Canada's economy grew 0.8 per cent in the second quarter of 2026, its strongest quarterly expansion since the Canada-U.S. trade conflict began, Statistics Canada reported on October 28. The same week, the Bank of Canada raised its policy rate to 2.5 per cent, its first hike in three years, citing the risk that high oil prices could fuel broader inflation.

Why did the economy grow so quickly?

The gain was broad-based, with 17 of 20 industrial sectors expanding, according to the agency. Goods exports rose 4.9 per cent, led by passenger vehicles and light trucks, while business investment in machinery and equipment climbed 5.2 per cent, a third straight quarterly gain. Merchandise exports to the United States ran 11.6 per cent above the second half of 2025, and shipments to other countries rose 19.4 per cent. Canada posted its first current account surplus in four years, the largest in more than 20 years.

Read also Bank of Canada raises interest rate to 2.5% amid oil price concerns

How will the rate hike affect households?

The Bank of Canada lifted its benchmark to 2.5 per cent from 2.25 per cent, a move that raises borrowing costs, especially for homeowners with variable-rate mortgages. Governor Tiff Macklem said an increase was needed to reduce the risk that elevated energy prices could spill over into general inflation. The bank's new forecast sees headline inflation above 3 per cent through most of 2027, returning to the 2 per cent target in mid-2028, and Macklem said further increases may be needed but would be weighed one meeting at a time.

What is happening in the labour market?

Hiring has not kept pace with output. Net employment gains from May to July only offset losses from the first four months of the year, and the unemployment rate was 6.4 per cent in July, down from 6.9 per cent in April. Employment then contracted in August and September, with the losses concentrated among public sector employees and youth. A companion Statistics Canada study found little sign that generative AI explains weaker hiring of young workers.

FAQ

What pushed inflation higher?

Disruptions in the Strait of Hormuz caused by the military conflict between the United States and Iran put upward pressure on energy prices, lifting headline inflation to 3.0 per cent in July.

Is the recovery expected to last?

Economists caution the rebound may already be losing steam, pointing to the recent employment declines and unresolved trade tensions with the United States.