Canadian Economy Tariff Impact Hits Growth

Statistics Canada’s Q2 GDP numbers show the Canadian economy tariff impact was stronger than expected, with the economy shrinking by -1.6% at an annualized rate. That’s worse than what most experts predicted, driven mainly by a sharp 26.8% drop in exports. Business investment also weakened, especially in equipment spending, which fell more than 30%.

Exports of cars, trucks, industrial machinery, and even travel services were hit hard, largely because of U.S.-imposed tariffs. Canadian counter-tariffs also slowed imports, particularly for vehicles and travel, though imports of metals like gold and silver surged.

Consumer Spending Softens the Canadian Economy Tariff Impact

It wasn’t all bad news. Canadian households showed resilience. Consumer spending grew 4.5% in Q2 (up from just 0.5% in Q1), and government spending also helped keep the economy moving.

Housing activity made a comeback too, with residential investment jumping 6.3% after a steep drop earlier in the year. Domestic demand rose 3.5%, showing Canadians were still spending despite tariffs and trade tensions.

The downside? Income growth was weak, up only 0.7% year-over-year, and the savings rate slipped to 5%. That could make it harder for consumers to keep spending at the same pace.

Canadian Economy Tariff Impact Seen in Manufacturing

June GDP numbers showed more weakness, slipping -0.1% month-over-month. Manufacturing was the biggest drag, falling 1.5%. Services were mixed, with gains in retail and wholesale trade offsetting some of the broader slowdown.

While the July flash estimate showed slight growth (+0.1%), the June numbers highlight how volatile the economy has become under the Canadian economy tariff impact.

What This Means for Interest Rates

The Bank of Canada had already forecasted a Q2 decline close to what we saw, so the report wasn’t a total surprise. However, early signs suggest Q3 growth may also be weaker than expected.

That puts pressure on the Bank of Canada ahead of its September 17 meeting. Rate cuts aren’t guaranteed—only a weak jobs report and soft inflation numbers could push them in that direction.

In the U.S., a Fed rate cut looks more likely, though political battles are adding uncertainty. If U.S. inflation rises and bond yields climb, Canadians could see higher fixed mortgage rates, even if the Bank of Canada holds steady.

Bottom Line

The Canadian economy tariff impact is clear—exports and manufacturing are struggling, but consumers and housing are keeping things afloat for now. The big question: Will the Bank of Canada cut rates in September, or will Canadians face higher borrowing costs as U.S. politics spill across the border?

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