Statistics Canada reported this morning that the Canadian economy grew at a whopping 3.3% pace in the second quarter, following an upwardly revised 0.3% in Q1 led by upward revisions to exports, particularly non-metallic minerals and energy products.  This wipes out the two quarters of negative growth that triggered recession fears. Indeed, a sharp rise in exports, household spending and business investment led Q2 growth, both the result of efforts to broaden our trading relationships beyond the US. Exports surged as our trade balance turned positive for the past four months. Canada’s exports of oil to China and Korea are one example of our success in boosting trade. Businesses are increasingly investing in AI-related capital expenditures.

On a per capita basis, real GDP increased 1.0% in the second quarter of 2026, as the Canadian population declined for the third consecutive quarter.

Exports rose 3.6% in the second quarter of 2026, the largest increase since the first quarter of 2023. The rise in exports in the second quarter of 2026 was led by an increase in exports of passenger cars and light trucks (+27.0%), coinciding with a rebound in auto production in Canada following declines in the preceding two quarters. Higher exports of intermediate metal products, energy products, and industrial machinery and equipment also boosted overall export volumes in the second quarter.

Imports rose 0.3% in the second quarter of 2026, after increasing 3.1% the previous quarter. Higher imports of tires, motor vehicle engines and vehicle parts led the overall increase, followed by imports of basic chemicals and computers and computer peripherals. These increases were partially offset by a decline in imports of intermediate metal products, mainly unwrought gold.

Residential investment rallied in the second quarter of 2026, increasing 2.5% following two consecutive quarterly declines. All components of residential investment were up in the second quarter, with ownership transfer costs—which represents resale activity—rising the most in Ontario, Quebec and British Columbia. New construction rose 0.8% in the second quarter led by work put in place for apartments in British Columbia.

Business investment up on higher machinery and equipment as well as engineering structures
Business capital investment was up in the second quarter of 2026 as engineering structures rose 2.3%, following two consecutive quarters of declines. Business investment was also bolstered by higher spending on machinery and equipment, which rose in the second quarter to its highest level since the second quarter of 2024. Investment in computers and computer peripherals rose 16.7% in the second quarter of 2026, mainly on higher imports of processing units, notably the types used in data centres. Businesses also invested more in medium and heavy trucks as well as communication and audio and video equipment.

Household spending up on higher demand for services
Household final consumption expenditure rose 0.8% in the second quarter of 2026, led by higher spending on mutual funds and other investment services, passenger vehicles and rent. Meanwhile, households purchased less gasoline and food in the second quarter, likely in response to higher prices. On a per capita basis, housing spending was up 1.0% in the second quarter.

Gross domestic product deflator records its largest increases in four years on higher export prices
The GDP deflator rose 2.5% in the second quarter of 2026, the largest increase since the second quarter of 2022. Growth in the deflator was led by export prices, which rose 6.5% in the second quarter of 2026 following a substantial rise in international oil prices. Meanwhile, import prices were up 3.2%, resulting in the terms of trade—the difference between the price of exported goods and services and the price of imported goods and services—increasing 3.3%.

Compensation of employees rises
Compensation of employees increased 1.5% in the second quarter of 2026, led by higher wages in finance, real estate and company management and trade. Wages fell in transportation and storage as well as information and cultural industries.

Compensation of employees grew in all provinces and territories in the second quarter of 2026, ranging from 2.5% in New Brunswick to 0.5% in Newfoundland and Labrador.

Corporate incomes rise sharply on higher energy prices
Corporate incomes rose 9.6% in the second quarter of 2026, the largest increase since the first quarter of 2021. The energy sector was the top contributor to the increase in corporate surplus in the second quarter of 2026. Meanwhile, manufacturing industries, which is heavily reliant on energy inputs, recorded lower operating surplus as their costs increased. Among financial corporations, surplus was led by strength in investment dealers and financial investment activity as equity markets strengthened in the quarter.

Household saving rate up as income grows more than spending
The household saving rate reached 3.7% in the second quarter of 2026 as growth in disposable income (+2.1%) outpaced nominal household spending (+1.7%). The household saving rate is aggregated across all income brackets; in general, saving rates are greater in higher income brackets.

