Current conditions

Canadian economic growth has slowed, reflecting the disruptive effects of US tariffs and a decline in population growth. Exports and business investment have slumped. After being close to 2% for several months, CPI inflation was 2.4% in September.

At the onset of the trade conflict, tariffs were expected to reduce exports. Spillovers to the rest of the economy and heightened uncertainty were anticipated to slow growth in private domestic demand. The imposition of Canadian counter-tariffs, the rise in global production costs and the restructuring of supply chains and business operations in Canada were expected to exert upward pressure on inflation. All told, the scope and impact of tariffs and their broader economic effects were highly uncertain. 

With tariffs now in place and US protectionism entrenched, the impact on Canada has become clearer, even as the level and scope of future tariffs remain uncertain. Exports and business investment fell sharply in the second quarter of 2025, and the unemployment rate rose as businesses deferred hiring. Nevertheless, consumption spending proved resilient, buoyed by easing financial conditions.

Consumer price index (CPI) inflation was 2.4% in September, after being close to 2% for several months. The preferred measures of core inflation have been sticky at around 3%, while a broader set of indicators suggest underlying inflation has persisted at around 2½%.

Recent developments in inflation reflect competing forces. On the upside, inflation in shelter prices remains elevated. Moreover, tariffs and the restructuring of global trade and domestic production are pushing costs up. On the downside, excess supply is dampening inflationary pressures. The removal of the carbon tax has also temporarily reduced inflation.

Economic activity

GDP fell in the second quarter as exports slumped

Real gross domestic product (GDP) contracted by 1.6% in the second quarter of 2025, as expected in the July Report (Chart 1). This decline reflects the disruptive effects of US tariffs on exports as well as heightened uncertainty. Rising equity prices and declining borrowing costs helped mitigate the drag on GDP.

Export volumes fell sharply in the second quarter. Trade activity that had been brought forward in previous quarters was reversed, and newly imposed tariffs began to weigh directly on exports. For example, steel and aluminum exports declined by about 25% from a year earlier. Overall, exports were about 5% lower in the second quarter than they were 12 months ago. Business investment also decreased in response to trade developments and elevated uncertainty. The biggest drop was seen in spending on industrial machinery and equipment.

Other components of domestic demand supported GDP in the second quarter. Consumer spending growth picked up, boosted by a spike in motor vehicle purchases. Spending per person was strong, rising by 3.4% (Chart 2). The recent strength in consumption exceeded income growth, pushing the savings rate down from 7.2% in the third quarter of 2024 to 5% in the second quarter of 2025.

Residential investment also increased. Housing starts and housing resales have both increased since the spring, although the strength in activity has been uneven across regions (Chart 3). In some markets, such as Toronto and Vancouver, households continue to face acute affordability challenges.

Weak growth is likely in the second half of 2025

After contracting in the second quarter, GDP growth is estimated to be about 0.75% on average in the second half of the year. Evidence suggests that the impact of the trade conflict is broadening.

Export volumes are expected to have remained weak in the second half of 2025. US tariffs continue to weigh on exports of motor vehicles, steel and aluminum, while new tariffs—such as those on copper, furniture and softwood lumber—are expected to add further strain. Chinese tariffs on canola, peas, pork and seafood are compounding these challenges (Chart 4).

Exports to the United States will be weighed down by tariffs and sluggish growth in industrial demand. Services exports also face pressure because the number of tourists visiting Canada from the United States remains below 2024 levels. Energy exports are estimated to have risen.

Exports to non-US markets are expected to have increased, reflecting businesses’ efforts to diversify into new markets. However, these gains only partially offset weak exports to the United States (Chart 5).

Imports also declined partly because businesses imported fewer inputs needed to produce their goods for export. In addition, fewer Canadians travelled to the United States.

Business investment is estimated to have fallen again in the second half of the year. This partly reflects the effects of ongoing uncertainty related to trade.

Despite lower interest rates, consumption growth will likely be modest, constrained by weak population growth and softness in the labour market. Housing activity is expected to increase further but remain uneven across regions.

Labour market weakness continues

Employment gains in September were strong but followed two months of sizable losses. Overall, employment growth has been weak due to slowing demand and low population growth.

