The Canadian economy faced a significant contraction in the second quarter of 2025, largely attributed to U.S. President Donald Trump’s tariffs. Statistics Canada reported a 1.6 percent annualized decline in gross domestic product (GDP), following a two percent increase in the first quarter. This downturn has raised concerns about a potential technical recession, defined as two consecutive quarters of negative GDP growth.

The decline in GDP was primarily driven by substantial drops in goods exports and reduced business investment in machinery and equipment. However, this was somewhat mitigated by increased household and government spending. Royce Mendes, managing director and head of macro strategy at Desjardins, stated, "Simply put, the tariff war with the U.S. was terrible for the Canadian economy."

In August, Trump raised tariffs on non-compliant goods under the Canada–United States–Mexico Agreement (CUSMA) from 25 percent to 35 percent. Despite this, most Canadian producers comply with CUSMA, resulting in a lower effective tariff rate compared to other countries. Mendes noted that easing trade tensions, highlighted by a reduction in retaliatory tariffs announced by Prime Minister Mark Carney, could provide some relief.

The second quarter saw exports plummet by 27 percent on an annualized basis, particularly in the passenger car and light truck sectors. Imports also fell by 5.1 percent due to Canada’s counter-tariffs. Additionally, real GDP per capita decreased, and wage growth slowed to its lowest rate since 2016, excluding the pandemic period. The household saving rate also dropped, indicating financial strain on consumers.

In July, Canada lost 41,000 jobs, maintaining an unemployment rate of 6.9 percent. A report from CIBC highlighted that youth unemployment is currently at levels typically seen during recessions. The GDP decline closely aligned with the Bank of Canada’s July estimate of a 1.5 percent drop under its current tariff scenario, which anticipates ongoing tariffs and trade uncertainty affecting economic activity.

Looking ahead, Mendes suggested that the recent GDP figures support his prediction that the Bank of Canada may cut interest rates in September to stimulate growth. The central bank has held its key interest rate steady at 2.75 percent for the last three meetings. However, some economists, including TD Bank's Rishi Sondhi, believe the central bank might maintain current rates, citing strong consumer spending. Sondhi noted, "Policymakers still have one more jobs and inflation report to digest before that time."

As the Canadian economy navigates these challenges, the impact of U.S. tariffs continues to loom large.