Key Takeaways:
Canada's economy expanded at a 3.4% annualized pace in the second quarter, the strongest in three years and well above the Bank of Canada's 2.5% forecast.
Canada's industry-level gross domestic product rose 0.3% in May, building on an upwardly revised 0.6% advance a month earlier, Statistics Canada said Friday. The agency's advance estimate points to 0.2% growth in June, putting the economy on track for a 3.4% annualized expansion in the second quarter — the fastest since the first quarter of 2023 and sharply above the Bank of Canada's 2.5% projection.
The rebound follows two consecutive quarters of no growth between the first quarter of 2025 and the first three months of this year. "The economy appears to be adjusting to the shocks it has faced," the Bank of Canada said in a summary of deliberations released this week, while flagging risks that businesses remain wary and consumer spending could weaken if hiring does not pick up.
Growth in May was led by oil and gas extraction for a second straight month, with increased activity in Alberta's oil sands and energy support services. Thirteen of 20 tracked industrial sectors expanded, with goods producers up 0.6% and services-producing industries up 0.2%. Manufacturing, hard hit by tariffs and trade uncertainty over the past year, grew for a second month on a rebound in chemical production and gains in pharmaceuticals. Year-over-year, GDP rose 1.7% in May.
The stronger-than-expected data reduces the case for near-term rate cuts, supporting the Canadian dollar and pressuring interest-rate-sensitive sectors such as real estate. The Bank of Canada left rates unchanged for a sixth consecutive meeting this month, and the growth surprise — which outpaces its own forecast by nearly a full percentage point — could keep it on hold longer. Official expenditure-based GDP for the second quarter is due in late August.
The boost from oil and gas was tempered by mining, where declines in coal and non-metallic minerals countered higher metal ore output. Apartment building contraction increased for a second month, while real estate and rental and leasing expanded for a fourth straight month. Finance and insurance activity rose for a second month, buoyed by equity and bond markets as uncertainty stayed high during the Middle East conflict. Transportation and warehousing also gained for a second month, largely on strength in natural gas and crude oil pipelines. Canada's public sector continued to expand, helped by federal government activity tied to the 2026 census.
The growth surprise complicates the Bank of Canada's policy path. The central bank has held its policy rate steady for six consecutive meetings, and its own forecast assumed a 2.5% second-quarter expansion — a full percentage point below the current tracking. Governing council members expressed a range of views about the sustainability of the rebound, with risks including a possible stalling in the housing recovery given a large inventory of condos in some cities. The last time Canada's economy grew this quickly, in the first quarter of 2023, the central bank was still in a tightening cycle. If the momentum holds into the third quarter, markets may push back expectations for any easing this year; if the rebound fades, the BoC retains room to respond.
This article is for informational purposes only and does not constitute investment advice.
