By Michael O’Neill

Canada is cooking. For the past three weeks, record-breaking heat has rolled from west to east, baking everything in its path. Bank of Canada policymakers may not have escaped unscathed. Heat stroke may even have found its way into the July Monetary Policy Report.

The Bank of Canada left its benchmark rate unchanged at 2.25% and it’s July Monetary Policy Report painted an increasingly optimistic picture of the Canadian economy. After a year of treading water, the Bank believes the foundations for a recovery are finally falling into place.

Exports are expected to become the economy’s primary engine of growth, while businesses are expected to increase investment as they adapt to tariffs, diversify export markets and rebuild supply chains. The recent jump in inflation is viewed as temporary, with the Bank arguing that higher energy prices will fade and its preferred measures of underlying inflation remain comfortably anchored around the 2% target.

That confidence appears to be reinforced by recent trade data. Merchandise exports reached a record high in April. Canada posted its second consecutive monthly trade surplus and exports to the United States increased for a third straight month. Those developments suggest exporters are beginning to find their footing despite ongoing trade tensions and provide the foundation for stronger business investment and a gradual pickup in economic growth.

In other words, the economy has weathered the tariff storm, adapted to geopolitical uncertainty and is finally ready to move forward. It’s an easy story to like, and one that explains why many of the media headlines focused on a brighter outlook for Canada. Canadians can feel good.

That Warm and Fuzzy Feeling May Just Be a Rash

Scratch beneath the surface and the Bank’s optimistic narrative begins to unravel. Much of the evidence contained in the report points in the opposite direction.

The Bank admits the economy is operating with slightly more excess capacity than it expected just three months ago. That’s bank-speak for “weak and struggling,” which explains why they downgraded 2026 GDP growth to 0.7% from 1.2% in April. At that pace, year-end GDP could be 0.2% in the October forecast.

Unemployment has been stuck around 6.5% for more than a year, hiring remains subdued and housing activity remains soft. Businesses report they have sufficient capacity to meet current demand and are reluctant to expand payrolls, while wage growth has eased to around 3%.

Taken together, the Bank’s own assessment describes an economy still struggling to gain traction rather than one preparing to shift into a higher gear.

Wishful Thinking Doesn’t Boost Growth

According to the Bank, Canada is on the cusp of an export-driven growth spurt which will more than double GDP from 0.7% this year to 1.8% in 2027. Canadian businesses are expected to adapt to tariffs by finding new markets, rebuilding supply chains and stepping up investment.

It’s an attractive theory.

The problem is that the evidence supporting it is remarkably thin. Crude oil was the largest contributor to export growth, and the recent export surge is mostly due to higher energy prices rather than a broad-based increase in foreign demand.

Statistics Canada reported that energy exports jumped 9.7% in April after surging 23.4% in March, with both increases driven primarily by higher oil prices caused by the Iran conflict. That’s just a price story.

If Middle East tensions ease and oil shipments through the Strait of Hormuz normalize, much of today’s price premium could disappear. Canada can’t simply make up the difference by exporting more crude. The country’s production and pipeline capacity are already constrained.

Outside energy, the picture is less convincing. Exports to countries other than the United States actually fell in April, suggesting Canada’s much-heralded diversification into new markets still has a long way to go.

The unfortunate reality is that Canada’s economic engine is still powered by the United States. As long as that remains true, Ottawa doesn’t control Canada’s growth story. Washington does.

Loonie Catching Updraft

It would be tempting to say that the BoC rate decision and the upbeat MPR boosted the Canadian dollar. It may have helped a tad, but it was the sharply narrowing CAD and US interest differentials that were the main catalyst. The cooler-than-expected US inflation reports (CPI and PPI were lower than expected) triggered an unwinding of Fed rate hike bets for July and September. If that sentiment picks up steam, USDCAD may blow through support in the 1.4010 area and drop to 1.3950.

One would be wise to remember that triple digit temperatures affect all of us. Heat stroke isn’t always obvious until the symptoms begin to show.