A railway grain terminal in Alberta. (Photo by: LJM Photo/Design Pics Editorial/Universal Images Group via Getty Images) · Design Pics Editorial via Getty Images
Canada’s economy shrank 1.6 per cent on an annualized basis in the second quarter of 2025, Statistics Canada said on Friday.
Analysts had expected real gross domestic product (GDP) for the quarter to shrink by 0.5 per cent annually, according to consensus estimates published by the Bank of Montreal.
Newly imposed U.S. tariffs choked off exports in the second quarter, Statistics Canada said, and businesses also invested less in machinery and equipment. Exports dropped 7.5 per cent, with passenger car and light truck exports down 24.7 per cent and industrial machinery, equipment and parts down 18.5 per cent. Travel services also fell 11.1 per cent.
Real GDP contracted 0.1 per cent in June from the previous month, also weaker than expected. The flash estimate for July, Statistics Canada’s projection based on preliminary data, came in showing an increase of 0.1 per cent.
Though below consensus, the second-quarter slowdown is “broadly in line with the Bank of Canada’s July MPR forecast,” CIBC economist Andrew Grantham says in a note to clients, referring to the central bank’s Monetary Policy Report.
Even with July’s flash estimate showing improvement, June’s GDP contraction “leaves momentum heading into Q3 weaker than we or the Bank of Canada were likely expecting,” Grantham writes, and third-quarter projections currently come in below the BoC’s forecast of one per cent growth.
“That weaker than expected trend in the monthly figures makes today’s release supportive for our forecast of a September interest rate cut, although upcoming employment and CPI data will still be important for that call,” Grantham says.,
In a note to clients last Friday, BMO economist Shelly Kaushik pointed out that in July the Bank of Canada had projected a “hefty” annualized real GDP contraction of -1.5 per cent, “so it will be tough for the data to surprise to the downside.”
“Given the Bank’s pessimistic outlook, the further softness required to prompt a September rate cut is more likely to come from the timelier jobs data,” Kaushik wrote.
The economy grew 2.2 per cent in the first quarter of 2025, well past estimates.
This story will be updated.
John MacFarlane is a senior reporter at Yahoo Finance Canada. Follow him on Twitter @jmacf.
Download the Yahoo Finance app, available for Apple and Android.