Oil, construction and real estate drove May's gain as US tariffs threaten the run
Canada's economy grew for a second consecutive month in May and is tracking its strongest quarter in more than three years, giving the Bank of Canada fresh grounds to keep interest rates on hold for the rest of 2026.
Real gross domestic product rose 0.3 percent in May, Statistics Canada reported on July 31, topping the 0.2 percent gain analysts had expected, according to Reuters.
The agency said 13 of 20 industrial sectors expanded, with goods-producing industries up 0.6 percent and services up 0.2 percent.
A preliminary estimate pointed to annualized growth of 3.4 percent in the second quarter, Reuters reported, which would mark the economy's best quarterly showing in more than three years.
The Globe and Mail noted that pace runs well above the 1.5 percent expansion the United States recorded for the same quarter.
The rebound reverses two straight quarters of annualized contraction that had raised fears of a technical recession, according to CBC News, after the first quarter shrank 0.1 percent on an annualized basis.
Oil and gas led the advance.
The mining, quarrying, and oil and gas extraction sector expanded 1.0 percent in a second straight monthly gain, Statistics Canada said, as support activities for the subsector rose 7.3 percent, their largest jump since March 2024.
Producers had deferred spring maintenance to capture higher prices, the agency noted.
That lift may prove short-lived: Mark Parsons, chief economist at ATB Financial, told the Globe and Mail the sector needs more certainty on policy and pipelines to sustain growth over the medium to long term, even as he welcomed the near-term boost.
Growth reached beyond energy.
Construction climbed 0.8 percent and real estate and rental and leasing rose 0.4 percent in a fourth consecutive monthly gain, per Statistics Canada, as offices of real estate agents and brokers advanced 5.1 percent on stronger home resales in Ontario and British Columbia.
Manufacturing, finance and insurance, and transportation and warehousing each grew 0.3 percent, the agency added.
Andrew DiCapua, principal economist at the Business Data Lab and the Canadian Chamber of Commerce, said the breadth stood out.
In an email to Wealth Professional, he said the figures suggest "the economy is not just surviving, but thriving," with rate-sensitive sectors, not just energy, driving the gain.
The data reinforces the Governing Council's view that "they don't need to intervene to support the economy," DiCapua said.
Money markets expect the central bank to stay on the sidelines, with investors pricing in a hold for the rest of the year, Reuters reported.
The Canadian Press, citing LSEG Data & Analytics, put the odds of a hold at the September 2 decision at nearly 97 percent as of Friday, with the benchmark rate sitting at 2.25 percent through 2026.
"We continue to see slack in the economy fading only slowly and for the Bank of Canada to keep interest rates on hold throughout the remainder of the year," said Andrew Grantham, a senior economist at CIBC Capital Markets.
TD struck a similar note, saying real GDP is tracking around 3.0 percent annualized, slightly ahead of the Bank's latest forecast, while its economist Marc Ercolao said the print does little to change the outlook for a central bank he expects to stay on hold.
Markets took the data in stride.
The loonie traded 0.1 percent lower at $1.4025 against the US dollar on July 31 but was on track for a 1.2 percent monthly gain as oil climbed, according to Reuters.
Canadian bond yields rose across the curve in the same session, Reuters added, with the 10-year up six basis points at 3.650 percent, while US crude futures traded 2.7 percent higher at US$85.83 a barrel.
Several economists cautioned against over-reading the rebound.
BMO chief economist Doug Porter said the figures show the earlier weakness was overstated and that "the underlying economy is still grinding ahead," and he added, in comments reported by Reuters, that the data would not ease "the bigger picture concerns of fresh tariff threats and lofty energy prices."
Analysts also flagged temporary factors behind the spring strength, including the FIFA World Cup, hiring for the 2026 census and deferred oil maintenance, Reuters reported.
Matthieu Arseneau, deputy chief economist at the National Bank of Canada, told the Financial Post that combining May with the June estimate would produce "the strongest performance seen in 13 quarters," but expected momentum to fade.
"A moderation in economic activity is therefore to be expected in the coming months once these temporary factors subside," he said.
Ranella Billy-Ochieng, a senior economist at TD Bank Economics, called the broad-based growth "really encouraging" and said earlier shocks were fading, while cautioning that monthly data can be volatile.
"What we want to see going forward is sustained momentum and sustained broad-based participation in growth," she told the Financial Post.
Trade remains the swing factor.
DiCapua said new US tariff threats could take effect in just over two weeks, adding uncertainty that businesses have warned would further delay investment, and said the growth outlook could become the central risk for the Bank of Canada depending on how negotiations unfold.
The Globe and Mail likewise reported that a fresh wave of tariffs could temper the recovery expected later in the year.
Statistics Canada will publish official second-quarter figures on August 28, alongside revised June data.
