Economy records sharpest contraction since Q2 2020 in Q2

GDP reading: GDP contracted 1.6% in seasonally adjusted annualized rate terms (SAAR) in the second quarter, contrasting the 2.0% expansion tallied in the first quarter and marking the worst reading since Q2 2020. The second-quarter contraction stemmed largely from sharp drops in goods exports and reduced business investment in machinery and equipment. However, these setbacks were partially offset by quicker inventory buildups, stronger household spending, and a decline in goods imports.

Weak exports outweigh solid domestic demand: Private consumption increased 4.5% in the second quarter, which was above the first quarter's 0.5% expansion. Public consumption rebounded, growing 5.1% in Q2 (Q1: -0.4% SAAR). Meanwhile, fixed investment fell at a slower pace of 0.4% in Q2, compared to the 5.0% decrease recorded in the previous quarter. Exports of goods and services fell 26.8% on a SAAR basis in the second quarter, which contrasted the first quarter's 5.8% expansion and was linked in part to U.S. tariff disruption; two fifths of Canadian manufacturers reported being impacted by tariffs in June. In addition, imports of goods and services deteriorated 5.1% in Q2 (Q1: +3.6% SAAR).

GDP outlook: Preliminary data suggest real GDP edged up 0.1% in July, with gains in real estate and rental and leasing, mining and quarrying (excluding oil and gas), and wholesale trade partly offset by a decline in retail trade. Our Consensus is for the economy to roughly flatline over Q3 as a whole, weighed on by U.S. trade restrictions and a softening jobs market.

Panelist insight: On the data, Desjardins’ LJ Valencia said: “The impacts of US tariffs on the Canadian economy are now clear as day. Net exports were the dominant source of drag, coinciding with US tariffs. Excluding the pandemic, the drag from net trade was the largest since the start of the data series in 1961. The decline in exports was broad based and observed across goods such as passenger cars, light trucks, machinery, equipment and parts. Travel services exports also fell, probably linked to reduced travel between Canada and the US. In addition, tariff uncertainty contributed to pushing down investment in machinery and equipment (-32.6%).”

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