Quarterly Economic and Trade Report: 2025 -Quarter 2

ISSN 2819-4063
September 2025

Highlights

• The U.S. announced sweeping tariffs in early April, including reciprocal and product-specific tariffs, which sparked counter-tariff announcements by a number of U.S. trade partners. These actions led to unprecedented uncertainty and rapid re-orientation of global trade.
• Despite these challenges, global GDP managed to grow 2.7% in Q2 (annualized). Much of the growth was driven by the U.S., supported by a reduction in their imports and strong consumer spending.
• Canada felt the pain of restrictive trade policies and the accompanying uncertainty in Q2, given its strong economic links to the U.S. The Canadian economy contracted 1.6% in Q2 following a 2.0% increase in Q1 when American companies stockpiled Canadian goods in advance of the potential tariffs.
• Canada’s exports of goods and services declined by 10.6% in Q2. Decreases were found across most goods categories and travel services, primarily due to an 18.7% drop in exports to the U.S. Meanwhile, exports of goods and services to non-U.S. destinations surged by 14.7%, but this increase was not enough to offset the decline in the value of exports to the U.S.
• While the outlook is marred with uncertainty, forecasters are anticipating some relative economic stability following the turmoil of the first half of 2025. They expect global GDP to expand 3.0% this year, and Canada’s GDP to expand 1.3%, as exports stabilize (at a lower level of activity) and household spending strengthens.

Table 1: Highlights - Second Quarter 2025

Global trade decelerates after strong growth in Q1

At the start of Q2, the U.S. announced unprecedented reciprocal tariffs affecting many countries worldwide, ranging from 10% to 49%. Although implementation was delayed until August, the announcements created uncertainty as this policy would have raised effective tariff rates beyond those seen during the Smoot-Hawley era of the 1930s, potentially triggering a global trade crisis. In response, many major countries and trade blocs announced counter-tariffs (e.g. EU, China, Canada and others). By the end of the quarter, there was more stability, with a few deals signed, and some tariffs removed, reduced or paused.

Although a full-blown crisis was ultimately avoided, the tariffs and the resulting uncertainty caused significant disruptions to the global trading system. Amid the U.S. tariffs and retaliatory measures, global trade volume growth slowed significantly to just 0.5% in Q2. As a result, many countries by diversified their trade relationships away from the U.S.

U.S. import volumes fell 18.1% in Q2, after a Q1 surge when companies front-loaded their purchases to avoid the tariffs. Trade picked up in other regions, especially among those with diversified partners. China’s export volumes rose 2.3%, driven by increased shipments to Hong Kong, Taiwan, Vietnam, and Singapore despite lower U.S. demand. U.S. export volumes also grew 2.7% in Q2, one of the strongest expansions since 2023, with exports destined mainly to E.U. countries, the UK, Japan and India.

World industrial production volumes increased by 0.6% in Q2, marking a tenth consecutive quarter of growth, driven by emerging economies (0.9%). In contrast, industrial production in advanced economies grew by only 0.3%, with declines observed in the euro area and the UK.

Figure 1: World merchandise trade and industrial production volume (Index 2021 Q1 = 100)

Advanced economies drove modest global growth in Q2 amid emerging market slowdowns

The elevated uncertainty due to the introduction of the U.S. tariffs affected all corners of the globe. Despite the turbulence, global GDP grew by 2.7% (annualized) in Q2, slightly faster than the 2.6% growth experienced in Q1. Advanced economies picked up the pace, expanding 1.8% in Q2 (up from 0.8% in Q1), led by strong U.S. performance. In contrast, emerging market growth continued to decelerate, reaching 3.9% in Q2, following 5.0% growth in Q1.

U.S. real GDP grew 3.3% in Q2, rebounding from a Q1 contraction of 0.5%. Growth was driven by a sharp drop in imports (after a rise in Q1) and stronger consumer spending. U.S. tariffs led firms to frontload imports in Q1, resulting in a sharp drop in Q2 as companies drew down their inventories. As a result, trade activity in the first half of the year was driven more by tariff-related distortions than by underlying economic factors.

