Canada's Economy Bounces Back in Q2, but New US Tariffs Threaten Future Growth

Canada’s Prime Minister Mark Carney walked away from trade negotiations with the US last week, stating that a bad deal was worse than no deal. Meanwhile, Canada’s economy rebounded sharply in the second quarter following six months of virtually no growth, bolstered by a strong increase in exports and solid domestic demand. However, a new round of tariffs from the United States introduces renewed uncertainty.

According to Statistics Canada on Friday, the economy grew at an annualised rate of 3.3 percent in the second quarter—the fastest rate since 2023—following a revised 0.3 percent increase in the first quarter. This upward revision indicates that Canada avoided a technical recession, which is typically defined as two consecutive quarters of contraction. Healthy domestic demand, driven by consumer spending and business investment, demonstrates that the economy is gradually overcoming the impact of more than 18 months of US import tariffs that disrupted North American supply chains and raised costs.

Renewed Tariff Dispute

Strong domestic consumption and expenditure patterns position Canada well to withstand a new 50 percent US import tariff imposed this week by President Donald Trump on $20bn of Canadian exports. In response, Canada enacted retaliatory 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,” wrote Royce Mendes, managing director and head of macro strategy at Desjardins, in a note. Mendes added, “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.”

Michael Davenport, senior Canada economist at Oxford Economics, noted to Al Jazeera that although gross domestic product (GDP) growth met expectations, “the economy is set to slow in the coming quarters amid escalating US-Canada trade policy uncertainty, new bilateral tariffs, and a shrinking population.”

Following the GDP data, the Canadian dollar weakened slightly, with the loonie trading down 0.01 percent at 72.17 US cents. On a quarterly basis, GDP grew 0.8 percent for the period ending in June, improving from an upwardly revised 0.1 percent in the previous quarter. Furthermore, second-quarter annualised growth surpassed the Bank of Canada’s July forecast of 2.5 percent growth.

Higher exports served as a primary driver for second-quarter growth, with outbound shipments increasing by 3.6 percent—the largest rise in over three years, according to Statistics Canada (StatsCan).

Stronger Household Spending

Final domestic demand, defined as the sum of all consumption and capital spending and serving as a crucial metric for domestic health, rebounded to 1 percent in the second quarter after contracting slightly in the first quarter. Domestic demand had remained muted for several quarters as consumers and businesses exercised caution amid the ongoing trade war with the US.

Household final consumption expenditure, the primary indicator of consumer spending, rose by 0.8 percent to reach its highest level in three quarters, supported by stronger household spending driven by higher wages and government benefits, economists reported.

Business investment, measured as business gross fixed capital formation, surged to a solid 2.3 percent growth rate in the second quarter, reversing a 1.3 percent contraction and marking the first expansion in a year and a half. StatsCan reported that this growth was led by investments in residential and non-residential structures, machinery, and equipment.

Conversely, general gross fixed capital formation—representing government expenditure on asset creation—continued to decline, contracting by 2.9 percent in the second quarter following a 2.6 percent contraction in the previous quarter.

On a month-to-month basis, June GDP grew by 0.3 percent, beating the forecasted 0.2 percent, while advance indicators showed that the economy remained largely flat in July, the statistics agency stated.