Disposable income gains in the second quarter of 2026 were mainly due to increases in wages and salaries and higher transfers from government. The increase in government transfers was mainly due to a one-time GST/HST credit top-up payment provided in June as part of the transition to the Canada Groceries and Essentials Benefit as of July 2026.

Net investment income (termed net property income) was flat in the second quarter of 2026, after falling for three consecutive quarters. Investment income received rose 0.7%, while property income payments were up 1.6%, as interest on both mortgage and consumer credit grew at the fastest pace since the second quarter of 2024 and continued the reversal in the trend of declining interest expenses.

Bottom Line
Today’s data releases are a look in a rear-view mirror, as they predate the latest US-Canadian trade war. New tariffs coming from both Canada and the US will no doubt slow trade between the two countries, weakening economic activity and raising domestic prices on both sides of the border.

The Bank of Canada meets again on September 2, when it will likely hold the overnight policy rate stable at 2.75%.

The Consumer Price Index (CPI) rose 3.0% y/y in July, following the June gain of 2.8%. The inflation uptick was caused by higher gasoline prices and a rise in the cost of travel tours. Slowing the faster price growth was the deceleration in grocery prices. The all-items CPI excluding gasoline rose 2.2% for the third consecutive month.

Year over year, gasoline prices grew faster in July (+25.7%) than in June (+20.5%). The conflict in the Middle East, including the blockade of the Strait of Hormuz and the partial closure of Red Sea shipping routes in late July, put upward pressure on gasoline prices.

Year over year, prices for travel tours rose faster in July (+15.2%) than in June (+6.8%). Higher prices were driven by more expensive hotels and flights, coinciding with World Cup matches.

Similarly, air transportation prices rose 12.0% year over year in July, following a 9.6% increase in June. Contributing to the price increase were higher jet fuel costs.

The average of the Bank of Canada’s preferred core measures of inflation rose by 1.95%, barely rising from the previous month and remaining below its 2% target.

Prices for food purchased from stores grew more slowly in July (+3.1%) than in June (+3.9%) on a year-over-year basis. Despite the slowdown, July was the 18th consecutive month that grocery price inflation outpaced the all-items CPI.

The year-over-year deceleration in grocery prices was driven by slower price growth for fresh vegetables (+3.9%) and fresh or frozen chicken (+0.3%) as well as lower prices for cereal products (-1.7%). Higher prices for fresh fruit in July (+6.1%) compared with June (+1.7%) moderated the slowdown.

On a monthly basis, price growth for fresh fruit recorded the highest month-over-month movement for the month of July since 2011, at 4.7%. Driving the monthly increase were higher prices for berries and melons.

Year over year, prices rose faster in all provinces in July than in June, except for Ontario.
Year over year, Ontario was unchanged at 2.0% in July compared with June (+2.0%). This was the smallest price increase among the provinces, driven by declines in homeowners’ replacement cost (-4.6%) and natural gas prices (-18.7%).

Nova Scotia had the highest rate of inflation among the provinces at 5.0% in July. Higher prices for electricity (+3.3%) and rent (+8.7%) drove the acceleration.

In New Brunswick, faster price growth was led by higher prices for electricity (+4.4%) and traveler accommodation.

Bottom Line

Today’s inflation report reinforces our view that higher gasoline prices temporarily boost headline inflation while further eroding household purchasing power. However, these energy-driven increases, largely tied to geopolitical tensions, are unlikely to trigger a broader resurgence in underlying inflation. While food and shelter continue to account for a disproportionate share of price growth, inflationary pressures across the economy are generally moderating amid slowing domestic demand.

The duration of the disruption in the Strait of Hormuz remains a key risk. The longer the shipping route remains closed, the longer energy prices are likely to remain elevated. Even so, the June data support our base-case scenario that the Bank of Canada will remain on hold through the remainder of 2026. Policymakers will continue to closely monitor incoming inflation data and stand ready to tighten policy if price pressures broaden and become more persistent. Still, for now, underlying inflation trends remain consistent with a patient, wait-and-see approach.

Surprisingly strong employment gains in July confirm the economy is recovering from its Q4-’25 to Q1-’26 weakness. This is consistent with the strong July GDP figures, which point to 3.8% growth in the second quarter following a -1.0% dip in Q1.

