The Canadian economy experienced a contraction in the second quarter of 2025, primarily due to a significant drop in exports to the United States. Statistics Canada reported that the real gross domestic product (GDP) fell by 0.4 percent, following a 0.5 percent increase in the previous quarter. On an annualized basis, the economy shrank by 1.6 percent, a notable decline from the 2 percent growth recorded in the first quarter.

Exports saw a sharp decline of 7.5 percent during the quarter, reversing a 1.4 percent increase in the first quarter. The statistics agency attributed part of this downturn to tariffs imposed by the United States, which led to a staggering 24.7 percent drop in international exports of passenger cars and light trucks. Additionally, exports of industrial machinery, equipment, parts, and travel services also decreased.

This contraction marks the first quarterly decline in seven quarters, raising concerns about the overall economic outlook. Despite the downturn in exports, higher household and government spending provided some support to the economy. The total annualized growth for the first half of the year now stands at 0.4 percent.

The unexpected slowdown in growth could influence the Bank of Canada’s monetary policy decisions. The central bank has maintained interest rates at 2.75 percent during its last three meetings. Prior to the release of the GDP figures, money markets had estimated a nearly 40 percent chance of a rate cut at the upcoming meeting on September 17.