Canada GDP Rebound Conceals Weak Domestic Demand

Canada’s latest GDP report showed an uptick in overall economic output, but a closer look reveals that the improvement is not broad-based. The headline growth was driven largely by trade and inventory adjustments, while domestic demand — the traditional engine of sustained expansion — remains subdued.

Household spending has cooled relative to previous cycles as higher borrowing costs and soft wage growth constrain consumption. Consumers appear more cautious, prioritizing debt repayment and essentials over discretionary purchases. This restraint is amplified by sluggish activity in the housing sector, where resale and construction have yet to stage a vigorous recovery amid tighter mortgage conditions.

Business investment also fails to provide a strong offset. Firms are hesitating to ramp up capital expenditures while uncertainty around demand and profit margins persists. The result is a domestic demand profile that lags the headline GDP figures, suggesting that underlying momentum is fragile.

External factors helped to lift output, with exports and inventory buildups contributing positively during the reporting period. Those components can mask the absence of solid household and corporate spending and may prove volatile in the near term if global demand softens or supply chains normalize.

For policymakers, the divergence is consequential. The Bank of Canada faces a nuanced policy challenge: headline growth might reduce immediate pressure to ease policy, but tepid domestic demand could argue for a more cautious outlook on rates. Inflation dynamics will remain central to decisions, as weak spending can eventually dampen price pressures, while supply-side shocks or persistent wage gains could sustain inflationary risks.

Labour market indicators and upcoming data releases will be closely watched for signs that consumer confidence and business investment are strengthening. Until there is clearer evidence of broad-based demand revival, the rebound in GDP should be viewed as tentative rather than a firm signal of durable recovery.