Canadian economy shrinks 1.6% in 2nd quarter as U.S. tariffs squeeze exports

Canada’s economy faced a larger-than-expected contraction in the second quarter of the year, with GDP slowing by 1.6 per cent on an annualized basis. This decline was primarily due to the impact of U.S. tariffs on exports. However, higher household and government spending helped soften the blow to some extent, according to Statistics Canada.
The latest data revealed that the Canadian economy grew at an annualized rate of 0.4 per cent in the first half of the year. This second-quarter contraction marked the first slowdown in seven quarters, raising concerns about the overall health of the economy.
The possibility of an interest rate cut by the Bank of Canada in September has increased following the disappointing GDP figures. The central bank has maintained its rates at 2.75 per cent in recent meetings, but with the economy showing signs of weakness, a rate cut may be on the horizon.
Economists had anticipated a 0.6 per cent contraction in second-quarter GDP, but the actual figures exceeded these expectations. The decline in June’s monthly GDP further highlighted the challenges faced by the economy, particularly in goods-producing industries.
Exports took a significant hit in the second quarter, declining by 7.5 per cent – the largest drop in five years. Business investment in machinery and equipment also decreased for the first time since the pandemic, indicating a slowdown in economic activity.
Despite these challenges, domestic demand showed resilience, with household spending, residential investments, and government spending all experiencing growth. This domestic strength provided some comfort amidst the external pressures faced by the economy.
Looking ahead, analysts are closely monitoring key indicators such as employment and inflation data to gauge the need for further monetary policy action. While the GDP report may not be sufficient to prompt an immediate rate cut, ongoing economic data will play a crucial role in shaping the Bank of Canada’s decisions in the coming months.
The Canadian economy’s performance in the second quarter underscores the impact of global trade tensions and highlights the importance of domestic resilience in mitigating external shocks. As policymakers navigate these challenges, maintaining a balance between supporting economic growth and managing risks will be crucial for sustaining Canada’s economic recovery.