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Canada’s economy took a big step back in the second quarter of 2025, shrinking at an annualized pace of 1.6%. This was much worse than the 0.7% drop economists were expecting, according to new figures from Statistics Canada. The slowdown shows how much damage ongoing trade fights with the United States and weaker factory activity are doing to the country’s growth.
This was Canada’s first quarterly economic decline since the end of 2022, and it lined up with three straight months of shrinking GDP through June. Goods-producing industries fell 1.2% over the quarter, with manufacturing, mining, and utilities all slipping. Services managed a tiny 0.2% gain, but not nearly enough to offset the weakness in goods.
CIBC economist Andrew Grantham said the most concerning part of the report is how little momentum there was heading into the summer. Even though exports had begun to level off, overall activity was still weak. He now expects the Bank of Canada to begin cutting interest rates as early as September to help kickstart a recovery, unless next week’s jobs report brings a major surprise.
Exports were hit especially hard, plunging 7.5% for the quarter. That was the steepest drop since the early days of the pandemic in 2020. The new U.S. tariffs slashed demand for Canadian cars, machinery, and travel services. Passenger vehicle exports alone tumbled almost 25%, making them one of the biggest drags on the economy.
Businesses also pulled back on spending. Investment in machinery and equipment sank 9.4%, one of the weakest results outside the pandemic since 2016. The only bright spot came from a 3.6% rise in large engineering projects, boosted by the arrival of a massive offshore oil module.
Manufacturing output overall was down 2.1% in the quarter, with steep declines in transportation equipment, petroleum, and wood products. Utilities fell 3.5%, hit by a sharp drop in hydroelectric generation caused by worsening drought.
On the household side, Canadians kept spending, even though their incomes barely grew. Final consumption was up 0.9%, led by purchases of new vehicles and financial services. But incomes rose just 0.2%—the slowest pace since 2016 outside the pandemic years. As a result, people dipped into their savings to maintain spending, and the national saving rate fell from 6% to 5%. Per capita GDP slipped 0.4%, underscoring the strain on households.
Looking ahead, early estimates for July point to a very small rebound of 0.1%, helped by strength in real estate and mining. Still, with trade barriers in place and factories struggling, the outlook for the second half of the year remains shaky.