Canada’s business investment recovered in Q2 but can it be sustained?

Claire
Canada business investment rebounded in the second quarter of 2026. And that may be signaling that some of the confidence that was lost due to the trade war earlier in 2025 has been coming back. Although the question there is will that continue?

Carrie
In the U.S., an unprecedented AI buildout is still supporting private investment growth. But borrowers may be increasingly contending with higher borrowing costs as bond yields rise. Hello and welcome back to The Ten-Minute Take. I’m your host, Carrie Freestone.

Claire
And I am Claire Fan. In this episode, we break down the latest on business investment in Canada and the U.S.

Carrie
Okay, Claire, let’s start with some of the more positive news you mentioned. Can you break down the Q2 GDP data and what we saw in terms of business investment in Canada?

Claire
For sure. So like I mentioned in the intro, it did seem like confidence was starting to come back among Canadian businesses in the second quarter. What we saw was a 12.3% quarter-over-quarter annualized increase in non-residential business investment, driven by gains in both structures investment as well as investment into machinery and equipment. So there are two large drivers behind those gains. One is a recovery in oil and gas investment. And the second is actually record levels of investment into computers and peripherals that may be related to the broader AI infrastructure buildout in Canada.

Carrie
Okay so diving deeper, let’s break those sectors down one by one maybe starting with oil and gas.

Claire
For sure. So there was a pretty big increase where or rather rebound in engineering structures investment in the second quarter. Most of that was driven by a recovery in oil and gas investment to a level that’s still considered to be historically weak. And that’s sort of the key point here, because this investment rebound kind of coincided with elevated oil prices in the quarter. Many may be thinking that was the driver behind it, and actually part of that would be right because we did see higher rigging and drilling activities. And that goes into sort of structures investment as well. But overall oil and gas investment was still again at a level that historically soft. And that’s really in line with our earlier analysis on this sort of effect from higher prices to the economy, where we outlined that we really don’t expect a substantial pickup in CapEx among the sector, just due to volatile global commodity cycles that are driven by geopolitical conflicts, because elevated prices due to geopolitical factors are usually not persistent or stable enough to be driving these investment that may be spanning decades and are enormous in dollar amounts. So that’s actually what we saw among some of the more recent earnings calls as well, where large producers actually have not signaled increased CapEx intentions in 2026, despite records amounts of cash that were generated because of higher prices.

Carrie
Okay, let’s talk about AI now. I know in the U.S. the bulk of business investment growth is an AI story. Is that the case in Canada as well?

Claire
It’s definitely starting to become a bigger story in Canada, although probably still not as big as it is in the United States. So in July, the Canadian government actually outlined the national AI strategy, where it actually noted real growth in Canada’s hardware value chain due to the global AI data centre buildout. But what they also noted was high reliance domestically in terms of imports, specifically from the United States for chips or processing units. And that’s actually exactly what we saw in the second quarter GDP data. We saw an huge uptick in sort of investment into machinery and equipment, specifically computers and peripherals that matched a huge import surge from the United States in terms of processing units totalling $1.8 billion Canadian dollars in the second quarter, and were up over 240% from a year ago. So again, quite a substantial uptick over there. But again, the caveat here is that there is a certain level of reliance on imports specifically from the U.S. So in the second quarter, 60% of those chips that were imported were coming from the United States and 30% from Mexico. So I think this does raise an interesting question, which is, how does the push for AI infrastructure here in Canada broadly will interact with some of these other challenges, including trade uncertainty and the question on AI sovereignty and safety as well.

Carrie
So I guess the natural question I want to ask as well is, do we expect to see that this Q2 rebound will continue? And what are you thinking about for 2027?

Claire
For sure. So heading into 2027 we do expect government policy will continue to facilitate investment in these two things that we just spoke pretty extensively about. And those are energy as well as the AI infrastructure related spending as well. What we’re also expecting here is a broadening out in drivers of investment, hopefully to some of the other sectors as well. And the key supporting factor there is still the resilience in the Canadian economy. Businesses that have been holding off on investing over the past year have now seen that again, domestic consumers are spending and, behaving resiliently, amidst sort of the latest trade shock in the second quarter we saw a decent rebound in the Canadian economy and pretty broad base as well really coming from different sectors not only households but among businesses themselves which we’re talking about and governments as well. So all of those positive domestic signals are what we expect Canadian businesses will be turning to for incentives to start deploying capital again over the rest of this year into 2027. One last thing here. What we do know over the past year also, and why we think sentiment matters is because, again, Canadian businesses do have ample amount of capital in terms of cash and cashable assets to start to get the investment cycles going. But so the question really is that, well, the demand start actually pick up upon this turnaround in sentiment and how that would have changed, perhaps amid the latest round of new U.S. tariffs.

Claire
Okay. We’ve talked plenty about Canada, where investment seems to be coming around in the United States. It’s a complete different story of investment going full steam ahead.

Carrie
But first I want to give our listeners a little bit of context into how business investment differs in the U.S. versus Canada. So to start, we mentioned that there was a sizable business investment slowdown in Canada. We never saw that in the U.S. Business investment has been exceptionally strong. And to give you an idea of kind of what’s been normal for the U.S., since 2021, real quarter-over-quarter annualized business investment growth has been about 6% per quarter on average, which is pretty strong. And this year it’s been even stronger. So Q1 this year, we started off with double digit growth in real business investment. And in Q2 we were north of 8%. And over those two quarters earlier this year, we had over a one percentage point contribution to real GDP growth coming from business investment alone, which is not unheard of, but pretty strong. So, the backdrop is exceptionally robust here.

Claire
In one of the earlier episodes you had Imri on, and you guys were chatting about AI related investment and really how concentrated I guess the broader investment picture has become in terms of how it’s centring just around this one thing. Is that still the case?

Carrie
We’re reasonably confident that the pace of AI growth continues, just given how many projects are underway in the pipeline. But the question for long term sustainability and durability of these trends is really going to be whether we move beyond the initial infrastructure buildout and if we see other firms, aside from tech and infrastructure firms, starting to invest in productivity enhancing capital and automation, that is the real question. Now You know, this trend doesn’t persist without some risks. And recently there have been headlines calling into question the feasibility of our long term electricity demand and also discussing the impact on electricity prices. And I’ve talked at length about, how to date. The bulk of this investment really has been large scale, large firms with access to cash. And for smaller firms, credit conditions really are going to matter and costs are going to come into play as well. But I can say that, over the near term, we really don’t expect business investment to slow down meaningfully. Our base case calls for real business investment growth of between 3.5% and 4% in 2027. And if anything, that’s a little bit of a conservative estimate given just how strong growth has been over the past few quarters.

Claire
And that marks the end of this episode of The Ten-Minute Take.

Carrie
Thank you for listening. You can tune in to our other episodes on Apple Podcasts, Spotify, or wherever you listen to your podcast. We’ll catch you again in two weeks.