Canada’s economy experienced a more significant contraction than anticipated in the second quarter due to U.S. tariffs impacting exports. However, increased household and government spending helped mitigate the impact, according to Statistics Canada. The GDP for the quarter ending June 30 declined by 1.6% on an annualized basis, with the first-quarter growth being revised downward to 2%. This resulted in the economy growing at an annualized rate of 0.4% in the first half of the year, marking the first quarterly slowdown in seven quarters.
The larger-than-expected slowdown in growth may increase the likelihood of an interest rate cut by the Bank of Canada in September. The central bank has maintained rates at 2.75% in its recent meetings. Economists had predicted a contraction of around 1.5% during the second quarter, with money markets now indicating a 48% chance of a rate cut on September 17 following the release of GDP figures.
Statistics Canada reported a 0.1% contraction in the economy in June on a monthly basis, primarily driven by a decline in output from goods-producing industries. Economists had anticipated a 0.6% contraction in second-quarter GDP and a 0.1% growth in June’s monthly GDP. Andrew Grantham, a senior economist at CIBC Capital Markets, highlighted concerns over the weak momentum of the economy towards the end of the quarter and the beginning of Q3, supporting the forecast of a 25 basis points interest rate cut by the Bank of Canada in September.
Exports played a significant role in the economy’s decline in the second quarter, with a notable 7.5% decrease during that period, marking the largest drop in five years. Additionally, business investment in machinery and equipment shrank for the first time since the pandemic, falling by 0.6% in the second quarter. However, domestic demand showed resilience, growing by 3.5%, driven by increased household spending, rising residential investments, and a surge in government spending on goods and services.
Benjamin Reitzes, a macrostrategist and managing director of Canadian rates at the Bank of Montreal, noted that the Canadian economy faced challenges in Q2 due to escalating tariffs. While the domestic strength is reassuring, the sustainability of this momentum remains uncertain. Reitzes mentioned that the economy is tracking closely with the Bank of Canada’s July forecast, and the recent GDP report is unlikely to prompt a rate cut in September, especially with upcoming employment and inflation data to consider.
