TORONTO, Canada, (Statistics Canada) – Real gross domestic product (GDP) declined 0.4 percent in the second quarter of 2025, following a 0.5 percent gain in the first quarter. The contraction in the second quarter was driven by significant declines in the export of goods, as well as decreased business investment in machinery and equipment. These declines were tempered by faster accumulations of business inventories, higher household spending and lower imports of goods.
On a per capita basis, real GDP was down 0.4 percent in the second quarter, after an increase of 0.4 percent in the previous quarter. Final domestic demand, which represents total final consumption expenditures and investment in fixed capital, was up 0.9 percent in the second quarter of 2025, following a decline of 0.2 percent in the first quarter. Increased household and government spending led the rise in final domestic demand in the second quarter.
Significant decline in exports of goods as tariffs slow trade with the United States
Exports declined 7.5 percent in the second quarter of 2025 after increasing 1.4 percent in the first quarter. As a consequence of United States-imposed tariffs, international exports of passenger cars and light trucks plummeted 24.7 percent in the second quarter. Exports of industrial machinery, equipment and parts (-18.5%) and travel services (-11.1%) also declined.
Amid the counter-tariff response by the Canadian government for imports from the United States, international imports declined 1.3 percent in the second quarter, after rising 0.9 percent in the previous quarter. Lower imports of passenger vehicles (-9.2%) and travel services (-8.5%; Canadians travelling abroad) were moderated by higher imports of intermediate metal products (+35.8%), more specifically, by unwrought gold, silver, and platinum group metals.
Export (-3.3%) and import (-2.3%) prices fell in the second quarter, as businesses likely absorbed some of the additional costs of tariffs by lowering prices. Given the larger decline in export prices, the terms of trade—the ratio of the price of exports to the price of imports—fell 1.1 percent.
Business investment in machinery and equipment contracts in face of tariffs
Overall, business investment fell 0.6 percent in the second quarter of 2025, led by much weaker investment in machinery and equipment (-9.4%), as every group recorded declines except computers and computer peripheral equipment. Outside of 2020, the first year of the COVID-19 pandemic, this was the slowest pace of investment in machinery and equipment since the end of 2016.
Business investment in non-residential buildings (-3.3%) also decreased in the second quarter of 2025. Meanwhile, the arrival of a high-value import of a module destined for an oil project off the coast of Newfoundland led to a 3.6 percent increase in engineering structures in the second quarter, bringing overall business non-residential investment to positive growth.
Business non-farm inventories accumulate at faster pace in the second quarter
Business non-farm inventories accumulated at a faster pace in the second quarter (+$30.1 billion) compared with the first quarter (+$10.8 billion). The larger accumulation in the second quarter was led by the manufacturing and wholesale trade industries, as well as by acquisitions of gold and other precious metals by investors. Retail trade industries recorded a slight accumulation of inventories, as withdrawals from inventories of motor vehicles amid shrinking imports dampened the accumulation of other retail durable and non-durable goods.
Household spending
Household spending increased 1.1 percent in the second quarter after rising 0.1percent in the first quarter. Higher expenditures for new trucks, vans and sport utility vehicles (+5.6%) led the overall increase in the second quarter, followed by insurance and financial services (+1.3%), food (+0.9%) and food and beverage services (+0.9%). These increases were tempered by reduced spending on electricity (-3.2%) and alcoholic beverages (-3.9%).
On a per capita basis, household spending increased 1.1 percent in the second quarter, after being flat in the first quarter, as population growth eased.
Residential construction up
Residential investments rose 1.5 percent in the second quarter of 2025, driven by an increase in new construction (+3.7%), as higher work-put-in place and absorptions for apartments, primarily in British Columbia, fuelled growth. Ownership transfer costs, which represent residential resale market activity, rose 1.0 percent in the second quarter, recovering slightly from a large decline (-16.3%) in the first quarter. In contrast, residential renovations declined 1.1 percent in the second quarter.
Gross domestic product deflator flat in the second quarter
The GDP deflator was flat in the second quarter of 2025, following a 0.7 percent increase in the first quarter. The decline in export prices in the second quarter was offset by lower prices for imports and higher prices for household final consumption expenditures, particularly services, as well as for government final consumption expenditures.
Growth in wages slows to lowest rate since 2016, aside from 2020
Compensation of employees edged up 0.2 percent in the second quarter; this was the smallest increase since the second quarter of 2016 (aside from the pandemic-induced decline in 2020). Wages and salaries were up in construction (+1.2%), federal government public administration (+2.5%) and mining and oil and gas extraction (+2.9%). In contrast, wages fell in finance, real estate and company management (-1.1%) and utilities (-6.1%).
Household saving falls as incomes weaken
The household saving rate fell to 5.0 percent in the second quarter of 2025, down from 6.0 percent in the first quarter. Disposable income edged up 0.3 percent in the second quarter, pulled lower by weak growth in salaries and wages, while nominal household consumption expenditures rose 1.2 percent. Overall, household incomes were relatively weak across several components.
Household property income received rose 0.9 percent in the second quarter, as a decline in interest earned on deposits, securities and other assets (-1.8%) was more than offset by increases in foreign investment and in dividend income.
As the Bank of Canada held the policy interest rate steady in the second quarter, household property income payments, comprised of mortgage and non-mortgage interest expenses, edged up 0.1 percent. Mortgage interest paid expanded 0.7 percent , marking the first quarter of growth following three consecutive quarterly declines. Interest paid on consumer credit products, such as personal loans and lines of credit, ticked up 0.1 percent.
Corporate surplus falls as the energy sector lowers incomes
Corporate incomes, as measured by gross operating surplus of corporations, decreased by 1.9 percent in the second quarter, as declines in energy prices and output within the oil and gas sector tempered earnings among non-financial corporations. Income of financial corporations grew in the second quarter, as financial businesses reduced their operating expenses, notably wages and salaries, relative to their output of financial services.
Government net borrowing increases as revenue down following removal of carbon tax
Federal government revenue declined 4.2 percent in the second quarter, as excise taxes fell sharply following the removal of the federal consumer carbon tax on April 1, 2025. Reduced income taxes from households and withholding taxes on non-residents also contributed to the lower overall revenues for the federal government in the second quarter, while increased revenue from import duties moderated some of these declines.
Expenditures for the federal government increased 1.8 percent in the second quarter, led by higher purchases of goods and services and wages within the federal non-defence sector. The initial payment for the Robinson Superior legal settlement, increased employment insurance benefits paid, as well as funds provided to cover the current financial difficulties of Canada Post also contributed to the higher expenditures for the federal government in the second quarter.
The result of the lower revenue and increased expenditures was an acceleration in the net borrowing of the federal government in the second quarter.
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