Canada’s economy shrank in the second quarter of 2025 as new US tariffs sharply reduced exports, leading to the first quarterly decline in seven quarters, according to data released on Friday by Statistics Canada.
Real gross domestic product (GDP) fell 0.4% in the April to June period, following a 0.5% increase in the first quarter.
On an annualized basis, GDP contracted 1.6%, a steeper decline than the 0.6% drop economists had expected.
The contraction was driven primarily by a 7.5% fall in exports, reflecting the impact of trade measures between Canada and the United States.
International exports of passenger cars and light trucks plunged 24.7%, while exports of industrial machinery, equipment and parts dropped 18.5%. Travel services also declined 11.1%.
Imports fell 1.3% as Canadian counter-tariffs took effect, with lower purchases of passenger vehicles and travel services partially offset by higher imports of intermediate metal products, particularly unwrought gold, silver and platinum group metals.
Export and import prices both fell, reducing Canada’s terms of trade by 1.1%.
Business investment weakened, falling 0.6% in the quarter.
Machinery and equipment investment contracted 9.4%, marking its slowest pace outside of 2020 since late 2016.
Investment in non-residential buildings declined 3.3%, though spending on engineering structures rose 3.6% due to offshore energy project activity.
Not all sectors posted declines. Household spending grew 1.1%, supported by higher purchases of new trucks, vans and SUVs, insurance services, and food.
Residential investment also advanced 1.5%, led by a 3.7% increase in new construction, particularly in British Columbia. Business inventories accumulated at a faster pace, adding $30.1 billion, with notable gains in wholesale trade and manufacturing.
Despite these offsets, per capita GDP slipped 0.4% in the quarter, reflecting weaker trade and investment activity.
The economy also recorded a 0.1% monthly decline in June, marking a third straight month of contraction.
With growth slowing more sharply than anticipated, markets are increasing bets that the Bank of Canada may consider lowering its policy interest rate from the current 2.75% at its September meeting.