The Canadian economy contracted in the second quarter under the weight of U.S. tariffs, Statistics Canada said Friday.
Real gross domestic product declined 1.6% on an annualized basis in the second quarter thanks to a sharp drop-off in exports and business investment.
That’s down from annualized growth of two per cent in the first quarter, a figure StatCan revised down Friday from 2.2% originally.
Real GDP was also down on a per-capita basis in the second quarter, swinging from a gain in the previous quarter.
U.S. President Donald Trump ratcheted up his tariffs against Canada and the world in the second quarter, particularly targeting steel, aluminum and autos.
“It should come as no surprise that the Canadian economy struggled in Q2 as tariffs ramped up,” said Benjamin Reitzes, BMO’s managing director of Canadian rates and macro strategist, in a note to clients Friday.
Economists expected a sharp slowing in growth last quarter as businesses seemed to rush orders early in the year to get ahead of tariffs – boosting activity in the first quarter and cooling the economy off in the second.
Last quarter saw net exports take 8.1 percentage points away from real GDP growth — Reitzes noted that was the second highest toll on record, behind only the pandemic. International exports of passenger cars and light trucks plummeted 24.7% in the quarter, StatCan said.
Industrial machinery, equipment and parts exports declined, as did travel services.
Investment in machinery and equipment meanwhile was down 9.4% in the second quarter – the slowest pace observed since 2016, outside the Covid-19 pandemic.
Imports were also down last quarter as Ottawa fired back with counter-tariffs against the United States, discouraging U.S. firms from selling to Canada. A drop-off in Canadians’ travel to the United States during the trade war also lowered imports.
The decline in imports helped to offset the drop in GDP. Businesses were also stockpiling goods at a faster rate and government and household spending ramped up, boosting growth somewhat last quarter.
Reitzes said these signs of domestic strength were “somewhat comforting,” but he questioned how sustainable those trends would be as tariffs put a damper on activity elsewhere.
StatCan’s early estimates based on the monthly real GDP by industry results had called for flat growth in the second quarter, though these figures can vary from the quarterly spending-based figures published Friday.
The agency said real GDP declined 0.1% in the month of June, though it had initially expected growth of 0.1%. A third decline in the tariff-struck manufacturing sector in four months meant a drag on June business activity, the agency said.
Goods-producing sectors were broadly down 0.5% in June while services industries edged up 0.1%.
June’s decline matched contractions in April and May, StatCan said, marking the first three consecutive months with GDP declines since the final quarter of 2022.
The agency’s early estimates have real GDP ticking up 0.1% in July. The second-quarter drop was sharper than most economists expected heading into the release, and was a tick below the Bank of Canada’s forecasts for the quarter published at the end of July.
The central bank will be carefully parsing the latest GDP figures ahead of its next interest rate decision on Sept. 17. Monetary policymakers have largely kept to the sidelines during Canada’s trade war with the United States, waiting to see how tariffs will affect the economy and inflation.
Andrew Grantham, senior economist at CIBC, said in a note to clients that the weak June figure means Canada’s economy was entering the third quarter on a low note. Growth for this quarter is tracking between flat and 0.5% growth, he said.
“That weaker than expected trend in the monthly figures makes today’s release supportive for our forecast of a September interest rate cut,” Grantham said, though he added that upcoming inflation and jobs data for August will also have a say in the Bank of Canada’s decision.
Reitzes was less convinced that the Q2 GDP print will sway the Bank of Canada in any direction, given that the central bank opted to pause at its last rate decision and its forecasts for the economy are broadly coming in as expected.
“For the BoC, there’s nothing here screaming for a September cut, though it will certainly keep the chatter around further easing intact,” he said.
This report by The Canadian Press was first published Aug. 29, 2025.
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