Canada’s economy contracted in the second quarter of this year due to “significant declines” in the export of goods, driven by

United States-imposed tariffs , and decreased business investment in machinery and equipment,

Statistics Canada reported Friday. Real gross domestic product (GDP) , which measures the total monetary value of goods and services produced in a country, declined 0.4 per cent after a 0.5 per cent gain the previous quarter, the national data agency said. On a per capita basis, GDP was down 0.4 per cent, after an increase of 0.4 per cent in the previous quarter.

Annualized, the economy shrank 1.6 per cent in the second quarter, slowing from growth of two per cent in the first quarter of 2025. This was worse than the consensus projection of 0.7 per cent, but “broadly in line” with

Bank of Canada’s July forecast, CIBC economist Andrew Grantham said in a note on Friday.

Aside from a slump in exports, Grantham also credited a “reversal” of the first quarter’s front-loading activity for the contraction.

The weaker-than-expected GDP numbers could drive the Bank of Canada to cut

interest rates in September, after keeping the rates steady at 2.75 per cent in its last three meetings, Desjardins economist Royce Mendes said in a note on Friday.

“As a result of the headline miss for Q2 and no signs of momentum heading into the third quarter, we are retaining our forecast that the Bank of Canada will resume its cutting cycle in September,” he said. “Government of Canada bond yields are falling, as analysts in the “no cut” camp revisit their assumptions and traders begin to price in more easing.”

The “good news” though is that trade tensions between Canada and the United States have been easing, said Mendes, with most goods crossing the border in compliance with the

Canada-United-States-Mexico Agreement (CUSMA). “Moreover, the reduction in retaliatory tariffs will remove any lingering concerns at the Bank of Canada about tariff-induced inflation,” he said. “That said, the Canadian economy is still far from firing on all cylinders.”

Exports declined by 7.5 per cent in the second quarter that ended on June 30, after increasing by 1.4 per cent in the first quarter.

International exports of passenger cars and light trucks “plummeted” by 24.7 per cent in the quarter, Statistics Canada said, while exports of industrial machinery, equipment and parts and travel services declined by 18.5 and 11.1 per cent, respectively.

International imports declined by 1.3 per cent as well, after rising 0.9 per cent in the previous quarter.

Imports of passenger vehicles fell by 9.2 per cent, whereas imports of metal products such as unwrought gold, silver and platinum group metals increased by 35.8 per cent.

Export and import prices fell by 3.3 and 2.3 per cent respectively in the quarter, which suggests that businesses likely absorbed some of the additional costs of tariffs by lowering prices, Statistics Canada said.

Business investment fell by 0.6 per cent overall, led by a “much weaker investment” in machinery and equipment. The 9.4 per cent decline in this category was the slowest pace of investment since the end of 2016 – outside of the pandemic.

Compensation of employees grew up by 0.2 per cent – also the smallest increase since the second quarter of 2016. While wages were up in construction, federal government public administration and the mining sectors, they fell in finance and real estate.

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The lower growth in salaries also pulled household savings down to five per cent from six per cent in the previous quarter.

The removal of the carbon tax on April 1, led to a 4.2 per cent revenue decline for the federal government, Statistics Canada said. In addition, government spending increased 1.8 per cent. These factors led to an “acceleration in the net borrowing” for the federal government in the second quarter.