Canadian employment defied the bears by jumping 75,100 in July, nearly evenly split between full-time and part-time work. Self-employment (+44.4k) accounted for close to half of the overall increase, while private sector jobs still rose by 57.9k. These were offset by a 27k drop in public sector jobs (a rarity, echoing the big drop seen stateside in July). Decisively, total hours worked rose 0.6% m/m in July.

Employment increased by 181,100 between May and July, marking the biggest three-month employment gain since before US President Donald Trump began imposing tariffs on Canadian goods last year.

The employment rate increased by 0.1 percentage points to 60.9% in July. The rate was up 0.2 percentage points compared with 12 months earlier.

Today’s report marked the third consecutive monthly decrease for the unemployment rate, which has fallen by 0.5 percentage points since April. The rate was also own 0.5 percentage points year-over-year in July.

A higher proportion of people searching for work have been finding jobs compared with last year, with the job-finding rate coming in at 20.8%. This was up from 18.5% for the same period a year earlier but below the pre-COVID-19 pandemic average of 26.6% recorded for the same period from 2017 to 2019 (not seasonally adjusted). Canada’s population barely grew in the past year given the tightening in immigration policy, making it easier for the jobless to find work.

Wholesale and retail trade (+21,000; +0.7%) recorded the largest employment increase across industries in July. Despite the monthly increase, employment in this industry was down by 50,000 (-1.7%) compared with 12 months earlier, largely reflecting a downward trend observed from January to May 2026.

Employment also rose in July in finance, insurance, real estate, rental and leasing (+18,000; +1.2%), professional, scientific and technical services (+17,000; +0.8%) and construction (+16,000; +1.0%). Despite recording monthly gains, employment in these three industries changed little on a year-over-year basis.

Provinces had varied results, with employment increasing the most in Ontario (52,000 jobs), in British Columbia (18,000 jobs), Manitoba (5,900 jobs) and Nova Scotia (4,600 jobs). Alberta and Quebec saw little change, although Alberta has seen notable job growth and decline in unemployment since July 2025.

The unemployment rate dipped again to 6.4%, down from 6.5% in June. This represents a two-year low in joblessness, down from the recent peak of 7.1% in September. The unemployment rate has fallen by half a percentage point since the spring. The Bank of Canada will see this as further tightening in the job market.

Among the three largest census metropolitan areas, the unemployment rate rose by 0.7 percentage points to 6.6% in Montréal, offsetting a similar-sized decline in the previous month. In Vancouver, the unemployment rate fell 0.6 percentage points to 6.0% in July. The unemployment rate was little changed in Toronto at 6.7%; however, it was down from a recent high of 9.0% observed in July 2025.

In direct contrast to the Canadian jobs report, the US nonfarm payroll report was much weaker than expected. US employers unexpectedly cut jobs in July and hiring in the prior two months was revised lower, suggesting the labour market is weaker than previously thought after surprising strength earlier this year.

Nonfarm payrolls decreased 23,000 last month following a combined 103,000 downward revision to the May and June figures, Bureau of Labour Statistics data showed Friday. The unemployment rate fell to 4.1% as labour force participation continued to slide, and wage growth slowed.

According to Bloomberg news, the US labour market may be starting to falter amid rising prices and uncertainty from the Iran war, despite recent data showing strength in consumer spending and business investment. The data could also prompt the Federal Reserve to delay interest-rate increases as officials measure inflation against risks to employment.

Bottom Line

Employment increased by 181,100 between May and July in Canada, marking the biggest three-month employment gain since before US President Donald Trump began imposing tariffs on Canadian goods. These blockbuster Canadian jobs reports, accompanied by inflation risk stemming from high tariffs and the war in Iran blocking the Strait of Hormuz, are troubling for both stocks and bonds.

While the economy continues to show signs of stabilization, trade uncertainty still looms. US President Donald Trump has threatened to impose a new round of 50% tariffs on a number of Canadian goods starting Aug. 19.

Canadian officials met with US Trade Representative Jamieson Greer on Thursday as the two sides try to find a deal before Trump’s deadline.

With wage growth decelerating further and energy prices more moderate, the Bank of Canada won’t take on a more hawkish tone yet, though a strengthening economic backdrop could eventually push it in that direction if it persists.