Canada’s economy got smaller in the second quarter of 2025, shrinking at an annual pace of 1.6%. This is the first decline in seven quarters, and the main reason is weaker exports caused by tariffs from the United States.
Statistics Canada also lowered its estimate of growth in the first quarter, from 2.2% down to 2.0%, showing that U.S. trade actions are hitting Canada harder than expected.
Exports Take a Big Hit
- Overall exports dropped 7.5% between April and June, compared to a small increase in the previous quarter.
- Shipments of cars and light trucks plunged 24.7%.
- Exports of industrial machinery and equipment fell 18.5%.
- Travel services also dropped 11.1%.
Domestic Demand Stays Strong
Despite weak exports, people and businesses inside Canada kept spending:
- Household consumption rose 4.5%.
- Housing investment went up 6.3%.
- Government spending grew 5.1%.
This meant that overall domestic demand grew by 3.5%, which softened the blow from falling exports.
Interest Rate Cut Expectations
The Bank of Canada (BoC) has kept its key interest rate at 2.75% for the last three meetings. But the weaker GDP numbers are raising chances that the BoC will cut rates in September.
- On a monthly basis, GDP fell 0.1% in June, mainly due to weaker goods-producing industries.
- Financial markets now see a 48% chance of a rate cut on September 17, up from 40% before the GDP release.
Outlook for July and Beyond
A flash estimate for July showed a small 0.1% increase, suggesting the economy may recover slightly in the third quarter, but growth could remain flat.
Economists say upcoming jobs and inflation data in August will play a key role in the BoC’s decision.
Market Reaction
- The Canadian dollar weakened, trading at 1.3771 per U.S. dollar (72.62 US cents).
- Yields on two-year government bonds also fell slightly.
Canada’s economy is slowing down because of weaker exports, but strong consumer and government spending are keeping things from getting worse. The big question now is whether the Bank of Canada will cut interest rates in September to support growth.
