Weak GDP Data Casts Doubt on Bank of Canada’s Next Rate Move

Canada’s economic outlook has dimmed following a third consecutive monthly decline in GDP, raising questions about whether the Bank of Canada will adjust its interest rate stance in September.

Statistics Canada reported that GDP shrank by 0.1% in June — the third monthly contraction in a row, marking the first such streak since 2022. On a quarterly basis, real GDP fell 0.4% in Q2, or 1.6% on an annualized basis, following a downwardly revised 0.5% gain in the first quarter. Per-capita GDP also declined 0.4% in Q2, after rising 0.4% in the prior quarter.

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TD economist Rishi Sondhi attributed the contraction to a steep drop in exports, which fell 7.5% over the quarter — including a sharp 24.7% plunge in vehicle exports, largely due to U.S. tariffs. “As expected, the economy contracted in the second quarter, as exports were hit by the double blow of weaker U.S. demand and the reversal of front-loaded shipments ahead of tariffs,” he wrote in a note.

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In June alone, goods-producing industries declined by 0.5%, driven by a 1.5% drop in manufacturing activity. Nearly 40% of manufacturers reported being negatively impacted by tariffs, according to Statistics Canada.

Still, some areas of the economy showed resilience. BMO economist Benjamin Reitzes pointed to a 1.1% increase in household spending (4.5% annualized) and a 1.6% rise in residential investment (6.3% annualized) as signs of underlying strength.

Preliminary data for July suggests a slight rebound, with real GDP estimated to have grown by 0.1%.

Uncertainty Surrounds September Rate Decision

The GDP figures have left economists split on what the Bank of Canada will do at its upcoming policy meeting. While the economic softness adds weight to the case for a rate cut, the data was broadly in line with the central bank’s expectations and may not be enough, on its own, to prompt immediate action.

Between ongoing trade tensions, a sluggish export sector, and modest consumer strength, the path forward for Canadian monetary policy remains uncertain as markets await more definitive signals.