The trade war took a larger than expected bite out of Canadian gross domestic product in Q2, but data still shows an economy that has weathered recent trade pressures better than feared when uncertainty was most acute in the spring, according to a new report by RBC Economics.
“Trade-sensitive sectors have faced significant challenges. Exports declined sharply in Q2 and manufacturing contracted by an annualized 8%. U.S. imports of steel and aluminum products from Canada targeted with 50% tariffs decreased almost 50% year-over-year in July,” said the report.
“But critically, most Canadian exports continue to cross the border duty-free thanks to CUSMA exemptions, and weakness remains largely contained to directly impacted sectors. Employment in manufacturing and transportation sectors are down 32,000 from the end of 2024, but up 70,000 in other industries.
“Meanwhile, activity outside of tariff-affected sectors has been resilient. Consumer spending jumped 4.5% in Q2 despite low confidence. Our tracking of RBC card transactions pointed to further Q3 growth.
“The unemployment rate reached 7.1% in August—the highest outside the pandemic in nearly a decade—but job openings and improving business confidence suggest hiring demand is stabilizing.
While Canada faces a national shock from its trade relationship with the United States, the provinces are facing differentiated trade shocks that are creating divergences in both growth and growth drivers, explained the report.
“First, the doubling of U.S. tariffs on steel and aluminum to 50%, and newly added tariffs on copper of 50% has prompted further downgrades of our 2025 growth forecasts for: Ontario, Quebec and Manitoba.
“Second, heightened duties on lumber exports—which are compounding existing challenges of investment weakness—implies a lower growth projection for British Columbia as well.
“Third, while all eyes are on U.S. tariffs, Chinese tariffs are also in play. Seafood tariffs had already been incorporated into earlier projections, and therefore haven’t altered the better-than-national average growth outlook for Atlantic provinces. Chinese canola tariffs in effect from August were implemented too late in the 2025 growing season to impact our gross domestic product outlook for the Prairies this year. We will, however, monitor trade negotiations closely as they unfold over the next six months, and may adjust our 2026 forecasts depending on outcomes.”
Mario Toneguzzi
Mario Toneguzzi is Managing Editor of Canada’s Entrepreneur. He has more than 40 years of experience as a daily newspaper writer, columnist, and editor. He was named in 2021 and 2024 as one of the top business journalists in the world by PR News. He was also named by RETHINK to its global list of Top Retail Experts 2024 and 2025.
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