Canada: Q2 GDP Rebound Faces Headwinds Ahead — RBC

RBC economists Nathan Janzen and Abbey Xu noted in their latest report that upcoming June and Q2 GDP data are expected to confirm a significant rebound in the Canadian economy from early-year weakness. This aligns with the "strong start to Q2" momentum indicated by April GDP growth, but the economists also warned that the rebound will be followed by a series of headwinds.

**Rebound Driver: Goods Sector Leading**

The rebound is primarily driven by the goods-producing sector. RBC previously pointed out, based on April data, that economic performance at the time showed upside risks to its forecast of 1.7% annualized quarterly growth. Market data indicates that the resilience displayed by the Canadian economy in Q2 provides more room for the central bank's ongoing tightening policy.

**Future Risks: Interest Rate Environment as the Biggest Threat**

Despite strong short-term growth, RBC remains cautious on the outlook. The bank views the interest rate environment as the biggest risk to markets and the economy. Sustained high rates and inflationary pressures could dampen subsequent consumption and investment, casting a shadow over the sustainability of this rebound. The economists did not provide specific growth forecasts but emphasized the presence of "headwinds ahead."

**Market Implications: Seeking Opportunities Amid Concerns**

This macro picture of growth coexisting with risks is also reflected in RBC's views on capital markets. The bank's strategists believe that while rates and inflation could pressure valuations, low market sentiment may actually breed opportunities against a backdrop of strong earnings growth and solid overall GDP. According to RBC's previously published U.S. equity outlook, it maintains a 12-month target of 8,150 points for the S&P 500, suggesting that the risk of an economic slowdown is not yet sufficient to reverse the medium-term market trend.