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Economic News

Canada: Real GDP Takes a Tariff-Induced Dive in Q2

August 29, 2025
LJ Valencia, Economist

Highlights

  • Real GDP growth declined at an annualized pace of 1.6% in Q2 2025. This was below the consensus of economic forecasters (-0.7%) but was close to the Bank of Canada’s outlook (-1.5%). Table 1 provides more details on the release. 
  • Monthly real GDP fell in June (-0.1% m/m), two ticks below Statistics Canada’s flash estimate and consensus. Statistics Canada expects that real GDP by industry grew 0.1% in July 2025. Our early tracking suggests that growth in real GDP by expenditure could be flat to slightly negative in Q3 2025.

Implications

The impacts of US tariffs on the Canadian economy are now clear as day. Net exports were the dominant source of drag, coinciding with US tariffs (graph 1). Excluding the pandemic, the drag from net trade was the largest since the start of the data series in 1961. The decline in exports (-26.8% annualized) was broad based and observed across goods such as passenger cars, light trucks, machinery, equipment and parts. Travel services exports also fell, probably linked to reduced travel between Canada and the US. In addition, tariff uncertainty contributed to pushing down investment in machinery and equipment (-32.6%). 

In contrast to trade, household spending accelerated in the quarter, up 4.6% annualized from 0.3% in the previous quarter. This came on the back of higher spending on durable goods and services. Residential investment rose thanks to new construction, mostly in British Columbia and a rise in ownership transfer costs. Business non‑farm inventories saw further stockpiling as manufacturers and wholesalers increased their reserves, likely in response to trade tensions and ongoing uncertainty.

Compensation of employees saw growth slow in Q2, from 3.2% to 0.7% annualized. As a result, the savings rate edged down as well from 6.0% to 5.0% in Q2. At the same time, corporate profits fell (-13.1%) in the quarter, largely as a result of falling energy prices and lower output from the oil and gas sector.

Overall, the economy appears to be sputtering, although this is almost entirely due to trade tensions so far, with net exports and business investment leading the decline. Early signs for Q3 point to sluggish economic activity, as suggested by the weak July job numbers External link.. That said, the government’s recently announced reduction in retaliatory tariffs External link. should provide a modest boost to economic growth while lowering inflation. With inflation tail risks abating and with the economy in a state of excess capacity, we expect the Bank of Canada will resume its rate cutting cycle in September. 

NOTE TO READERS: The letters k, M and B are used in texts, graphs and tables to refer to thousands, millions and billions respectively. IMPORTANT: This document is based on public information and may under no circumstances be used or construed as a commitment by Desjardins Group. While the information provided has been determined on the basis of data obtained from sources that are deemed to be reliable, Desjardins Group in no way warrants that the information is accurate or complete. The document is provided solely for information purposes and does not constitute an offer or solicitation for purchase or sale. Desjardins Group takes no responsibility for the consequences of any decision whatsoever made on the basis of the data contained herein and does not hereby undertake to provide any advice, notably in the area of investment services. Data on prices and margins is provided for information purposes and may be modified at any time based on such factors as market conditions. The past performances and projections expressed herein are no guarantee of future performance. Unless otherwise indicated, the opinions and forecasts contained herein are those of the document’s authors and do not represent the opinions of any other person or the official position of Desjardins Group.