Canada’s economy entered Q2 with momentum as real GDP rose 0.5% in April, beating a 0.4% consensus forecast. Growth was broad-based but led by energy, which climbed 3.1%, while mining, quarrying, and oil and gas extraction increased 2.9%. The April improvement followed a normalisation in oil sands and pipeline activity after earlier disruptions, and elevated prices in May and much of June supported the sector through the quarter.
With the preliminary estimate included, Q2 real GDP is tracking a 2.3% annualised gain; on a per-capita basis, GDP is tracking a 2.8% annualised increase. Price pressures are expected to ease, while volumes may stay supported as inventories drawn down in Q2 are rebuilt. Even so, the outlook remains fragile due to tariff uncertainty, weak resale activity in major housing markets, and the lingering inflation impact from previously elevated energy prices.
Energy Sector Drives Unexpected Economic Momentum
We see that the Canadian economy began the second quarter with unexpected momentum, tracking a solid 2.3% annualized gain in real GDP. This strength is primarily concentrated in the energy sector, which rebounded sharply from earlier disruptions. This suggests near-term bullish opportunities in oil and gas futures and call options on energy-related ETFs.
This view is supported by recent data showing Western Canadian Select crude prices averaged over $85 USD through much of June 2026, bolstering profit margins for producers. Furthermore, oil export volumes have remained high, with the Trans Mountain pipeline consistently moving over 850,000 barrels per day. We believe this strength in energy can support the Canadian dollar against the USD in the coming weeks.
Risks, Policy Uncertainty, and Positioning Strategies
However, we must recognize that this outlook is fragile and presents risks outside of the energy complex. Lingering inflation and weakness in the housing market are significant headwinds for the consumer. The Canadian Real Estate Association confirmed this by reporting a 4.2% drop in national home sales for May 2026, the third consecutive monthly decline.
This complicated economic picture creates uncertainty around monetary policy, directly impacting rate-sensitive instruments. While the Bank of Canada held its key interest rate at 3.75% last week, its hawkish tone suggested a potential hike in September if growth remains strong. This puts pressure on Canadian bond futures and financial sector stocks.
Given these crosscurrents, we are positioning for increased volatility, particularly as unresolved U.S.-Canada tariff negotiations on aluminum and electric vehicles add another layer of risk. While we are holding our long energy positions, we are simultaneously buying put options on major Canadian banks and the broader TSX 60 index. This provides a necessary hedge against a potential slowdown later in the third quarter.