The UK also experienced faster growth in Q2 (1.4%), driven by gains in services, manufacturing, and construction output. In contrast, Euro Zone growth slowed to 0.4% in Q2 from 2.3% in Q1, partly due to contractions in Italy (-0.3%) and Germany (-0.4%) following frontloaded exports to the U.S. France’s economy rebounded, growing 1.2%, driven by inventory buildup despite weak exports.

In Q2, several emerging markets showed signs of slowing growth, partly due to trade disruptions linked to U.S. tariffs. China’s GDP growth moderated to 4.1%, down from 6.2% in Q1, despite some tariffs easing with the U.S. in May. While net exports to non-U.S. markets continued to support activity, domestic private demand remained subdued. India also saw a sharp deceleration, with growth falling to 3.5% from 9.8% in the previous quarter, reflecting weaker external demand and fading momentum in domestic consumption.

Figure 2: Real GDP growth, top economies (quarterly % change, annualized)

The global economy is forecast to show resilience in 2025 amid uncertainty

The IMF projects global GDP growth to only reach 3.0% in 2025, compared to 3.3% in 2024 and 3.5% in 2023, facing much uncertainty, instability and challenges.

The concentration of import activity in the first quarter is expected to reduce demand in later quarters. As a result, a trade correction is likely to begin in the second half of the year and continue into 2026, as elevated inventories and softer demand weigh on trade flows. This correction reflects a normalization following earlier frontloading, leading to weaker trade growth ahead. Although front-loading in international trade provided an early boost, current growth in 2025 is being supported by declining global inflation and improved financial conditions. Forecasted growth in advanced economies is expected to be primarily driven by the U.S., with the IMF forecasting real GDP growth of 1.9% in 2025.

Several emerging markets and developing economies will be key contributors to global growth. China is forecast to grow 4.8% in 2025, supported by strong exports and consumption, and India’s economy is forecast to expand 6.4%. However, the global economy continues to face significant risks, including the potential for rising tariff rates, ongoing geopolitical tensions, and widening fiscal deficits. These factors could lead to higher interest rates and tighter financial conditions worldwide.

GDP growth in advanced economies is projected to pick up slightly in 2026, supported by improved financial conditions and fiscal expansion in major jurisdictions. However, this is not expected to be the case for many emerging markets, which may struggle to stimulate growth due to limited fiscal and monetary policy space.

Figure 3: Global forecasted GDP growth (annual % change)

Uncertainty starts to impact Canadian economy in Q2

Real Canadian GDP declined by 1.6% (annualized) in Q2, marking the first quarterly contraction since Q3 of 2023. The decline was driven by sharp drops in goods exports to the U.S. following a large increase in Q1. A decline in business investment in machinery and equipment, which fell to its slowest pace since late 2016 (excluding the pandemic period) also contributed to the Q2 GDP decline. The overall contraction was slightly offset by increased household consumption, higher inventory accumulation, and lower goods imports.

Goods exports fell sharply (-9.4%) as tariffs slowed trade with the U.S., while goods imports also fell by 1.5% in Q2. Canada's counter-tariff measures on U.S. goods potentially played a role, as well as lower services imports due to reduced travel by Canadian residents to the U.S.

In the second quarter, inventory accumulation among non-farm businesses accelerated significantly (3.2%), reaching a level nearly 3 times higher than in the previous quarter. This acceleration was primarily driven by increased stockpiling in manufacturing and wholesale trade and acquisitions of gold and other precious metals.

After a Q1 slowdown, household spending rose 2.4% in Q2, led by purchases of vehicles, insurance, financial services, food, and dining out, partially offset by lower spending on electricity and alcohol. Government spending also increased by 1.1%, following its first quarterly decline since 2023.

Employment rose by 99,300 in Q2, driven by gains in service-producing sectors such as retail, finance, real estate, and culture and recreation, while manufacturing declined. Meanwhile, unemployment increased by 43,700, mainly among youth aged 15 to 24. As a result, the overall unemployment rate rose to 6.9%, up from 6.6% in Q1, with youth unemployment jumping 0.8 percentage points to 14.2%.

