Canadian GDP Contracts in Q2 2025 Amid Trade Headwinds

Canada’s economy continues to show signs of strain, with real GDP falling by 0.1 per cent in June 2025, following a similar 0.1 per cent decline in May.

• Goods-producing industries contracted by 0.5 per cent, dragged down by weak performance in manufacturing (-1.5 per cent) and utilities (-1.2 per cent).

• Service-producing industries rose slightly (+0.1 per cent), led by retail trade (1.4 per cent), wholesale trade (0.5 per cent), and construction (0.3 per cent).

• Notably, real estate activity showed resilience, with output from the offices of real-estate agents and brokers rising 3.1 per cent month-over-month.

Preliminary estimates point to a modest 0.1 per cent rebound in July, but the bigger story lies in the broader quarterly data.

Q2 2025: Annualized GDP Declines 1.6%

For the second quarter of 2025, real GDP declined by 0.4 per cent, translating to an annualized contraction of -1.6 per cent.

The contraction was driven primarily by:

• Trade slowdown: Exports fell 7.5 per cent and imports dropped 1.3 per cent, marking the largest drag on growth.

• Business investment weakness: Down 0.6 per cent, led by a steep decline in machinery and equipment (-9.4 per cent).

• Mixed construction investment: Residential structures rose 1.5 per cent, but non-residential investment fell 3.3 per cent.

On the household side:

• Spending rose 1.1 per cent, showing continued consumer resilience.

• However, the savings rate fell to 5.0 per cent, reflecting weaker income growth.

• On a per capita basis, GDP shrank 0.4 per cent in Q2 after rising 0.4 per cent in Q1.

Tariff Impacts and Policy Outlook

The sharp drop in trade highlights the consequences of tariffs on the Canadian economy, with Q2 GDP growth coming in below the Bank of Canada’s recent projections. While Q1 was buoyed by companies rushing to ship goods ahead of tariffs, Q2 brought the expected pullback.

The uncertainty surrounding trade policy also weighed on business investment, as firms delayed or scaled back spending in an uncertain environment.

Looking ahead, this weaker-than-expected GDP report could strengthen the case for a Bank of Canada rate cut at its upcoming meeting. Policymakers will be paying close attention to next month’s inflation data to determine whether core inflation is easing toward the 2% target, paving the way for a 25-basis-point cut in September.