Current conditions

Economic growth in Canada has been weak but is set to pick up. Headline inflation has risen above 3%. If oil prices and gasoline refinery margins decline as assumed, inflation should ease in the coming months. Inflation excluding gasoline remains near 2%.

Gross domestic product (GDP) in the first quarter of 2026 was at the same level as in the first quarter of 2025. Growth over this period was choppy and uneven across sectors, impacted by US tariffs, trade policy uncertainty and slowing population growth. The labour market has been soft, with the unemployment rate generally between 6½% and 7%. The Canadian economy has remained in excess supply.

Average GDP growth is estimated to be just above 1% in the first half of 2026. GDP growth was close to zero in the first quarter, partly due to temporary factors. It likely rebounded in the second quarter as the effects of these factors faded. A pickup in exports and residential investment provided further support.

After being close to 2% over the past year and a half, consumer price index (CPI) inflation rose to 3.2% in May because of the increase in gasoline prices. Measures of core inflation have moderated and are now close to 2%.

CPI inflation is expected to diminish in the coming months because oil prices have fallen from their peak and gasoline refinery margins are anticipated to gradually decline.

Economic activity

GDP growth has been weak and volatile since the United States introduced tariffs in early 2025 (Chart 1). GDP growth is estimated to have averaged about 1% in the first half of 2026.

Activity stalled in the first quarter

Economic activity was roughly flat in the first quarter of 2026, weaker than the 1.5% growth projected in the April Report. Several temporary factors weighed on economic growth. These include:

• an unexpected decline in government spending
• a fall in motor vehicle production, with some plants shut down for retooling
• a sudden drop in oil and gas investment

In addition, housing activity declined, hampered by affordability challenges, slow population growth and elevated economic uncertainty.

In contrast, growth was supported by consumer spending, which remained resilient even with elevated uncertainty and higher gasoline prices at the end of the quarter.

Growth likely picked up in the second quarter

GDP growth is estimated to have strengthened to 2.5% in the second quarter, partly reflecting the reversal of temporary weakness in the first quarter (Chart 2). Strength in exports and residential investment also helped boost growth.

After a year of sustained weakness, export growth likely resumed in the second quarter, led by exports of energy and non‑commodity goods. Investment in oil and gas is estimated to have rebounded in response to higher oil prices. Bank of Canada survey results suggest that business investment outside the energy sector also increased.1

Household spending likely strengthened. Consumer spending growth appears to have edged up, supported by high equity prices and one‑time government transfers.2 Recent indicators point to some stabilization in housing activity after a period of weakness, but conditions remain uneven across regions.

Government spending is estimated to have picked up, partly supported by ongoing public investment.

Capacity pressures

The output gap for the second quarter of 2026 is estimated to be in the range of -1.5% to -0.5%, indicating slightly more excess supply than was anticipated in the April Report.

Many businesses reported they have enough capacity to meet current demand. Fewer businesses than in recent quarters said they would struggle if demand rose unexpectedly.

Hiring remains subdued

Labour market conditions continue to be soft but broadly stable (Chart 3). The unemployment rate was 6.5% in June. It has generally stayed between 6.5% and 7.0% since the end of 2024.

Growth in labour demand has been subdued, and job turnover continues to be low.3 Businesses reported that they are retaining their workers but are reluctant to hire more, given persistent uncertainty and soft demand growth. Businesses also signalled that they expect hiring to remain modest.

Growth in labour supply has been constrained by slow population growth and more people retiring from the workforce.

Wage growth remains close to 3%, with the LFS‑Micro measure at 2.7% in June.4

Inflation

After being close to the 2% target for more than a year and a half, CPI inflation rose to just over 3% in May due to higher gasoline prices.

Inflation is expected to have stayed elevated in June but should ease to about 2.5% by August (Chart 4). This easing is based on the assumption that oil prices are around US$75 per barrel and gasoline refinery margins edge down. But the situation in the Middle East remains fluid and subject to flare‑ups, which could affect oil prices and inflation.5

In contrast, services inflation is below its historical average, especially in shelter categories. Inflation in both housing‑related services and rent has slowed, partly reflecting lower demand amid slower population growth. Still, rent inflation remains elevated at 3.5%. Inflation in services excluding shelter is also somewhat subdued, partly because of past modest growth in unit labour costs.

Measures of core inflation have been easing since September 2025, with both CPI‑trim and CPI‑median reaching about 2% in April and May. The distribution of inflation has also normalized in recent months, and the share of CPI components rising above 3% has declined and is close to its historical average (Chart 6).

War‑related cost pressures are feeding through supply chains

Cost pressures related to the war in the Middle East are making their way through supply chains. Many businesses expect higher fuel costs to lead to increases in their input and selling prices in the near term. Moreover, cost pressures have emerged in energy‑related inputs—such as petrochemicals and plastic resins—and in fertilizer.

However, competition and weak demand could make it more difficult than usual for businesses to pass on cost increases to consumers. The decline in oil prices since April is also expected to limit the risk of these cost pressures broadening significantly (see In focus: War‑related supply disruptions are passing through to consumer prices).

Non‑energy commodity prices have edged down

Prices of non‑energy commodities have fallen about 5% since the April Report, led by declines in the prices of aluminum and precious metals. The drop in aluminum prices is mostly due to expectations for a recovery in Middle East production.

Financial conditions

Canadian financial conditions have eased since the April Report. Sovereign bond yields have remained volatile and have continued to diverge across regions. In Canada, yields are little changed on net.

Global equity prices remain buoyant, and credit spreads are compressed.

In the United States, sovereign bond yields and market pricing for the policy rate have increased. This is partly due to stronger‑than‑expected economic activity.

The US dollar has appreciated broadly since the April Report, while the Canadian dollar has depreciated to around 71 cents US (Chart 9). This partly reflects a widening spread between US and Canadian government bond yields.