Canada’s economy is improving, RBC says

RBC economist Abbey Xu notes that Canada’s economy rebounded strongly in Q2 as domestic demand strengthened and trade recovered.

In an Aug. 28 report, Xu pointed out that real GDP increased 3.3% annualized in Q2, following an upwardly revised 0.3% gain in Q1.

Quarterly and monthly GDP data remain volatile, and the Q2 pace is unlikely to be repeated. Statistics Canada’s early estimate showed July output was essentially unchanged from June, Xu said.

Still, the data are consistent with an economy that is gradually improving, particularly on a per-person basis as Canada’s population edges lower.

Final domestic demand rose 3.9% annualized, reflecting stronger household consumption, business investment and residential investment.

Household consumption increased 3.3%, led by services spending. Business fixed investment rose 9.5%, helped by a 22% increase in machinery and equipment spending.

Exports increased 15.1%, led by a recovery in motor vehicle production and shipments after winter disruptions. Imports rose 1%, leaving net trade to add 4.4 percentage points to annualized GDP growth.

Xu said growth should moderate but remain positive through the rest of 2026.

She said the latest 50% U.S. tariffs add downside risk, though RBC expects the effects to be concentrated in exposed sectors rather than materially changing aggregate growth. More than 80% of Canadian exports continue to enter the U.S. duty-free under CUSMA.

Xu said plastics, electrical machinery, furniture and wood products face the greatest disruption, with regional pressure concentrated in Quebec, British Columbia and Ontario.

Overall, Xu said the Q2 report shows Canada entered the latest period of trade disruption from a stronger starting point.

RBC continues to expect the Bank of Canada to keep interest rates unchanged through the rest of 2026.

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