Figure 4: Real Canadian GDP growth (quarterly % change, annualized)

Q2 GDP decline marked by weakness in goods-producing industries

On a sectoral basis, GDP in goods-producing industries declined by 1.2% in Q2, reflecting the impact of tariff-related disruptions. This followed a rise in Q1, when demand surged as businesses stockpiled in anticipation of trade restrictions. In contrast, services industries slightly increased by 0.2% in Q2.

Utilities declined the fastest in Q2 (-3.5%), driven by a $1.4 billion drop in electric power generation, transmission and distribution, as worsening drought conditions limited hydroelectric production. Manufacturing recorded the largest decline in value terms, falling by $4.3 billion (-2.1%), as two-fifths of manufacturers reported being impacted by tariffs in June (Monthly Survey of Manufacturing, June 2025). This was driven by a $1.1 billion drop in petroleum and coal product manufacturing (-8.0%), $583 million in wood product manufacturing (-5.5%), and $538 million in transportation equipment manufacturing, which includes autos (-1.9%). The wholesale trade industry also declined 1.9%, with most sub-sectors affected.

The fastest expansion was in arts, entertainment and recreation (2.3%), as five Canadian NHL teams qualified for the playoffs for the first time since 2017, and in food services and accommodation (1.2%). The largest increases in value terms were in finance and insurance (0.9% or $1.5 billion), public administration (0.8% or $1.3 billion), and retail trade (0.8% or $929 million). However, these gains were not enough to offset the overall decline.

Figure 5: Canada’s GDP* at basic prices by industry for Q2 (Quarterly % change)

Trade of goods edged down in most product categories

Exports and imports of goods and services fell by 10.8% and 3.5% respectively in Q2, following the Q1 rise. As mentioned, the Q2 decline reflects a pullback from unusually high activity, and both exports and imports still remained higher overall in the first half of 2025 compared to the first half of 2024.

Goods exports dropped 13.1% in Q2, reaching their lowest level since late 2021, mainly due to a 9.7% decline in volumes and a 3.5% fall in prices. All categories declined except metal ores and non-metallic minerals. Energy exports fell 20.7%, driven by a 16.3% drop in prices. Motor vehicles and parts decreased by $4.3 billion (16.6%) to $21.8 billion, their lowest since late 2022, coinciding with U.S. tariffs.

Service exports declined 1.2% in Q2, mainly due to a 10.0% drop in travel services (which includes foreign students studying in Canada as well as tourism) after a 6.0% increase in Q1. Government services also fell 1.2%, while transport rose 2.0% and commercial services 3.3%. However, these gains were not enough to offset the overall decline.

Goods imports fell 4.0% in Q2 after rising 4.2% in Q1. Most categories declined, except metal products, boosted by a $2.7 billion import of unwrought precious metals in April, and metal ores. The largest drop was in motor vehicles and parts, down 12.1% to a 2-year low, possibly linked to Canada’s tariff response to U.S. tariffs on vehicles.

Service imports declined by 1.9% in Q2 compared to the previous quarter, mainly due to a continued drop in travel services, which fell by 9.9 as Canadian residents travelled less to the U.S. and reduced their spending. In contrast, the 3 other service categories recorded growth.

Figure 6: Canada’s international trade by product (Q2 2025, quarterly % change)

U.S. and China drove decline in Q2 exports

Canadian goods exports to the U.S. dropped 21.4% in Q2, reaching levels last seen in Q3 2021. During the first half of 2025, Canada exported 1.7% less goods to the U.S. compared to the same period in 2024.

The export decline in Q2 coincided with the introduction of U.S. tariffs on Canadian products, as well as a sharp appreciation of the Canadian dollar against the U.S. dollar, appreciating by 7 cents (4.9%) from the first of April to the last day of June. The drop in exports was widespread, with significant decreases in consumer goods, energy products, and metal and non-metallic mineral products such as unwrought aluminium and iron and steel.

