Growth returned but risks remain

Canada's economy rebounded in Q2 2026, with real Gross Domestic Product (GDP) increasing by 0.8% on the quarter — the strongest expansion since Q1 2023. Growth was led by exports, which rose 15.1% on a recovery in automotive shipments, and business investment, which increased 9.5% on greater machinery and equipment spending. These improvements helped restore some momentum following a weaker start to the year.

Hiring conditions are picking up as well, with employment rising 1.0% on the year in August 2026, and the unemployment rate sitting at 6.4% — its lowest level in two years. Albeit job gains have been concentrated among private-sector and self-employed workers, highlighting an uneven market, and the unemployment rate is still elevated relative to historical norms. Furthermore, ongoing US trade tensions are likely to negatively affect labour market conditions, particularly across manufacturing and other export-oriented industries.

Headline inflation hit 3.0% in July, reaching the upper limit of the Bank of Canada’s target range as rising energy costs filtered through into higher goods prices. Currently, this pace of growth shouldn’t destabilise economic activity, however, escalating US trade tensions have increased the probability of further inflationary pressure.

The expectations of future price rises, and a growing fiscal deficit, have begun to influence financial markets, with bond yields being pushed higher as risk premiums grow. Despite the Bank of Canada holding its policy rate at 2.25% in September, the prospect of future rate increases cannot be ruled out amid an inflationary environment.