Canada's Economy Returning to Normal Growth on Lower Trajectory

Canada's economy has been described as being 'on fire' after a strong jobs report in July, but this reaction is misleading. The employment rate rose by 75,000, and the unemployment rate fell to 6.4 percent. However, the Labour Force Survey is a survey with a margin of error, which means any single month's data tells us very little on its own.

The trend is what matters, and the trend is up, just not as sharply. I estimate that trend employment rose by roughly 25,000 in July, one-third the headline growth. The trend unemployment rate has been improving since mid-2025 and now sits near 6.5 percent.

Before President Trump changed trade relations with Canada at the start of 2025, the Bank of Canada projected that the economy would be 2.4 percent larger by the second quarter of 2026. Instead, it has barely grown at all, with output in the second quarter this year likely close to where it stood a year and a half earlier.

This means Canada's economy is roughly $60 billion or about $1,400 per Canadian smaller than projected. Even if growth returns to normal rates, we will continue along a trajectory about 2 percent lower than before. The Bank of Canada's latest projections point to quarterly growth through the third quarter of 2026 that is roughly in line with what it was forecasting back in 2025.

Canada has been lagging behind its peers since the first quarter of 2025, with real GDP shrinking by about 0.1 percent on average compared to a 1.7 percent growth across the OECD. Even Mexico, also heavily exposed to US trade policy, grew 0.4 percent during this period.