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Canadian Economy Contracts in the Second Quarter

Canadian Economics

By: Viktor Cicman

    

Real gross domestic product (GDP) decreased 0.1 per cent in June, a third monthly decline in a row. For the second quarter, real GDP fell by 0.4 per cent (1.6 per cent annualized).

  • Exports were one of the main culprits causing the decline in economic activity in the second quarter. Exports contracted by 7.5 per cent after increasing 1.4 per cent in the first quarter. The United States-imposed tariffs hammered a few sub-categories such as international exports of passenger cars and light trucks, which fell by 24.7 per cent in the second quarter.
  • Following Canada’s counter-tariff measures on U.S. imports, international imports also declined, falling by 1.3 per cent in the second quarter, reversing a 0.9 per cent increase in the previous quarter.
  • Business investment also took a hit in the second quarter amid the uncertainty surrounding trade. It fell 0.6 per cent, led by much weaker investment in machinery and equipment. In fact, other than during the pandemic, this was the slowest pace of investment in machinery and equipment since the end of 2016.
  • One bright spot is that consumer spending performed well in the second quarter. Household spending increased by 1.1 per cent, led by higher expenditures for new trucks, vans and sport utility vehicles, rising by 5.6 per cent. On a per capita basis, household spending increased 1.1 per cent in the quarter, after being flat over the first three months of the year.
  • Business non-farm inventories accumulated at a faster pace in the second quarter. The larger accumulation was led by the manufacturing and wholesale trade industries. Retail trade saw only a slight increase in inventories.
  • Residential investment grew by 1.5 per cent in the second quarter of 2025, led by a 3.7 per cent increase in new construction. The rise was largely driven by higher work-put-in-place and apartment absorptions, particularly in British Columbia.
  • In June, good-producing industries led the drop in output, following a similar story from the past three months. The goods-producing industries contracted 0.5 per cent, driven by declines in the manufacturing and utilities sectors. Meanwhile, the services-producing industries edged up 0.1 per cent, driven by increases in retail trade, real estate and rental and leasing and wholesale trade.

Key insights

Following a stronger start to the year, Canada’s economic growth slowed significantly in the second quarter of 2025, with real GDP declining by 1.6 per cent on an annualized basis. The unwinding of front-loaded exports in the first quarter—driven by businesses attempting to get ahead of new U.S. tariffs—alongside the initial impact of those tariffs themselves, has begun to weigh on trade and business investment. Private sector investment declined in the second quarter, and signs of weakness in the labour market are becoming more pronounced. While employment rose by 83,000 jobs in June, 41,000 of those were lost in July. The employment rate dropped 0.2 percentage points to 60.7 per cent last month and is now 0.4 points lower than at the start of the year.

Household spending was a bright spot in the second quarter. Up to now, tariffs have mostly been targeted to a few sectors, and most goods continue to flow between Canada and the U.S. tariff free under CUSMA exemptions. Further, the impact of Canada’s retaliatory tariffs has had a modest impact on consumer prices as a whole. These two factors have kept consumer spending resilient during what has been a turbulent year.

Canada’s economic fortunes remain tied to U.S. policy in the short term. All eyes remain on negotiations between the two countries to work out a new economic and security deal. The longer the trade dispute lingers, the worse it is for the Canadian economy. Businesses will continue to show hesitancy in investment and hiring, and the sluggish labour market will continue to weigh on households’ pocketbooks. On the other end of the spectrum, a new trade deal, or even an announced framework for one, could provide some much-needed clarity, and ultimately give a lift to the Canadian economy to round out the year.

To learn more about Canada’s economic outlooks for the long-term or the next five year’s, please visit The Conference Board of Canada’s Canadian Outlook.

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