Canada’s economy experienced a significant contraction in the second quarter of the year, largely impacted by U.S. tariffs affecting exports. However, increased household and government spending helped mitigate the downturn, according to Statistics Canada. The Gross Domestic Product (GDP) for the quarter ending on June 30 declined by 1.6% on an annualized basis, with the first-quarter growth being revised downward to two percent.
Data from Statistics Canada revealed that the Canadian economy expanded by 0.4% on an annualized basis in the first half of the year. This quarter’s contraction marked the first slowdown in seven quarters. The larger-than-expected decline in growth raises the likelihood of the Bank of Canada implementing an interest rate cut in September. The bank has maintained a steady rate of 2.75% at its recent meetings.
In line with the Bank of Canada’s forecast, the economy faced a contraction of approximately 1.5% during the second quarter, as per the July monetary policy report. Following the release of GDP figures, the probability of a rate cut on September 17 rose to 48% from the previous 40%.
Statistics Canada reported a 0.1% monthly contraction in the economy for June, primarily driven by reduced output from goods-producing industries, which constitute a significant portion of the country’s GDP. Economists had anticipated a 0.6% contraction in second-quarter GDP and a 0.1% expansion in June’s monthly GDP.
The decline in exports, down by 7.5% in the second quarter, played a major role in the economic downturn, marking the most substantial drop in five years. Additionally, business investments in machinery and equipment saw a decline of 0.6% during this period, the first decrease since the onset of the pandemic.
Despite these challenges, domestic demand showed resilience, growing by 3.5%. Notably, household spending surged by 4.5% annually, residential investments increased by 6.3%, and government spending on goods and services rose by 5.1%.
While the economy faced struggles in the second quarter due to escalating tariffs, the strength in domestic sectors provided some assurance. The sustainability of this momentum remains uncertain, according to experts. The economy’s performance aligns closely with the Bank of Canada’s July forecast.
The recent GDP report is not expected to prompt immediate rate cuts in September, with central bank officials awaiting more data on employment and inflation before making any policy decisions.
