The Canadian economy experienced a significant contraction in the second quarter of 2025, with real gross domestic product (GDP) declining by 0.4 per cent, a stark reversal from the 0.5-per-cent gain in the first quarter, according to federal data.
The downturn was primarily driven by the cascading effects of U.S.-imposed tariffs, which have slowed trade and stifled business investment, according to a report released Friday by Statistics Canada.
Exports plummeted by 7.5 per cent in the second quarter, following a modest 1.4-per-cent increase in the first. The most dramatic hit was to the automotive sector — exports of passenger cars and light trucks plunged by 24.7 per cent. Exports of industrial machinery and travel services also saw double-digit declines.
Imports from the U.S. into Canada decreased by 1.3 per cent, as businesses and consumers re-evaluated their purchasing in light of retaliatory tariffs.
In another blow, trade disruptions contributed to a 9.4-per-cent contraction in business investment in machinery and equipment.
“Outside of 2020, the first year of the COVID-19 pandemic, this was the slowest pace of investment in machinery and equipment since the end of 2016,” noted the statistics agency.
The report was not without bright spots — household spending increased by 1.1 per cent, led by a notable 5.6-per-cent jump in purchases of new trucks, vans, and sport utility vehicles. Higher government spending and a faster accumulation of business inventories also contributed positively to the GDP, StatCan found.
A key indicator of domestic strength was the housing market, where residential investment rose by 1.5 per cent. British Columbia, in particular, was singled out for its relatively robust residential construction sector. The province saw an increase in new construction, driven largely by apartment developments. That helped to offset weakness in other areas of the housing market, such as renovations and resale activity.
Wage-growth slows to a crawl
Worker compensation climbed 0.2 per cent in the second quarter, the smallest increase since the second quarter of 2016, excluding the first year of the pandemic.
Wages and salaries in the federal government public administration rose 2.5 per cent, while those in the mining and oil and gas extraction saw a 2.9-per-cent boost.
The weak growth in salaries and wages pulled the household saving rate to five per cent in the second quarter of 2025, down from six per cent in the previous quarter.
At the same time, household property income climbed 0.9 per cent. StatCan found increases in foreign investment and in dividend income more than offset the decline in interest earned on deposits, securities and other assets. Mortgage and non-mortgage interest expenses edged up 0.1 per cent in the second quarter as the Bank of Canada held the policy interest rate steady.
Revenue brought in by the federal government was also found to decline a sharp 4.2 per cent in the second quarter, driven largely by the removal of the federal consumer carbon tax on April 1, 2025.
Federal spending, meanwhile, increased 1.8 per cent in the second quarter, driven by higher wages, purchases of goods and services, and funds provided to cover Canada Post's current financial difficulties, among other things.
The result: the federal government’s net borrowing accelerated.
GDP data in line with Bank of Canada forecast
The data comes nearly a month after U.S. President Donald Trump raised tariffs on goods not compliant with the Canada–United States–Mexico Agreement (CUSMA) to 35 per cent from a previous 25 per cent.
The move sent many companies scrambling to seek compliance under the trade deal.
Ahead of the Aug. 1 tariff hike, about 86 per cent of Canadian exports to the U.S. were eventually expected to become compliant under the trade agreement and get across the border duty free. At the time, however, less than half of those those goods were certified, according to a research note from RBC economist Salim Zanzana.
The Bank of Canada's latest Monetary Policy Report noted that, under the current tariff scenario, Canada’s economic growth would sit at a modest one per cent in the second half of 2025.
“Growth then rises, reaching 1.8 per cent in 2027 as the effects of trade policy uncertainty fade and as global demand and exports increase modestly,” noted the July report.
In a policy note, TD economist Rishi Sondhi said the wallop from U.S. tariffs that showed up in StatCan's data on Friday was expected, but that domestic demand was buoyed by a surprisingly strong, broad-based surge in consumer spending, among other things.
“Today's GDP data fell in almost exactly in line with what the Bank of Canada expected in their latest forecast. However, domestic demand looks to have surprised on the upside,” wrote Sondhi.
“This points to further downward pressure on inflation and could pave the way for more rate cuts this year.”
With files from Glen Korstrom/BIV
