Canada’s Real GDP Forecast Remains Unchanged Despite Q2 Contraction

  • While second quarter (Q2 2025) Gross Domestic Product (GDP) data were weaker than expected, Fitch Solutions has maintained its growth forecast for 2025 at 1.4%, with the Q2 data not moving the needle on its outlook. Additionally, the weak Q2 growth figure is expected to have little impact on the Bank of Canada’s (BoC) interest rate calculus, given the strength of the economy. This leaves Fitch’s expectation that the BoC will lower the policy rate by 50bps by year-end 2025 intact.
  • Canada’s real GDP contracted 0.4% quarter over quarter (QoQ) in Q2 2025 for a drop of 1.6% on an annualised basis, falling more than the consensus expectation of a 0.7% contraction. The lacklustre Q2 real GDP print was driven by deteriorating trade dynamics, with exports falling significantly (-7.5%), driven by contractions in both goods (-9.2%) and services (-1.4%) exports. Additionally, business investment fell for a second straight quarter, contracting by 0.6% on the back of heightened business and trade uncertainty, with a notable drop in machinery and equipment investment, which fell 9.4%.
  • However, the downbeat headline growth figure masks a more resilient domestic economy. Final domestic demand grew by 0.9% in Q2, recovering from a weak -0.2% in Q1 and driven primarily by strong household consumption growth. Additionally, residential investment grew by 1.5% in Q2, up from -3.2% in Q1, contributing 0.12pp to the headline growth rate and offsetting the weakness seen in business investment that subtracted 0.11pp from the Q2 figure.
  • Looking ahead, while a trade deal with the United States (U.S.) remains elusive, uncertainty in the trade relationship will continue to ebb, with Canada removing many of its reciprocal tariffs on U.S. goods and existing U.S. tariffs on Canadian goods only applying to a small subset of non-USMCA-compliant goods.
  • Finally, with Fitch expecting both looser fiscal and monetary policy through the end of the year, the agency remains relatively upbeat that the Q2 contraction will be followed by steady, albeit uninspiring, growth. Of note, advance estimates of July’s growth figure show a 0.1% increase, with wholesale trade, real estate, and mining showing signs of strength, underpinning Fitch’s expectation of modest, but positive, growth in the second half of 2025 (H2 2025).

(Source: BMI, a Fitch Solutions Company)