Bank of Canada: Solid Canadian growth meets narrow tariff headwinds

Canada’s economy bounced back strongly in Q2. Hiring picked up to drive the unemployment rate lower. Domestic demand remained resilient, while net trade recovered from a soft Q1.

U.S. Section 338 tariff threats won’t derail overall growth in Canada, as they target a narrow base of Canadian products. Impact to targeted producing regions and industries will be more significant.

The Bank of Canada is more comfortably on hold amid signs of a firming economy and soft core inflation prints.

"We expect modest adjustment hikes in 2027 should these trends persist," it says.

Summary of BoC forecast changes in August:

• We raised Canada’s Q2 2026 GDP growth from 1.7% annualized to 3.4% based on early monthly GDP readings. That pushed the expected annual growth rate to 0.9% from 0.7%—still an acceleration from 2025 once Canada’s unprecedented population declines are accounted for.

• Monthly GDP readings have been highly revision-prone, but they are consistent with expenditure data showing solid increases in spending and investment across Canadian households, businesses, and governments in Q2, supporting the GDP rebound.

• U.S. GDP and unemployment rate forecasts are little changed. Growth in Q3 was marked slightly stronger (from 2.1% to 2.4% annualized), and the unemployment rate slightly lower. Overall, the economy is expected to grow at a similar pace in 2026 as in 2025 just above 2%, with unemployment rate hovering around historical lows.

• The U.S. yield curve is expected to remain steeper than previously expected. The gap between 2-year and 10-year Treasury yields is expected to average 60 basis points over the remainder of 2026, before narrowing in 2027.

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