While goods exports to the U.S. declined in the first half of 2025, this was offset by stronger performance in other markets. In Q2 alone, exports to countries outside the U.S. rose by 14.7%, helping lift total goods exports by 1.9% in the first half of the year compared to the same period in 2024. The most significant export growth in Q2 was to the UK, which rose by 61.3% to reach $13.7 billion—a new record—mainly driven by exports of unwrought gold. Exports to the European Union also contributed to the overall increase, rising by 8.5%, with notable growth to the Netherlands, Germany, Italy, and Spain. In contrast, exports to China declined by 7.0%, partly offsetting the overall increase. This drop was driven by lower exports of canola, due to the introduction of Chinese tariffs on Canadian agricultural exports, as well as reduced exports of copper ore and crude oil. Exports to Japan also fell by 4.0%, mainly due to reduced exports of iron ore.

Canadians shifted their purchases away from the U.S. (with imports dropping 10.2%) towards new markets (with imports expanding 6.2%). Imports from China increased for a third quarter by a notable 9.0%, while imports from the European union increased by 2.5%, mainly by Spain (21.9%). Imports from Mexico also rose significantly (10.1%), driven in part by higher imports of passenger cars and light trucks.

Figure 7: Canada’s goods trade, by major trading partner (Q2 2025, quarterly % change)

Modest declines in services exports and imports in Q2

In Q2, service exports declined across most major markets, while import trends were more varied.

Services exports to the U.S. declined by 3.3% in Q2, following a 3.0% increase in Q1, partly due to reduced spending by U.S. travellers in Canada. Imports of services from the U.S. also fell by 3.2%, as travel services continued to decline, with the number of Canadians visiting the U.S. decreasing for a third consecutive quarter in Q2 (-11.2%).

Services exports outside the U.S. increased by 1.0%, mainly driven by exports to the UK (6.4%). In contrast, exports declined to China (-5.6%) and to India (-2.6%). Exports to the European Union also decreased by 2.0%, largely due to a significant drop in exports to France, which fell by 12.8%. The drop in exports to India coincides with a sharp reduction in the number of Indian students coming to study in Canada, with 37,775 fewer study permits issued in Q2 compared to the same period in 2024, impacting travel services exports.

Services imports from outside of the U.S declined slightly (-0.4%), marking the first decline since Q1 2023. The change in imports varied by region, with a decline from Mexico (-5.6%), while imports increased from the European Union (0.8%), Hong Kong (3.4%), and China (0.8%).

Figure 8: Canada’s services trade, by major trading partner (Q2 2025, quarterly % change)

2025 Canadian economic growth hit by trade, but a rebound is expected

Due to economic uncertainty, the Bank of Canada presented 3 possible scenarios for the economic outlook in its July Monetary Policy Report. In their central scenario, the Bank expects economic activity to pick up in the second half of 2025, following the contraction in Q2. This recovery is expected to be supported by stabilized exports, although they will remain below the pre-tariff levels, and increased household spending. However, slower population growth and weak business investment are expected to weigh on overall economic momentum in the months ahead.

Looking ahead to 2026, the Bank of Canada projects that potential output growth under its central scenario will accelerate, driven largely by stronger gains in labour productivity. However, tariffs have placed economic activity on a persistently lower growth path. While GDP growth is expected to slow to 1.1% in 2026 from 1.3% in 2025, exports are expected to rise modestly in 2026, while Canadians adapt to the evolving trade environment. Import growth and business investment should also strengthen in 2026. Consumption and residential investment are projected to grow at a more moderate pace, constrained by ongoing trade policy uncertainty. The current tariff scenario assumes that existing U.S. tariffs and trade agreements remain in place, with a weighted average U.S. tariff rate of 13% on global imports and continued uncertainty extending into 2026.

The 2 other scenarios presented by the Bank reflect different paths for trade tensions. In a scenario where trade tensions de-escalate, the Bank projects GDP growth of 1.4% in both 2025 and 2026, supported by reduced trade uncertainty. In contrast, under an escalation scenario where trade uncertainty remains elevated, Canadian GDP growth slows to 0.9% in 2025 and contracts in 2026.

Figure 9: Canadian forecasted GDP growth (annual % change)

Table 2: Canadian trade by industry sector ($ millions)

Table 3: Canadian goods trade by trading partner ($ millions)

Table 4: Canadian services trade by trading partner ($ millions)