Canada’s Economy & Fall Inetrest Rates

Canada's economy is showing signs of slowing down. According to the latest data from Statistics Canada, real gross domestic product (GDP) fell by 0.1% in June, marking the third straight monthly decline — the first such streak since 2022. In the second quarter, real GDP contracted by 0.4% (or –1.6% annualized), following a revised 0.5% gain in Q1. On a per-capita basis, GDP declined by 0.4% in Q2, after rising by the same amount in the previous quarter.

This economic softness was largely driven by external factors. Exports fell 7.5% in the second quarter, led by a massive 24.7% plunge in vehicle shipments, a consequence of retaliatory U.S. tariffs. Goods-producing industries shrank by 0.5% in June, with 40% of manufacturers reporting negative impacts from tariffs.

TD economist Rishi Sondhi noted that the contraction was expected, largely due to weaker U.S. demand and the fading impact of a tariff-driven export surge earlier in the year. He also emphasized that despite the contraction, domestic demand remained stronger than anticipated, potentially giving the Bank of Canada reason to hold interest rates steady in the short term. However, he added that the slack created in the economy during Q2 could increase downward pressure on inflation, and if that trend continues into Q3, it could justify further rate cuts before year-end.

CIBC economist Andrew Grantham was more definitive in his outlook. He expects the Bank of Canada to cut rates at its next meeting on September 17 and sees further easing as necessary to support the recovery. Assuming upcoming employment and inflation data don’t bring any major surprises, Grantham forecasts that rate cuts will begin this month.

Markets appear to be cautiously aligned with that view. There’s currently a 55% probability priced in for a September rate cut, with at least one cut fully expected by the end of the year.

Despite the broader contraction, the GDP report wasn’t all bad news. Household spending rose by 1.1% in Q2 (4.5% annualized), and residential investment climbed 1.6% (6.3% annualized), suggesting that Canadian consumers and housing are still providing some economic support. Furthermore, early estimates suggest that GDP grew by 0.1% in July, indicating that a Q3 rebound is possible.

Overall, while the economy is under pressure, particularly from external trade and tariff issues, domestic resilience and easing inflation could give the Bank of Canada more room to maneuver. Whether that translates to a rate cut in September will depend heavily on the next round of data. For now, the economic picture remains mixed — but the door to lower interest rates is clearly open.

Details courtesy of : https://www.canadianmortgagetrends.com/2025/08/gdp-contraction-clouds-outlook-for-bank-of-canadas-september-rate-decision/