A railway grain terminal in Alberta. (Photo by: LJM Photo\/Design Pics Editorial\/Universal Images Group via Getty Images) \u00b7 Design Pics Editorial via Getty Images <\/p>\n
Canada\u2019s economy shrank 1.6 per cent on an annualized basis in the second quarter of 2025, Statistics Canada said on Friday.<\/p>\n
Analysts had expected real gross domestic product (GDP) for the quarter to shrink by 0.5 per cent annually, according to consensus estimates published by the Bank of Montreal.<\/p>\n
Newly imposed U.S. tariffs choked off exports in the second quarter, Statistics Canada said, and businesses also invested less in machinery and equipment. Exports dropped 7.5 per cent, with passenger car and light truck exports down 24.7 per cent and industrial machinery, equipment and parts down 18.5 per cent. Travel services also fell 11.1 per cent.<\/p>\n
Real GDP contracted 0.1 per cent in June from the previous month, also weaker than expected. The flash estimate for July, Statistics Canada\u2019s projection based on preliminary data, came in showing an increase of 0.1 per cent.<\/p>\n
Though below consensus, the second-quarter slowdown is “broadly in line with the Bank of Canada’s July MPR forecast,” CIBC economist Andrew Grantham says in a note to clients, referring to the central bank’s Monetary Policy Report.<\/p>\n
Even with July’s flash estimate showing improvement, June’s GDP contraction “leaves momentum heading into Q3 weaker than we or the Bank of Canada were likely expecting,” Grantham writes, and third-quarter projections currently come in below the BoC’s forecast of one per cent growth.<\/p>\n
“That weaker than expected trend in the monthly figures makes today’s release supportive for our forecast of a September interest rate cut, although upcoming employment and CPI data will still be important for that call,” Grantham says.,<\/p>\n
While trade and investment were the main factors slowing the economy, household demand showed surprising resilience. Household spending rose 1.1 per cent in the quarter, led by purchases of trucks, vans and SUVs, insurance and financial services, and food. Housing investment also turned positive, with new construction driving a 1.5 per cent gain. Retail trade hit a record high in June, rising 1.4 per cent.<\/p>\n
However, underlying momentum was mixed. Wage growth was anemic at just 0.2 per cent \u2014 “the smallest increase since the second quarter of 2016” outside of the pandemic, Statistics Canada says \u2014 and the household saving rate fell to 5.0 per cent as spending grew faster than incomes. Federal finances also weakened as “as excise taxes fell sharply following the removal of the federal consumer carbon tax.”<\/p>\n