Economists impressed with GDP data, expect interest rates to hold with uncertainty ahead

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‘Bounce-back landed as expected’: TD Bank

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Toronto-Dominion Bank director and senior economist Andrew Hencic said Friday’s data is a welcome result after some nervous handwringing about a fourth quarter contraction and a flat first quarter.

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“The second quarter bounce-back has landed as expected,” he said, adding that healthy recoveries were seen across the board, with still solid business investment.

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Hencic said the print ultimately shows that growth was roughly 1.8 per cent (annualized) in the first half, with volatility in trade figures muddying the waters.

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“The problem going forward is that trade uncertainty is back with new U.S. tariffs now imposed, Canadian retaliation due early next month, and the prospect of further escalation hard to dismiss,” he said.

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He added that the newly imposed duties are likely to shave 0.3 to 0.6 percentage points from growth over the next year. This would still leave growth through 2027 in the mid-one per cent range, but further escalation risks dragging this figure lower, he said.

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Uncertainty incoming: Desjardins

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New trade restrictions have cast a fresh shadow over the outlook despite Canada’s economy bouncing back in the second quarter, said Desjardins economist Royce Mendes.

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The second quarter ended with a bang, with GDP up 0.3 per cent in June, partly due to economic activity surrounding the FIFA World Cup. As a result, Mendes said it’s no surprise that the flash estimate for July GDP shows no growth occurred during the month, with the tailwind from the World Cup fading.

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He also said that it seems like households and businesses were beginning to find ways of navigating the trade-related uncertainty before the latest round of tariffs.

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“While it helps that the economy was on stronger footing heading into August, the fresh wave of protectionism injects a significant amount of uncertainty into the outlook,” wrote Mendes.

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As a result, he said the rates market has shown little reaction to confirmation that the second-quarter rebound was stronger than the Bank of Canada had projected in July and continues to anticipate that central bankers will remain on the sidelines for the rest of the year.

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Rates to hold until 2027: BMO

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Bank of Montreal chief economist Douglas Porter said the details of the latest data, if anything, were even stronger than the headline. Notably, the so-called technical recession has been sent to the trash bin, as Q1 was revised to a small positive, he said.

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While June GDP was a tick above consensus, the flash estimate for July was for a flat reading, a bit better than some of the preliminary monthly figures would suggest, but also before the latest tariff spat kicked off, said Porter.

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“The third quarter is thus off to a tougher start, and it won’t get easier in August and September with the wave of downbeat headlines,” he said.

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Porter said that Friday’s data was impressive overall, there’s not a lot to seriously move the needle bigger picture for the Bank of Canada. The economy was better than the Bank expected in the second quarter and appeared to be picking up steam, but the sluggish start to the third quarter and the trade flare-up cast a dark cloud over the near-term outlook.

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The Bank of Canada will likely wait and see how the economy handles the latest tariff spat — and how the tussle develops — before judging where rates need to go next, he said.

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“Look for the BoC to be on hold into 2027” wrote Porter. “That posture could last well into next year depending on how the trade backdrop unfolds and just how growth and inflation respond to the tariffs and counter-tariffs.”

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