The Canadian economy shrank by 0.1% in June, the third consecutive month of declines. Still, it remains a close call as to whether the Bank of Canada will cut interest rates in September. The GDP decline was below expectations; economists had forecast a 0.15% rise, according to FactSet.
The June drop marks the first time since the final quarter of 2022 that the Canadian economy shrank for three consecutive months. On an annualized basis, the latest report shows a 1.6% GDP decline in the second quarter, almost in line with the Bank of Canada’s estimate of a 1.5% contraction, while reversing the 2.0% growth in the first quarter.
The central bank has kept its policy rate steady at 2.75% at its last three meetings in April, June, and July after cutting seven consecutive times, including twice this year.
In the bond market, traders raised the odds of a September rate cut to 48%, from 40% prior to the GDP report. Observers say while this news increases the odds of a cut, the Bank of Canada might want to see other key economic data, particularly the August jobs report due on Sept. 5 and the August inflation report on Sept. 16. The Bank has its next policy-setting meeting on Sept. 17.
The June report found that the economic deceleration in all three months was primarily led by goods-producing industries, which make up a quarter of the GDP. In contrast, services-producing industries ticked up 0.1%, driven by a rise in retail, real estate, and the wholesale trade.
The decline was led primarily by a slowdown in the manufacturing and utilities sectors. Manufacturing contracted 1.5% in June as the impact of tariffs intensified, steadily working its way through export-driven industries.
Advanced Estimates See a Reversal in July
Advanced data from Statistics Canada suggests the GDP edged up 0.1% in July, lifted by real estate, mining and quarrying (except oil and gas), and the wholesale trade, though this was partially offset by a decline in retail.
Below are excerpts from economist commentaries on the June GDP report.
Not Enough for the Bank of Canada to Cut Rates
Benjamin Reitzes, managing director of Canadian rates and macro strategist at BMO Economics
“It should come as no surprise that the Canadian economy struggled in Q2 as tariffs ramped up. However, the domestic strength is somewhat comforting, although the sustainability of that momentum is an open question. Arguably, the economy is evolving largely in line with the Bank of Canada ‘s July Monthly Policy Report forecast. Policymakers opted to stay on hold then, so this report likely doesn’t push them any closer to cutting in September, with the LFS and CPI still to come.”
The Report Provides Marginal Push for a Rate Cut
Thoman Ryan, North America economist at Capital Economics
“The contraction in second-quarter GDP was due to a large drag from net trade, which is unlikely to be repeated, but the downward revision to monthly GDP in June and preliminary July estimate showing only a muted gain leaves third-quarter GDP growth on track to be weaker than the Bank of Canada expected. That provides some support to our view that the Bank will soon resume cutting interest rates.”
Next Month’s CPI and Jobs Data Are Crucial Determinants for Policy
Andrew Grantham, senior economist at CIBC
“A slump in exports, driven by the imposition of US tariffs and a reversal of Q1’s front-loading activity, drove a contraction in Canadian GDP during the second quarter. The 1.6% annualized contraction was worse than the consensus projection (-0.7%) but broadly in line with the Bank of Canada’s July MPR forecast.
“That weaker than expected trend in the monthly figures makes today’s release supportive for our forecast of a September interest rate cut, although upcoming employment and CPI data will still be important for that call.”
The Bank of Canada will Resume Cuts in September
Royce Mendes, managing director and head of macro strategy at Desjardins
“Simply put, the tariff war with the US was terrible for the Canadian economy. The monthly June reading for GDP posted a surprise contraction of 0.1%, against expectations for an increase of 0.1%. So while the July flash showed that the economy largely recovered the lost ground from June, our early tracking points to a flat to slightly negative estimate for Q3 GDP.
“As a result of the headline miss for Q2 and no signs of momentum heading into the third quarter, we are retaining our forecast that the Bank of Canada will resume its cutting cycle in September. Government of Canada bond yields are falling, as analysts in the ‘no cut’ camp revisit their assumptions and traders begin to price in more easing. That said, we remain of the view that the central bank will do more than what the market is pricing even after today’s moves.”
