Canadian economy shrinks in 2nd quarter due to U.S. tariffs

August 29, 2025

RED FM News Desk

Statistics Canada reported Friday that the Canadian economy contracted in the second quarter, largely due to the impact of U.S. tariffs.

The nation’s real gross domestic product (GDP) declined by 1.6% on an annualized basis, a result of a sharp decrease in exports and business investment. This marks a significant drop from the 2% growth seen in the first quarter, a figure that StatCan has since revised down from its initial estimate of 2.2%.

On a per-capita basis, real GDP also saw a decline in the second quarter, reversing the growth from the previous quarter.

The economic downturn follows U.S. President Donald Trump’s decision to increase tariffs on goods from Canada and other nations during the quarter, with a particular focus on steel, aluminum, and autos. This move appears to have prompted companies to expedite their orders earlier in the year to avoid the tariffs, which boosted the economy in the first quarter but caused it to cool in the second.

StatCan highlighted that international exports of passenger cars and light trucks plummeted by 24.7% in the quarter. Additionally, exports of industrial machinery, equipment, and parts, as well as travel services, also saw a decline. Investment in machinery and equipment fell by 9.4%, marking the slowest pace since 2016, excluding the COVID-19 pandemic period.

Imports also decreased in the last quarter as Ottawa imposed counter-tariffs on the U.S., which discouraged American firms from selling to Canada. A drop in Canadian travel to the U.S. during the trade dispute also contributed to the decline in imports.

While the drop in imports helped offset some of the GDP decline, an increase in government and household spending, along with businesses stockpiling goods, provided some support to growth.

The agency noted that real GDP dropped by 0.1% in June, the third decline in four months for the tariff-affected manufacturing sector. The June decrease, along with contractions in April and May, marks the first three consecutive months of GDP decline since the final quarter of 2022.

However, StatCan’s preliminary estimates indicate that real GDP is expected to tick up by 0.1% in July.