The signs have been there all along, but now the evidence is clear: U.S. President Donald Trump’s tariffs have been killing Canadian economic growth.
The economy contracted more than many economists expected in the second quarter of 2025, reigniting fears that a “technical recession” — defined by two consecutive quarters of negative gross domestic product (GDP) — is looming.
Canada’s GDP fell by 1.6 per cent on an annualized basis, following a two per cent gain in the first three months of the year, Statistics Canada reported Friday.
This is the first blow to economic activity attributed almost entirely to Trump’s erratic trade war. The weakness in the second quarter largely came from “significant” declines in goods exports as well as less business investment in machinery and equipment, StatCan said.
That was offset, in part, by higher household and government spending.
“Simply put, the tariff war with the U.S. was terrible for the Canadian economy,” Royce Mendes, managing director and head of macro strategy at Desjardins, wrote in a note to clients.
“The good news is that trade tensions between Canada and the U.S. have been easing,” he added, citing the drop in retaliatory tariffs announced by Prime Minister Mark Carney on Aug. 22.
Earlier in August, Trump increased tariffs on goods that are not compliant with the Canada–United States–Mexico Agreement (CUSMA) to 35 per cent from 25 per cent. Most Canadian producers, however, comply with the terms of CUSMA, meaning the effective rate of U.S. tariffs on Canadian goods has been significantly lower than the ones on other countries.
“The impact of the trade war and elevated uncertainty on (business) sentiment, capital spending, and hiring will likely continue to build,” Michael Davenport, senior economist at Oxford Economics, wrote in a statement.
“We expect the economy will struggle to grow … and teeter on the verge of recession.”
In the second quarter, exports plummeted 27 per cent on an annualized basis, with a large decline in passenger cars and light trucks, StatCan said. Meanwhile, imports fell 5.1 per cent amid Canada’s counter-tariffs.
Real GDP per capita was also down.
At the same time, wage growth slowed to the lowest rate since 2016 (outside of the pandemic) as the labour market continued to show signs of struggle going into July.
Accordingly, the household saving rate dropped last quarter.
Last month, the economy lost 41,000 jobs while the unemployment rate remained at 6.9 per cent, StatCan reported on Aug. 8.
A recent report by CIBC said youth unemployment is currently at a level typically observed during recessions.
The dramatic GDP drop in the second quarter came close to the Bank of Canada’s July estimate under its “current tariff scenario” of minus 1.5 per cent.
In the bank’s “current tariff scenario,” tariffs and trade uncertainty will continue to weigh on economic activity.
After declining in the second quarter of 2025, the bank expects GDP to resume growth in the second half of the year as export levels stabilize.
Mendes said Friday’s numbers further support his prediction that the central bank will resume cutting interest rates in September in a bid to stimulate the economy.
The bank has kept its key rate at 2.75 per cent for the last three meetings. StatCan said that, as the bank stayed put, mortgage and nonmortgage interest expenses edged up.
But other economists aren’t so sure about the next move by the bank.
With consumer spending holding strong, TD Bank economist Rishi Sondhi says the central bank could choose to stand pat on interest rates on Sept. 17.
“Policymakers still have one more jobs and inflation report to digest before that time,” wrote Sondhi in a note to clients.