May GDP surprise calls Canada's rate outlook into question again

Canada's economy expanded 0.3% in May, comfortably outpacing Statistics Canada's advance estimate of 0.1% and extending a second consecutive month of growth that puts second-quarter gross domestic product (GDP) on course to significantly overshoot the Bank of Canada's own projections.

Released Friday by Statistics Canada, the May result, combined with a June flash estimate of 0.2%, puts annualised second-quarter growth on track for 3.4%. That is well ahead of the central bank's own July monetary policy report projection of 2.5% for the same period.

Coming just weeks after the economy entered a technical recession in the first quarter of 2026, the reading marks a substantial change in trajectory, though economists are cautioning against reading too much into a single month.

Real estate stirs as broad economy gains ground

Growth in May was widespread, with 13 of 20 industrial sectors contributing to the expansion.

Mining, quarrying, and oil and gas extraction rose 1%, leading the economy for a second straight month as oilsands operators completed or deferred spring maintenance ahead of schedule, freeing up extraction capacity.

Pipeline activity helped carry gains into the transportation and warehousing sector.

For mortgage professionals, the residential data commanded attention: offices of real estate agents and brokers rose 5.1% in May, the subsector's single biggest monthly jump since October 2024, according to Statistics Canada.

The spring housing market in Ontario and British Columbia, stalled for much of the year's first quarter, showed renewed signs of life.

Construction, manufacturing, and the finance and insurance sector all expanded for a second consecutive month, while April's GDP figures were revised upward by a tenth of a percentage point to 0.6%.

Andrew Grantham, an economist at the Canadian Imperial Bank of Commerce (CIBC), urged restraint.

"Growth was flattered by a reversal of some one-off factors — oil maintenance, weather disruptions — that negatively impacted the first quarter, as well as potentially some positive contributions related to the FIFA World Cup," he said.

September rate call complicated by tariffs and inflation

The overnight rate has been unchanged at 2.25% for six consecutive decisions, a freeze that has extended through every rate announcement since December 2025, leaving variable mortgage and home equity line of credit (HELOC) rates anchored at prime minus their discount, with the prime rate holding at 4.45%.

The stronger-than-expected May result does little to simplify the path to September. Canada's annual inflation rate climbed to 3.2% in May, its highest reading in more than two and a half years, driven almost entirely by gasoline.

Strip out energy, and core measures tracked near 2%, broadly in line with the Bank's target. Competing risks have kept the central bank firmly in monitoring mode.

US tariff threats set to take effect August 19 are adding fresh uncertainty to the rate outlook, a development Robert Kavcic, senior economist and director at BMO Economics in Toronto, described to Canadian Mortgage Professional earlier this month as "just a reminder that uncertainty on the trade front has not gone away."

BMO holds the view that the Bank is firmly on hold and that any rate increase would require careful deliberation.

Statistics Canada is scheduled to release official second-quarter GDP estimates — covering the full April-to-June period — at the end of August, ahead of the September 2 rate decision.

Source: Canadian Mortgage Professional