Canada’s economy contracted at an annualized rate of 1.6 percent in the second quarter of 2025, marking its first quarterly decline in nearly two years, as exports plummeted under pressure from newly imposed U.S. tariffs. The data, released Thursday by Statistics Canada, reflects the steepest decline in exports in five years and a growing strain on Canada’s trade-dependent economy. Real gross domestic product fell 0.4 percent in the April to June period compared to the previous quarter, following a 0.5 percent increase in the first quarter.
The downturn was led by a 7.5 percent drop in total exports, with the largest declines observed in automotive products, industrial machinery, and travel services. Exports of passenger cars and light trucks fell by 24.7 percent, while exports of industrial machinery dropped 18.5 percent. Business investment also weakened, declining by 0.6 percent on an annualized basis. It marked the first negative quarter for non-residential investment since the COVID-19 pandemic period. Overall, goods-producing industries recorded a 1.2 percent contraction, reflecting reduced output in manufacturing, mining, and oil and gas extraction.
Durable goods manufacturing dropped by 2.1 percent, with notable decreases in wood products, transportation equipment, and petroleum refineries. Despite the drop in output and exports, domestic demand showed resilience. Household spending rose by 4.5 percent, driven by increased outlays on services. Residential investment advanced 6.3 percent, while government consumption expenditures climbed 5.1 percent. As a result, final domestic demand increased by 0.9 percent after falling by 0.2 percent in the first quarter.
Exports fall 7.5 percent under US tariffs
However, the household savings rate fell to 5.0 percent from 6.0 percent, indicating slower growth in disposable income relative to spending. The Canadian dollar weakened following the release of the data, trading at 1.3771 per U.S. dollar, its lowest level in three months. Yields on two-year Canadian government bonds edged lower, reflecting market adjustments to the possibility of slower economic growth. In a separate release, Statistics Canada reported the country’s current account deficit widened to C$21.16 billion in the second quarter, the largest on record.
The goods trade deficit expanded significantly, reflecting the slump in exports alongside resilient imports. Service trade also recorded a higher deficit, driven in part by increased Canadian travel abroad. While overall output in the service sector grew by 0.2 percent, the pace of expansion slowed from earlier in the year. Gains were recorded in real estate, professional services, and health care, but these were partially offset by declines in transportation and accommodation services.
Currency and bond markets react to GDP drop
Service-producing industries have remained stable relative to the more volatile goods-producing sectors. Preliminary estimates for July indicate a marginal GDP increase of 0.1 percent, suggesting that the economy may have stabilized at the beginning of the third quarter. However, export challenges and broader global trade headwinds continue to weigh on the outlook. Canada’s economic trajectory remains closely tied to developments in international trade policy.
The latest tariffs imposed by the United States, targeting key Canadian exports including vehicles and machinery, have intensified bilateral trade tensions and placed pressure on several core sectors of Canada’s economy. The Bank of Canada’s next monetary policy decision is scheduled for September 4. Its policy rate currently stands at 4.75 percent, the highest level since 2007. The central bank has indicated its decisions will continue to be guided by incoming data, including GDP, inflation, and labor market indicators. – By Content Syndication Services.