MACRO CORNER
The Canadian economy outperformed expectations in Q2 2026, exhibiting strong demand and expanding by 3.3%. 1 Strong net foreign demand and core household demand (+4.4 percentage points (pp) and +2.5 pp, respectively) were the leading contributors to growth. Following two consecutive quarters of significant declines in household spending on housing, households increased residential spending by 10% on an annualized basis in Q2 2026—the largest quarterly increase since Q4 2024.
The quarter also recorded the strongest contribution from core business investment since Q2 2024, contributing 1.0 pp to GDP growth. This was driven by notable quarter-over-quarter increases in spending on structures and machinery and equipment (+1.6% and +5%, respectively). The increase in business investment in structures is particularly notable, as it reverses three consecutive quarters of declining spending. Business spending on machinery and equipment, by contrast, has now increased for three consecutive quarters.
Government spending also made a positive contribution to growth (+0.36 pp), although this was entirely attributable to government consumption spending (+0.8 pp). For the second consecutive quarter, however, reductions in government investment spending were a significant drag on the economy (-0.5 pp), with government investment falling by around 10% or more, on an annualized basis, for the second consecutive quarter.
Meanwhile, declining inventories contributed to a decline of 4.9 pp from GDP growth, which is consistent with other indicators that point to stronger than expected demand conditions.
1 Unless otherwise indicated, GDP growth and contributions to growth are reported at annualized rates; contributions are expressed in percentage points (pp)
LABOUR MARKET MOMENTUM INDEX (LMMI) *
Q2 2026 was characterized by stronger economic growth, and a steadily improving labour market. Despite a marginal slowing of wage growth, the stronger economic data helped push up the LMMI to 51.7.
THOUGHTS: Q1 2026 GDP REVISION
As expected in the May 2026 update, Statistics Canada revised its Q1 2026 GDP figures, indicating that the Canadian economy did not contract by 0.14%, but instead expanded by 0.3%.
Upward revisions were made to consumption and export spending, while downward revisions were made to residential and non-residential investment spending. From a sectoral expenditure perspective, the largest contributors to growth in the quarter were inventory investment (+4.2 pp) and core household demand
(+0.49 pp). These gains were offset by declines in net foreign demand (-3.6 pp), government spending (-0.47 pp), and core business investment (-0.13 pp), which acted as significant drags
on the economy.
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