Canada’s economy shrank in the second quarter of 2025, with real gross domestic product falling 0.4 percent following a 0.5 percent gain in the previous quarter. The contraction was primarily triggered by steep declines in exports and reduced business investment in machinery and equipment, even as robust household spending, rapid inventory accumulation, and lower imports cushioned the downturn.
Exports of goods fell sharply by 7.5 percent, a reversal from the 1.4 percent increase in the first quarter, weighed down by United States-imposed tariffs. International exports of passenger cars and light trucks plunged 24.7 percent, while industrial machinery, equipment, and parts dropped 18.5 percent. Travel services exports also saw an 11.1 percent decline, reflecting disruptions in cross-border commerce.
Counter-tariffs levied by the Canadian government dampened imports, which contracted 1.3 percent. Notably, imports of passenger vehicles decreased 9.2 percent, but purchases of intermediate metal products—especially unwrought gold, silver, and platinum group metals—expanded by 35.8 percent, signalling increased demand for precious metals.
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Businesses absorbed much of the tariff-driven cost pressure by lowering prices, with export prices down 3.3 percent and import prices down 2.3 percent, causing the terms of trade to slip by 1.1 percent. Overall business investment dipped 0.6 percent, with a striking 9.4 percent drop in machinery and equipment outlays, the weakest pace seen outside the pandemic’s first year since 2016.
Household spending climbed 1.1 percent, led by purchases of new vehicles, insurance, food, and dining out, though spending on electricity and alcoholic beverages declined. Residential construction rebounded, up 1.5 percent, driven by a surge in new apartment projects in British Columbia. Ownership transfer costs increased modestly, while home renovations contracted.
Business inventories grew markedly, reflecting manufacturing and wholesale stockpiling and greater investor acquisitions of precious metals. While retail inventories edged up, withdrawals of motor vehicles amid shrinking imports slowed overall retail stock accumulation.
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