Recent Searches
In brief
Following a surge in Q1 driven by stockpiling ahead of the announced US tariffs, the Canadian economy contracted in Q2 as trade measures became increasingly more pronounced. Real GDP fell by 0.4% reflecting weaker exports and business investment. In response, the federal government is prioritizing targeted investments to enhance long-term competitiveness and productivity, while maintaining fiscal discipline.
Looking ahead, Canada’s economic performance will depend on the resilience of Canadian businesses in navigating geopolitical and market uncertainty, the impact of policy measures to foster sustained economic momentum, and the pace of adoption of productivity-boosting technologies.
The Q2 slowdown was primarily driven by weaker exports and a decline in investment in machinery and equipment. However, July brought a modest rebound, with gains in both merchandise and services exports, helping to narrow the trade deficit. This modest rebound suggests that industrial sectors may be showing signs of resilience as supply chains are beginning to stabilize.
While real GDP is projected to remain nearly flat through 2025, a gradual recovery is anticipated in 2026, fuelled by evolving policy priorities, increased technology adoption and strategic public investments.
Upcoming federal budget discussions signal a shift toward operational savings, paired with targeted investments in capacity-building priorities such as trade corridors, housing, defence and digital technologies, including AI. The emphasis is on reallocating resources to initiatives that enhance productivity and attract private capital, rather than expanding broad-based programs.
The impact in 2026 will depend on how effectively these initiatives are executed, prioritized and tracked, particularly as emerging technologies are playing a growing role in driving productivity. This outlook aligns with the latest EY-Parthenon Canadian CEO Outlook Survey, which highlights that Canadian business leaders increasingly view technology disruption and AI integration as essential for future competitiveness and financial performance.
Amid easing price pressures and a softening labour market, the Bank of Canada has lowered its policy rate to 2.5% to stimulate consumer spending and business investment. This move reflects a more supportive monetary approach aimed at supporting household and business activity as inflation moderates. Moving forward, the Bank of Canada is expected to adopt a more cautious approach to future rate decisions, closely monitoring inflation trends and labour market developments.
Household consumption rebounded in Q2, showing resilience in the evolving economic landscape despite sluggish real wage growth. This recovery was accompanied by a rebound in consumer confidence, which had dropped sharply in Q1, suggesting that households are adapting to ongoing economic pressures.
On the business side, sentiment remains subdued, but it’s beginning to stabilize as expectations reset. Canadian CEOs are cautiously optimistic about their outlooks, both domestically and globally, as they navigate geopolitical and market uncertainty. While this uncertainty continues to weigh on hiring and investment plans, revised expectations for moderate growth are contributing to a sense of normalization.
Canada faces economic challenges from trade tensions and slow growth, yet resilience is emerging. Strategic investments, technology adoption and stabilizing sentiment are setting the stage for recovery. Success will depend on how effectively Canada adapts to change and executes on its priorities in a shifting global landscape.
