Canadian GDP shrinks in Q2 but economists aren’t fretting a recession — yet

Bipan Rai, Managing Director, Head of ETF and Alternatives Strategy at BMO Global Asset Management, joins BNN Bloomberg to discuss the impact of tariffs on Canada's GDP.

Canada’s economy contracted in the second quarter as U.S. tariffs and trade uncertainty tanked Canadian exports.

But few economists are raising the alarm about Canada possibly being in a recession, and not all forecasters are convinced the economic weakness will push the Bank of Canada to cut interest rates next month.

Statistics Canada said Friday that real gross domestic product declined 1.6 per cent 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 per cent originally.

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 COVID-19 pandemic.

Exports of vehicles, industrial machinery and travel services were sharply down last quarter, and business investment in machinery and equipment also sank.

RBC assistant chief economist Nathan Janzen said in an interview that he sees more mixed signals in the data beyond the headline number.

Weakness in the Canadian economy was concentrated in trade-exposed sectors last quarter, he said, while relative strength in consumer spending helped offset the impact.

Final domestic demand — a measure that strips out trade flows and inventories from the GDP figures — rebounded from a decline in the first quarter of the year.

“There wasn’t a lot of evidence that the weakness was spreading to other sectors of the economy at this point,” Janzen said.

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 said real GDP declined 0.1 per cent in the month of June, matching contractions in April and May.

A third decline in the tariff-struck manufacturing sector in four months meant a drag on June business activity, the agency said.

The agency’s early estimates have real GDP ticking up 0.1 per cent in July.

Economists typically define a recession as two consecutive quarters of negative GDP.

Janzen said RBC doesn’t expect the slowdown in Q2 to be repeated in the third quarter.

Advanced manufacturing and wholesale trade figures show some signs of recovery in July, he said. Ongoing exemptions at the border for goods compliant with the Canada-U.S.-Mexico trade agreement are also limiting the broader impact of tariffs, Janzen said.

RBC is also expecting Canada’s unemployment rate could tick a bit higher than current levels of 6.9 per cent but will largely plateau as trade weakness fails to infiltrate the rest of the economy.

“We would still think as a most likely outcome that we won’t get another decline in Q3 GDP, that you’ll get back to slow but positive growth,” Janzen said.

The second-quarter drop was a tick below the Bank of Canada’s forecasts for the quarter published at the end of July when governing council held its policy rate steady at 2.75 per cent.

The central bank will be carefully parsing the latest GDP figures ahead of its next interest rate decision on Sept. 17.

Andrew Grantham, senior economist at CIBC, said in a note 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 per cent, 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.

Financial market odds of a quarter-point cut from the Bank of Canada next month sat just below 50 per cent midday Friday, according to LSEG Data & Analytics.

Janzen said that RBC is maintaining its call for no further interest rate cuts at this juncture.

Inflation continues to come in a bit hotter than the central bank’s liking, he noted, which is likely to keep the central bank from wanting to lower its policy rate.

And with economic weakness concentrated in trade-exposed sectors, Janzen argued more targeted relief from governments in the form of fiscal policy is better suited to address pain points than the broadness of monetary policy.

This report by The Canadian Press was first published Aug. 29, 2025.