Trade disruptions are leaving their mark on Canada’s economy, according to a new analysis
Canada’s economy is expected to show zero growth in the second quarter of 2025, according to a new report from RBC Economics, marking a sharp decline from the 2.2% gain recorded in the first quarter.
The flat reading, anticipated in Statistics Canada’s gross domestic product report due Friday, reflects significant disruptions from international trade tensions that emerged during the spring, according to economists Nathan Janzen and Abbey Xu, who authored the report. A surge in US tariffs and accompanying threats rattled both business and consumer confidence across the country.
“These international trade disruptions have significantly impacted the economy,” the report states. Canadian merchandise export volumes fell an annualized 31% in Q2, coinciding with a broader drop in US imports as businesses wound down pre-tariff inventory building.
Business investment likely declined modestly during the quarter, though the drop would have been substantially worse without a large $2-billion one-time import of machinery for offshore oil production in June.
Despite the challenging trade environment, household spending remained steady. Consumer spending maintained a similar pace to the first quarter’s 1.2% increase, while a rebound in home resales and housing starts signalled an increase in residential investment.
“Household spending, however, held steady,” the economists noted.
The resilience in domestic demand suggests underlying economic momentum may be stronger than headline figures indicate. Total final domestic demand, which excludes volatile swings in trade and inventories, is expected to post a small gain.
RBC economists predict gross domestic product will show a 0.2% month-over-month increase in June, slightly higher than Statistics Canada’s advance estimate of 0.1%. This would mark the first monthly increase in three months following small declines in April and May.
Early indicators point to growth in service-producing industries during June. Retail sales rebounded strongly by 1.5% after a 1.2% drop in May, which the economists noted to be consistent with RBC’s tracking of consumer card transactions that showed spending held up despite sharp declines in consumer confidence.
The manufacturing sector continues facing significant impacts from trade disruptions and uncertainty, with output expected to remain flat. However, oil production likely recovered after wildfire-related disruptions in Alberta during May.
Looking ahead, trade uncertainty is expected to continue affecting business investment regardless of future tariff decisions. Nevertheless, CUSMA exemptions for most Canadian exports have prevented worst-case scenarios, leading economists to anticipate subdued but positive growth through the remainder of 2025.
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