Weekly Economic Research Note: Canada GDP Rebounds, Policy Holds, Business Cost Pressure Eases

Facts

• Inflation: Statistics Canada reported July CPI inflation at 3.0% year over year, up from 2.8% in June. CPI excluding gasoline was 2.2% for a third consecutive month. Gasoline inflation accelerated to 25.7% year over year from 20.5%, while food purchased from stores slowed to 3.1% from 3.9%.
• Bank of Canada: on September 2, the Bank held the target for the overnight rate at 2.25%, with the Bank Rate at 2.5% and the deposit rate at 2.20%. The next scheduled decision and Monetary Policy Report are October 28.
• Monetary policy context: the Bank said recent data reaffirmed a broadening Canadian recovery, but it also flagged high uncertainty, new U.S. tariffs and Canadian countermeasures, high oil prices, and upside risks to inflation.
• Capacity and slack: the Bank of Canada capacity dashboard was last updated July 15 and showed the current MPR output-gap estimate at -1.3% for Q1, with its next update scheduled for September 3.
• Growth: real GDP by expenditure increased 0.8% in Q2 after Q1 was revised to 0.1%. GDP by industry rose 0.9% in Q2 after a 0.1% Q1 gain, and June GDP by industry grew 0.3% for a third consecutive monthly increase.
• Labour market: the latest Labour Force Survey remains July, when employment increased by 75,000, the employment rate rose to 60.9%, unemployment fell to 6.4%, and average hourly wages rose 2.8% year over year. The August LFS is scheduled for September 4.
• Payroll and vacancies: June job vacancies edged up by 10,500 to 509,100, payroll employment rose 18,800, and there were 2.9 unemployed persons for every job vacancy, down from 3.0 in May. Average weekly earnings were $1,343.86, up 3.4% year over year.
• Housing: residential investment rose 2.5% in Q2 after two quarterly declines, with all components up. June building permits rose 18.5% to $14.9 billion, led by non-residential permits, while real estate and rental and leasing output rose 0.2% in June.
• Consumer spending: June retail sales increased 0.6% to $74.3 billion, core retail sales rose 1.2%, and retail volumes increased 1.5%. Household disposable income rose 2.1% in Q2 and the household saving rate was 3.7%.
• Business investment and conditions: business capital investment rose in Q2, including a 2.3% gain in engineering structures and higher machinery and equipment spending. In Q3, 59.8% of businesses expected cost-related obstacles, down from 64.3% in Q2, while 41.6% expected inflation to be an obstacle.
• Trade and tariffs: 32.2% of businesses expected U.S. tariffs on Canadian imports to have a negative impact over the next 12 months, and 27.4% reported passing tariff-related cost increases to customers over the prior 12 months.
• Commodities and producer prices: July IPPI increased 0.6% month over month and 12.4% year over year, while RMPI fell 2.2% month over month and rose 18.1% year over year. Energy and petroleum products drove the monthly IPPI increase.

Facts

• Federal Reserve: the FOMC held the federal funds target range at 3.50% to 3.75% on July 29 by a 9-3 vote. The next scheduled FOMC meeting is September 15-16.
• U.S. inflation: FRED CPI data show July CPI at 332.813, up from 332.568 in June and 3.3% above July 2025 on a seasonally adjusted basis. Core CPI was 336.789 in July, up from 336.065 in June and 2.5% above July 2025.
• U.S. employment: FRED payroll data show nonfarm payroll employment fell by 23,000 in July to 158.858 million, while the unemployment rate declined to 4.1% from 4.2% in June.
• Treasury yields: FRED showed the 10-year Treasury yield at 4.75% on August 31, up from 4.66% on August 26. The 2-year yield was 4.34% on August 31, up from 4.19% on August 26.
• U.S. dollar and currencies: FRED showed the nominal broad U.S. dollar index at 118.7479 on August 28, up from 118.4461 on August 26. Bank of Canada daily exchange rates showed USD/CAD at 1.3896 on September 1, up from 1.3876 on August 26.
• Equity market and risk sentiment: FRED showed the S&P 500 at 7,631.47 on September 1, down from 7,675.70 on August 26. The latest move points to softer risk sentiment over the run-date window.
• Commodities: FRED WTI crude was $83.90 on August 25, down from $86.34 on August 24 and $86.04 on August 17, but Canadian policy commentary still highlighted high oil prices and refinery margins as inflation risks.
• Global context: the Bank of Canada described U.S. growth as solid, the euro area as stronger than expected in Q2, and China as slower. OECD data showed headline inflation easing to 4.2% in June from 4.6% in May, while G20 merchandise import growth accelerated to 6.7% in Q2 from 5.2%.