Canada’s Q2 GDP Rebound Faces Future Headwinds: RBC

Canada’s economy rebounded in the second quarter of 2025, but that momentum is expected to fade as headwinds mount, according to a recent report from RBC Economics. The bank’s analysis points to slowing global demand, persistent inflation pressures, and elevated interest rates as key challenges for the remainder of the year.

Q2 Rebound: A Closer Look

RBC’s report highlights that the GDP rebound in Q2 was largely driven by a bounce-back in energy exports and consumer spending, following a weak first quarter. However, the bank cautions that this growth is not sustainable, with leading indicators already pointing to a slowdown in the third quarter.

“The second-quarter numbers were flattered by temporary factors, such as the resumption of oil production and a rebound in auto sales,” said an RBC economist. “Underlying momentum is softer, and we expect growth to decelerate noticeably in the second half of the year.”

Headwinds on the Horizon

RBC identifies several headwinds that could weigh on Canada’s economic growth. The ongoing impact of high interest rates is expected to dampen consumer spending and housing activity, while global trade tensions and slowing growth in key trading partners, including the United States and China, pose risks to export demand.

Inflation, while easing from its peak, remains above the Bank of Canada’s target, limiting the central bank’s ability to cut rates. RBC projects that the policy rate will remain restrictive through 2025, further constraining economic activity.

Implications for Businesses and Consumers

For Canadian businesses, the slower growth environment means cautious investment planning and tighter credit conditions. Consumers, meanwhile, face continued pressure on purchasing power, despite some relief from lower energy prices.

“The rebound in Q2 is unlikely to translate into sustained strength,” the report concludes. “We advise clients to prepare for a period of below-potential growth, with the risk of a mild recession still on the table.”

Conclusion

RBC’s outlook underscores the fragility of Canada’s economic recovery. While the Q2 GDP rebound was a positive development, the combination of high rates, weak global demand, and lingering inflation suggests that the Canadian economy will face significant challenges in the coming quarters. Policymakers and market participants will be watching closely for signs of further softening.

FAQs

Q1: What drove Canada’s Q2 GDP rebound?
The rebound was primarily driven by a recovery in energy exports and a bounce-back in consumer spending, particularly in the automotive sector, after a weak Q1.

Q2: What are the main headwinds RBC identifies for the Canadian economy?
RBC points to elevated interest rates, slowing global demand (especially from the U.S. and China), and persistent inflation as the main headwinds.

Q3: How might this affect the Bank of Canada’s monetary policy?
RBC expects the Bank of Canada to keep interest rates restrictive for the rest of 2025, as inflation remains above target, which will likely slow economic growth further.