No, Canada’s economy isn’t on fire. Growth is returning, but on a permanently lower path
For several months this past year, Canada’s economy was often described as being in arecession. Last week, after astrong jobs report, somedescribed itas “on fire. ”Both reactions are understandable, at least. . .
For several months this past year, Canada’s economy was often described as being in arecession. Last week, after astrong jobs report, somedescribed itas “on fire. ”Both reactions are understandable, at least on the surface. Employment rose by 75,000 in July, and the unemployment rate fell. And when the second-quarter GDP arrives later this month, growth may turn out to be thestrongest in more than three years. The numbers are good, and the economy does appear to be turning the corner. That’s very welcome. But the swing from one label to the other tells us more about how fast the mood can shift than about how much the economy has actually changed. A better way to think about it is this: Canada is gradually returning to normal rates of growth, but along a permanently lower path. And measured against our peers, or even against our own potential, recent performance looks anything but strong. One report, wide error barsJuly was a genuinely good report. Employment rose by 75,000—a solid 0. 4 percent gain in a single month, in an economy with roughly 21. 2 million workers. The unemployment rate fell to 6. 4 percent. The gains were broad, across sectors, age groups, and provinces. But the Labour Force Survey is a survey. It’s essentially a large, well-run poll asking people whether they’re working (among many other questions). And like any poll, it comes with amargin of error—and that margin is much larger than most people assume. The July gain of 75,000 is actually plus or minus about 66,000, 19 times out of 20. Between June and July, every province except Ontario saw changes within their own respective margins. Graphic Credit: Janice Nelson. That’s not a knock on Statistics Canada. It’s normal sampling error. But it means any single month 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 (calculated similarly toStatCan’s approach) rose by roughly 25,000 in July. One-third the headline growth. The trend unemployment rate is improving too, and has been since the middle of last year. It now sits near 6. 5 percent, down from a peak of 7 but up from roughly 5 percent four years ago. Graphic Credit: Janice Nelson. So the labour market is getting better. That’s good news. But it is not an economy on fire. We’re still far short of where we were headedThe clearest way to see this is to compare where the economy is to where we expected it to be. Before President Trump changed the trade relationship at the start of 2025, the Bank of Canada projected that by the second quarter of 2026, Canada’s economy would be 2. 4 percent larger than it was in the first quarter of 2025. Instead, the economy has barely grown at all. Output in the second quarter of this year is likely close to where it stood a year and a half earlier. That’s slightly below even the better of the tariff scenarios the Bank laid out in itsJuly 2025 Monetary Policy Report, as I illustrate below. Graphic Credit: Janice Nelson. The gap is close to 2 percent. In dollars, that means Canada’s economy is roughly $60 billion, or about $1,400 per Canadian, smaller. That’s large. And that gap doesn’t close on its own. Even if growth returns to normal rates, we simply continue along a trajectory about 2 percent lower than before. Indeed, 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, which means the gap stays about where it is. Growth returning, in other words, is not the same as the economy catching fire. It mostly means the adjustment to the new trade reality has worked its way through. View reader comments(0)And we’re behind our peersThe international comparison tells the same story. Since the first quarter of 2025, real GDP across the OECD has grown 1. 7 percent on average. Canada’s has shrunk by about 0. 1 percent. Meanwhile, Mexico, also heavily exposed to U. S. trade policy, grew 0. 4 percent. The European Union grew 0. 8 percent. The United Kingdom, which has had a difficult run since voters chose to make trade with Europe harder with Brexit, grew 0. 9 percent. The G7 average was 1. 7 percent. Australia grew 2. 5 percent. The United States grew 2. 7 percent. Graphic Credit: Janice Nelson. Some of this reflects Canada’s recent slower population growth, so per-person figures may be more relevant. There we’ve done better—real GDP per person was 0. 2 percent higher in the first quarter of 2026 than a year earlier. But with the exception of Mexico, every economy above still beats us. The OECD averaged 1. 5 percent per person. The G7 averaged 1. 6 percent. Australia came in at 1 percent, and the U. K. and EU at 0. 7 percent each. Graphic Credit: Janice Nelson. By these measures, Canada has been languishing. Nor is the problem that we’re running below our own capacity. The Bank of Canada’s most recent estimate puts the economy about 1 percentaboveits own underlying potential—roughly where it has sat in most quarters over the past four years. The first half of 2026 looks much like the first half of every year going back to 2022. What’s been lagging isn’t output relative to potential. It’s potential itself. Optimistic, but clear-eyedNone of this makes me a pessimist. I’m genuinely optimistic about the quarters ahead (even despite some additional tariffs that may be headed our way). The Canadian Chamber of Commerce’s Business Data Lab, for example, runs a really coolreal-time nowcasting toolthat currently puts second-quarter growth well above most professional forecasts, and I tend to share that optimism. That means unemployment should keep falling (barring new international shocks or a fresh rise in uncertainty, of course) and the Bank of Canada may even begin raising rates early next year (if not earlier, although that’s probably a coin flip at this point). But rising growth off a lower base is not the same as a strong economy. Canada is getting closer to normal growth rates along a permanently poorer trajectory than the one we were on before January 2025. That’s the context worth keeping in mind. Trevor TombeTrevor Tombe is a professor of economics at the University of Calgary, the Director of Fiscal and Economic Policy at The School…Canada’s economy is showing signs of recovery with a recent increase in employment and a decrease in the unemployment rate. However, the growth trajectory is on a permanently lower path compared to previous expectations, indicating that the economy is not as robust as it appears. While the job market is improving, Canada lags behind its international peers in GDP growth. The adjustments to new trade realities have led to a slower growth rate, and despite optimism for the future, the economy remains below its potential output, highlighting a need for cautious assessment of its performance. Employment rose by 75,000 in July, a solid 0. 4 percent gain. The unemployment rate fell to 6. 4 percent. Canada’s economy is roughly $60 billion smaller than expected, about $1,400 per Canadian. Since the first quarter of 2025, Canada’s GDP has shrunk by about 0. 1 percent.