An advance indicator suggested the economy was largely flat in July, the statistics agency said.

“The economy was on stronger footing heading into August, but the fresh wave of protectionism injects a significant amount of uncertainty into the outlook,” said Royce Mendes, managing director and head of macro strategy at Desjardins, in a note to Al Jazeera. Michael Davenport, senior Canada economist at Oxford Economics, added that while GDP growth matched expectations, the economy is likely to slow in coming quarters amid escalating U.S.–Canada trade policy uncertainty, new bilateral tariffs, and a shrinking population.

Despite the tariff dispute, the rebound in domestic demand and robust export growth signal that Canada is slowly brushing off the impacts of more than 18 months of U.S. import tariffs that had disrupted North American supply chains and increased costs. The Canadian government’s counter‑tariffs and the economy’s resilience in consumer spending and business investment may provide a buffer, but analysts caution that the trade conflict could dampen growth if it continues to intensify.