The Canadian economy contracted more than many economists expected in the second quarter of 2025 as businesses grappled with U.S. President Donald Trump’s tariffs.
This is the first blow to economic growth induced almost entirely by Trump’s erratic trade war.
Gross domestic product (GDP) shrank 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 morning.
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 a rise in household 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 recent drop in retaliatory tariffs announced by Prime Minister Mark Carney on Aug. 22.
Exports plummeted 27 per cent on an annualized basis, with a large decline in passenger cars and light trucks. Meanwhile, imports fell 5.1 per cent amid Canada’s counter-tariffs, StatCan said.
Real GDP per capita was also down in the second quarter.
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.
The GDP drop came close to the Bank of Canada’s July estimate of -1.5 per cent. Mendes said Friday’s numbers further support his prediction that the central bank will resume cutting interest rates in September.
StatCan also said that, as the bank stayed put, mortgage and nonmortgage interest expenses edged up.
Other economists aren’t so sure about the next move by the Bank of Canada.
With consumer spending holding strong, TD Bank economist Rishi Sondhi says the bank could choose to stay pat on interest rates on Sept. 17.
“Policymakers still have one more jobs and inflation report to digest before that time,” Sondhi wrote in a note to clients.
This is a developing story …