The Economy Is in Dire Need of a Trade Agreement
Matthieu Arseneau, economist at National Bank of Canada
“We now have the full picture for the first quarter in which US tariffs were imposed, and it is far from reassuring. The Canadian economy posted its sharpest contraction since the pandemic, as the drop in exports far exceeded the decline in imports. As a result, trade made its largest negative contribution ever, with the exception of the temporary distortion caused by the pandemic.
“Overall, this morning’s data does not change our view that the Canadian economy, already in excess supply, has experienced difficulties in the second quarter and will in the third. The downward revision of monthly GDP for June (preliminary was 0.1% and was revised to -0.1%) and the weak rebound in July lead us to believe that the economic weakness will continue into the third quarter. This economy seems in dire need of a trade agreement to give businesses greater visibility. In the meantime, the Bank of Canada can provide a little extra help while waiting for the federal government’s budget plans.”
Canadian Economy Inching Closer to Recession
Michael Davenport, senior economist at Oxford Economics
“The trade war took its toll on Canada’s economy in the second quarter. GDP contracted 0.4% quarter over quarter in Q2 as net exports and business investment pulled back amid new tariffs, a reversal of front-loading in Q1, and elevated trade policy uncertainty.
“Rising USMCA compliance and lower Canadian counter tariffs are helping to cushion the impact of the trade war on Canada’s economy, and it looks increasingly likely that GDP may avoid another contraction in Q3. However, the impact of the trade war and elevated uncertainty on sentiment, capital spending, and hiring will likely continue to build. We expect the economy will struggle to grow in H2 and teeter on the verge of recession.”
Domestic Economy To Slow but Remain Positive
Abbey Xu, economist at Royal Bank of Canada
“The result was still broadly in line with the Bank of Canada’s July forecast of -1.5% under its ‘current tariff scenario,’ and details were more mixed than headline figures suggest. But weakness has largely remained concentrated in heavily trade exposed sectors. Most of the drop in Q2 GDP came from a steep drop in exports, tied to a broad-based fall in US imports after the surge in pre-tariff stockpiling in Q1.
“Looking ahead, Statistics Canada’s advance estimate pointed to a modest 0.1% increase in July GDP. Our base-case forecast still assumes GDP growth will be slow, but positive, through the second half of 2025, with Canada’s relatively favorable tariff position compared with other US trade partners should help limit downside risks and reduce the likelihood of a slide into recessionary territory.”
Previous Rate Cuts Still Passing Through the Economy
Derek Holt, vice president and head of capital markets economics at Scotiabank Economics
“Canada’s economy was much stronger than the headline GDP reading would suggest—so much that it’s a textbook example for students of how sometimes GDP isn’t a great measure and particularly from the standpoint of what policy should do about it.
The Bank of Canada should emphasize the final domestic demand detail— which they have always tended to do in their statements at times like this—and fade the headline GDP number. I still want to see next Friday’s spin of the wheel for Canadian jobs (+35k is my estimate) and then the next week’s CPI figures and other information, but the market may not be correctly interpreting what these numbers mean to the Bank of Canada.
“We’ve only just begun to see pass through of rate cuts. The first in July of last summer is only at the one-year anniversary and the last in March is still just a baby. There are 12-to-24-month lags for monetary policy actions and so a lot of the rate pass through to what’s been done is still ahead.”
Still Room for Rate Cuts
Rishi Sondhi, economist at TD Economics
“Today’s GDP data fell in almost exactly in line with what the Bank of Canada expected in their latest forecast. However, domestic demand looks to have surprised on the upside. On the margin, this could enhance the argument for the Bank to stand pat on rates at their Sept. 17 meeting.
“However, policymakers still have one more jobs and inflation report to digest before that time. The contraction in overall GDP also implies that slack built in the economy in Q2, and even with a better performance in Q3 likely on tap, the economy probably remains in excess supply. This points to further downward pressure on inflation and could pave the way for more rate cuts this year, especially with a policy rate only at the mid-point of what the Bank considers neutral for the economy. For their part, markets are pricing in a 55% chance of a cut in September, although one taking place by year’s end is fully priced in.”
