Economic Downturn in Canada
Canada’s economic output, as measured by Gross Domestic Product (GDP), declined for the third straight month in June. This decline is largely attributed to a slowdown in manufacturing production amid the ongoing trade war. According to Statistics Canada, the second quarter of 2025 saw a relative decrease in economic output by 1.6 percent compared to the same period a year prior.
Impact of Trade War
The trade war has had a significant impact on Canada’s economy, with many economists considering the decline in GDP as a sign of an economic recession. Principal economist Andrew DiCapua at the Canadian Chamber of Commerce notes that "the Canadian economy experienced a significant export shock in the second quarter as the receipts from the trade war were totaled up." This has resulted in weak investment numbers, confirming the sentiment that businesses are waiting for more clarity on the trade situation.
Silver Linings in the Report
Despite the decline in GDP, many economists see some positives in the report. Derek Holt, vice president and head of Capital Markets Economics at the Bank of Nova Scotia, notes that "Canada’s economy was much stronger than the headline GDP reading would suggest." He explains that the key to understanding the report lies in the domestic economy, which "ripped higher in Q2." This is evident in the increase in consumer spending and housing investment, which were up 4.5 percent and 6.3 percent, respectively, compared to the previous year.
What Was in the StatsCan Report?
Statistics Canada reported that GDP fell in June by 0.1 percent, marking the third consecutive decline. The second quarter of 2025 saw a 0.3 percent drop in GDP, following a 0.5 percent increase in the first quarter. On a seasonally adjusted annualized basis, the second quarter of 2025 saw GDP decline 1.6 percent compared to 2024. Two straight quarters of declines in GDP are what most economists consider to be an economic recession.
Manufacturing Sector Hit Hard
The manufacturing sector has been particularly affected, with June marking the third decline in four months. Statistics Canada notes that two-fifths of manufacturers say they are being impacted by tariffs. The ongoing trade tensions with the United States and China are expected to continue hampering the Canadian economy, especially the manufacturing sector.
What Could This Mean for Interest Rates?
The GDP report has left economists mixed on how the Bank of Canada may respond. DiCapua notes that "the rebound in domestic final demand is a sign that there remain decent consumer spending fundamentals humming beneath the surface." However, he also states that the result is weaker than the Bank of Canada was expecting and may lead to a resume of interest rate cuts at the September meeting. The Bank of Canada will be updating its monetary policy on September 17, which will include a decision on whether to change its current overnight benchmark lending rate of 2.75 percent.
Conclusion
In conclusion, Canada’s economic output has declined for the third straight month, largely due to a slowdown in manufacturing production amid the ongoing trade war. While the report shows some positives, such as an increase in consumer spending and housing investment, the manufacturing sector has been hit hard. The Bank of Canada’s decision on interest rates in September will be closely watched, as it may impact how much individual Canadians and business owners pay to borrow money. As the trade tensions continue, it remains to be seen how the Canadian economy will fare in the coming months.
