Canadian Gross Domestic Product (GDP) rose by 0.3% month-over-month in May, surpassing expectations for a 0.2% increase and flash estimates for a 0.1% rise, according to TD Securities and RBC economists [1][2]. RBC further notes an advance estimate of 0.2% growth for June, indicating a solid rebound in the second quarter after winter stagnation [2]. Both TD Securities and RBC estimate Q2 annualized GDP growth at 3.4%, which is above the Bank of Canada's projections and more than a percentage point higher than RBC's own 2.2% forecast [1][2]. Sector gains were broad-based, and signs of stabilization in labor markets were observed [2].
Despite the upside surprise in GDP, TD Securities analysts Robert Both and Emma Lawrence maintain their view that the Bank of Canada will keep policy rates unchanged through 2026, with a gradual hiking cycle expected to begin in early 2027, targeting a rate of 2.75% [1]. They emphasize that the Bank can remain patient, as excess supply is slowly absorbed, and the current print gives the Bank added confidence in the economy's adjustment to heightened uncertainty [1]. RBC economists Abbey Xu and Nathan Janzen echo the positive near-term outlook but warn that escalating trade tensions and new U.S. tariffs pose downside risks, particularly for targeted industries [2].
Looking ahead, RBC expects the Canadian economy to gradually improve on a per-person and per-worker basis this year, but cautions that monthly GDP readings and advance estimates are revision-prone [2]. TD Securities also notes that the Bank of Canada would feel comfortable with its decision to stay on hold after the latest GDP print [1].
In contrast, TD Securities reports that U.S. Q2 GDP growth moderated to 1.5% quarter-over-quarter annualized rate, but underlying private domestic final purchases accelerated to 3.9%, with broad-based momentum beyond AI-related sectors [3]. However, this U.S. data is not directly related to the Canadian GDP event and does not impact the Bank of Canada's outlook discussed in the Canadian sources [1][2].
CONCLUSION
Canadian GDP growth has outpaced forecasts, supporting a brighter near-term outlook and giving the Bank of Canada confidence in its current policy stance. Despite positive momentum, analysts expect the Bank to hold rates steady through 2026, with trade tensions posing potential risks. The market takeaway is cautiously optimistic, with gradual improvement anticipated but no immediate change in monetary policy.