Canada's Economy Rebounds Strongly in Q2 but Faces New US Tariff Risks

Canada's economy rebounded strongly in the second quarter after nearly six months of flat growth, supported by a surge in exports and solid domestic demand, even as a new wave of US tariffs raises concerns about the future.

According to data released Friday by Statistics Canada, the economy grew at an annualized rate of 3.3% in the second quarter, the fastest pace since 2023, following an upwardly revised 0.3% gain in the first quarter. The upward revision to first-quarter growth helped Canada avoid a technical recession, commonly defined as two consecutive quarters of negative growth.

Positive domestic demand, led by consumer spending and business investment, suggests the economy is gradually overcoming the impact of more than 18 months of US import tariffs, which have disrupted North American supply chains and pushed up costs.

New tariff dispute

Strong consumer and domestic spending patterns provide a solid foundation for Canada to withstand the new 50% import tariffs imposed this week by US President Donald Trump on $20 billion worth of Canadian exports. Canada has retaliated with countermeasures on US imports.

“It appears households and businesses began to find ways to adapt to trade-related uncertainty before the latest round of tariffs was imposed,” Royce Mendes, managing director and head of macro strategy at Desjardins, wrote in a note.

“While having the economy on a firmer footing heading into August is positive, this new wave of protectionism injects a significant amount of uncertainty into the economic outlook,” Mendes said.

Michael Davenport, senior Canada economist at Oxford Economics, said in a note to Al Jazeera that although GDP growth was within forecasts, “the economy is expected to slow in the coming quarters amid escalating US-Canada trade policy uncertainty, new bilateral tariffs, and a shrinking population.”

The Canadian dollar weakened slightly after the GDP data, trading at 72.17 US cents, down 0.01%.

On a quarterly basis, GDP rose 0.8% in the period ending in June, compared with 0.1% in the previous quarter after an upward revision. Second-quarter growth came in above the Bank of Canada's July forecast of 2.5%.

Higher exports were a key contributor to second-quarter growth, with export shipments up 3.6%, the largest increase in more than three years, according to Statistics Canada.

Stronger household spending

Final domestic demand, which aggregates all consumption and capital expenditure and is a key indicator of domestic economic health, rebounded to 1% in the second quarter after a slight decline in the first quarter.

Domestic demand had been subdued for several quarters as consumers and businesses stayed cautious amid Canada's trade war with the US.

However, household final consumption expenditure, the main gauge of consumer spending, rose 0.8%, the highest in three quarters, pointing to stronger household spending. Economists said the growth was largely driven by higher wages and government benefits.

Business investment, or gross fixed capital formation by businesses, surged to 2.3% growth in the second quarter from a 1.3% decline, marking the first expansion in a year and a half. According to Statistics Canada, the growth was led by investment in both residential and non-residential structures, as well as machinery and equipment.

However, overall gross fixed capital formation, essentially government spending on assets, continued to decline, falling 2.9% in the second quarter after a 2.6% drop in the previous quarter.

On a monthly basis, June GDP rose 0.3% against a forecast of 0.2%, and preliminary data suggest the economy was nearly flat in July, according to the statistics agency.