Industries sensitive to trade have been the primary source of weakness in employment growth since the beginning of the year (Chart 7). Layoffs have been reported in the aluminum, steel and auto industries. In other sectors, layoffs remain modest, which can be seen in the low job separation rate. Most businesses surveyed anticipate that their workforce will remain unchanged over the next 12 months, citing ongoing tariff uncertainty, soft demand and minimal capacity pressures.1

At the same time, the decline in population growth means fewer new jobs are needed to keep the employment rate steady (Chart 8). By the end of 2025, it is estimated that fewer than 5,000 jobs will need to be added each month to sustain the employment rate. This compares with an average of 18,000 new jobs needed each month between 2000 and 2019, and more than 60,000 new jobs per month needed in the first half of 2024, when population growth was much higher.

The unemployment rate was 7.1% in both August and September—its highest level since 2016, excluding the pandemic period—and the rate of long-term unemployment has risen.2 Reflecting the soft labour market, wage growth has slowed, with most measures now close to 3% (Chart 9).

Inflation

CPI inflation rose to 2.4% in September as the drag from gasoline prices faded. Inflation excluding indirect taxes was 2.9% (Chart 10).

Inflation in goods excluding energy remains above its historical average at 2.3%, reflecting the strength of past cost pressures and counter-tariffs. Energy prices are dampening overall inflation following the removal of the consumer carbon tax in April, although higher refinery margins have partially offset this. In September, energy inflation was -2.6%.

Inflation in services prices remains close to 3%, supported by strong growth in prices for some shelter components, financial services, fast food and motor vehicle insurance. But inflationary pressures from shelter services prices have been moderating as inflation in mortgage interest costs has continued to ease (Chart 11).

Inflation is expected to drop in October as energy prices decline, reflecting both lower oil prices and reduced refinery margins. Year-over-year inflation is anticipated to rise slightly by January 2026. This is mainly because prices will be compared with those from the same time last year, when the GST/HST holiday temporarily lowered some prices. After January 2026, inflation is projected to dip below 2% due to lower energy prices and the end of the volatility associated with the GST/HST holiday.

Underlying inflation has persisted at close to 2½%

A broad range of indicators continue to suggest that underlying inflation remains close to 2½% (see In focus: Assessing underlying inflation). Most measures of core inflation have been between 2½% and 3¼% in recent months (Chart 12). However, the upward momentum observed earlier in the year seems to have faded, with the three-month rates having edged down. The share of CPI components rising by more than 3% year over year has also declined modestly since its peak in March but remains above its historical average.

Cost pressures are easing but are still a concern (see In focus: Shifts in cost pressures). Several factors have contributed to the moderation in cost pressures. These include:

• the removal of most counter-tariffs on imported goods from the United States
• the easing of labour cost pressures, with growth in unit labour costs for the business sector of around 2% over the past four quarters
• the diminishing impact of past pressures coming from high global shipping costs, severe weather and the depreciation of the Canadian dollar

Businesses surveyed in the third quarter reported modest pressures on their costs, often linked to trade tensions.

After rising slightly in early 2025 due to concerns about tariffs, businesses’ short-term inflation expectations declined in the third quarter and are now only slightly above their levels in late 2024 (Chart 13). Consumers’ short-term inflation expectations have remained broadly unchanged in 2025 and are still above their pre-pandemic averages.

Chart 13: Businesses’ inflation expectations have declined, while consumers’ expectations have been flat

Quarterly and monthly data

Financial conditions

Canadian and US financial conditions have eased since July. Recent signs of weakening economic conditions have led to expectations for additional cuts to policy interest rates and lower yields for both Canadian and US government bonds (Chart 16). The decline in yields and continued strong earnings have supported the ongoing strength of risk assets. Most equity markets are currently trading near all-time highs and above their July levels (Chart 17). Corporate spreads are relatively unchanged and remain below their historical averages.

The Canadian dollar has weakened slightly against the US dollar since July and is currently trading below 72 cents US. However, both currencies have depreciated against several other currencies, partly due to recent signs of softening economic conditions in North America.

The ongoing decline in the US dollar continues the broader trend observed since the beginning of 2025. The US dollar has now depreciated by about 7% against other major currencies since the start of the year and is about 3% weaker against the Canadian dollar.

Endnotes