ECONOMIC OUTLOOK

Canada’s economy goes into reverse

Canada’s economic struggles were highlighted in its Q2 2025 gross domestic product (GDP) figures, with activity reducing by 0.4 percent on the quarter. This nearly reversed Q1’s 0.5 percent gain as increased trade barriers and persistent uncertainty curtailed growth.

Weakness also exists in the labour market. Employment fell by 0.3 percent in August 2025 and the employment rate (60.5 percent) dropped to its lowest level in over four years. Combined with subdued vacancies, this points to a softening of the economy and growing labour market slack.

Source: Statistics Canada

August’s inflationary print from Statistics Canada saw consumer prices rise by 1.9 percent on the year after July’s short-lived deceleration of 1.7 percent. While growing, price stability close to the 2.0 percent mid-point of the Bank of Canada’s (BoC) target range of 1.0 to 3.0 percent is welcome.

While the Canada-United States-Mexico Agreement (CUSMA) offers one line of tariff impact suppression, it is unlikely to shelter the economy from demand reduction in the US. Until trade barriers reduce, exports, manufacturing output and investment are all likely to be under duress in Canada. The CUSMA’s potential renewal in July 2026 will also be a significant milestone of great importance regarding trade uncertainty.

As a result, the BoC should have more flexibility, as employment cools and the economy decelerates even with inflation being sticky.

With Bill C-5 gaining Royal Assent, implementation of that legislation will be one lever the Canadian government can pull to help build economic autonomy, resilience and security. That improvement, alongside increased defense spending and fall budget outcomes, however, is likely to be felt next year when more clarity on Canada’s trading position with the US emerges.

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