By Promit Mukherjee
OTTAWA, Aug 28 (Reuters) – Canada’s economy rebounded sharply in the second quarter after six months of virtually no growth, aided by a strong jump in exports and solid domestic demand, data showed on Friday, though a new round of U.S. tariffs brings new uncertainty.
The economy grew at an annualized rate of 3.3% in the second quarter, the fastest rate since 2023, after a revised 0.3% increase in the first quarter, Statistics Canada said.
The upward revision to first-quarter growth means Canada was not in a technical recession, usually defined as two straight quarters of contraction.
Healthy domestic demand, led by consumer spending and business investments, signals the economy is slowly brushing off the impacts of more than 18 months of U.S. import tariffs that upended North American supply chains and increased costs.
FRESH TARIFF DISPUTE
A strong domestic consumption and expenditure pattern puts Canada on a firm footing to withstand a new 50% U.S. import tariff that President Donald Trump imposed this week on $20 billion of Canadian exports. Canada retaliated with its own counter-measures on Canadian imports from the U.S.
“It seems like households and businesses were beginning to find ways of navigating the trade-related uncertainty before the latest round of tariffs.” said Royce Mendes, managing director and head of macro strategy at Desjardins wrote in a note.
“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,” Mendes said.
The Canadian dollar slightly weakened after the GDP data with loonie trading down 0.01% to C$1.3856 against the U.S. dollar, or 72.17 U.S. cents.
Money markets were pricing in no change in interest rates next week..
Yields on 2-year government bonds firmed after the data and were up 1.3 basis points to 2.601%.
On a quarterly basis, GDP grew at 0.8% for the period ended June, from an upwardly revised 0.1% in the previous quarter.
Second-quarter annualized growth was higher than the Bank of Canada’s July forecast of 2.5% growth.
Higher exports were one of the main contributing factors for the second-quarter growth with outbound shipments growing 3.6%, the biggest increase in over three years, StatsCan said.
STRONGER HOUSEHOLD SPENDING
Final domestic demand, the sum total of all consumption and capital spending and a crucial metric to assess domestic health, rebounded to 1% in the second quarter, from a minor contraction in the first quarter.
Domestic demand had been muted for several quarters as consumers and businesses remain cautious while Canada navigates its trade war with the U.S.
But household final consumption expenditure, the main indicator of consumer spending, rose 0.8%, its highest level in three quarters, highlighting stronger household spending. This was mainly driven by higher salaries and government benefits, economists said.
Business investment, or business gross fixed capital formation, sprang to a solid 2.3% growth in the second quarter from a contraction of 1.3%, the first time in the last year and a half that business investment has expanded.
That growth was led by investment in both residential and non-residential structures, machinery and equipment, StatsCan said.
However, the general gross fixed capital formation, essentially government expenditure for creating assets, continued to decline with a second-quarter contraction of 2.9%, after shrinking 2.6% in the previous quarter.
On a month-to-month basis, the GDP for June grew 0.3% against a forecast of 0.2% and an advance indicator showed that the economy was largely flat in July, the statistics agency said.
(Reporting by Promit Mukherjee; Editing by Dale Smith, Elaine Hardcastle and Nick Zieminski)
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