Strong exports, housing and business investment drive fastest quarterly growth since early 2023, but new U.S. tariffs cloud the outlook
OTTAWA — August 28, 2026
Canada’s economy expanded at a surprisingly strong pace in the second quarter, easing concerns that the country had slipped into recession earlier this year.
Statistics Canada reported Friday that real gross domestic product grew at an annualized rate of 3.3 per cent in the second quarter, marking the fastest quarterly expansion since early 2023.
The result was slightly below economists’ expectations but comfortably exceeded the Bank of Canada’s 2.5 per cent forecast.
Adding to the positive picture, Statistics Canada revised its previous estimate for the first quarter. Instead of the small contraction initially reported, the economy is now estimated to have grown 0.3 per cent annualized in Q1.
That revision effectively puts earlier concerns about two consecutive quarters of economic contraction — commonly associated with a technical recession — to rest for now.
Exports and auto sector rebound
Exports were a major contributor to second-quarter growth, rising 3.6 per cent, led by a rebound in shipments of passenger vehicles and light trucks.
The improvement followed two quarters of declining automobile production.
Canada’s manufacturing sector also showed resilience. Manufacturing expanded for a third consecutive month in June despite ongoing concerns about trade barriers and tariffs.
Housing market provides another boost
Residential investment strengthened as Canada’s resale housing market picked up during the spring.
Statistics Canada reported particularly stronger housing activity in Ontario, Quebec and British Columbia.
Business investment also showed signs of recovery.
Capital investment increased 2.3 per cent, ending five consecutive quarters of decline.
Spending on machinery and equipment reached its highest level in two years, while investment in computers and related equipment jumped 16.7 per cent.
Statistics Canada linked some of that increase to advanced processing equipment used in data centres.
World Cup adds to June activity
Canada’s economy expanded 0.3 per cent in June alone, with growth spread across several industries.
Hosting 10 FIFA World Cup matches during June provided additional activity in some tourism, hospitality, entertainment and transportation sectors.
However, Statistics Canada’s preliminary estimate suggests the momentum weakened quickly afterward, with GDP expected to be essentially unchanged in July.
New U.S. tariffs threaten third-quarter growth
Despite the strong second quarter, economists are warning that the numbers largely reflect conditions before the latest escalation in the Canada-U.S. trade dispute.
New 50 per cent U.S. tariffs on a range of Canadian goods took effect last weekend, while Canada’s retaliatory measures are scheduled to begin September 8.
Ariane Curtis, senior North America economist at Capital Economics, cautioned that the strong second-quarter momentum is unlikely to continue at the same pace as businesses confront renewed tariff pressures.
Higher energy prices linked to the war in Iran also produced mixed effects. Energy companies benefited from stronger revenues, while manufacturers faced increased input costs.
What does this mean for interest rates?
The GDP report is the final major economic release before the Bank of Canada’s September 2 interest-rate decision.
The central bank has kept its benchmark interest rate at 2.25 per cent for six consecutive decisions.
Ordinarily, economic growth of 3.3 per cent could strengthen the argument for higher interest rates, particularly if strong demand begins putting additional pressure on inflation.
However, economists generally expect the Bank of Canada to keep rates unchanged because of uncertainty surrounding tariffs and geopolitical developments.
Anupriya Gangopadhyay of the Canadian Chamber of Commerce said the stronger GDP figures and upward revision to first-quarter growth have put recession concerns aside for the moment, but she expects the central bank to remain cautious.
BMO chief economist Doug Porter similarly expects the Bank of Canada to remain on hold through the remainder of 2026 and into 2027, while policymakers assess how the economy responds to the latest trade dispute.
Strong quarter, uncertain road ahead
The latest numbers provide a much stronger picture of Canada’s economy than appeared likely only a few months ago.
With 3.3 per cent annualized growth, stronger exports, recovering business investment and improved housing activity, fears of an immediate recession have diminished substantially.
But the next test may be more difficult.
The combination of new U.S. tariffs, Canadian retaliation, geopolitical uncertainty and signs of flat economic activity in July means Canada may have avoided recession — but maintaining the second quarter’s strong growth rate could prove challenging.