Our economic outlook for Canada

After months of frozen progress in U.S.-Canada trade negotiations, recent developments suggest a tentative thaw. On September 1, Canada removed its retaliatory tariffs on U.S. goods, a gesture aimed at easing tensions and reopening the door to broader talks. Recognition that the effective tariff rate paid by Canadian exporters remains modest underpinned the gesture. At approximately 6%, this rate is the lowest among major U.S. trading partners. More than 85% of bilateral trade continues to flow tariff-free under provisions of the United States-Mexico-Canada Agreement.

In this context, the steep drop in Canadian exports that resulted in second-quarter GDP contracting by an annualized 1.6% likely reflects a hiatus of foreign purchases following first-quarter tariff frontrunning and will ultimately be short-lived. Domestic consumption remained resilient in the second quarter, but there are signs that households are starting to draw on savings to support consumption in the face of slowing income growth.

The August employment report also disappointed, with the Canadian economy shedding about 66,000 jobs and the unemployment rate rising to 7.1%. We continue to expect a gradual cooling in the labor market through the second half of 2025, with the unemployment rate likely reaching 7.5% by year-end.

At its July meeting, the Bank of Canada (BoC) held its policy rate steady at 2.75%, citing both domestic and global economic resilience as reasons to pause and assess the inflationary implications of evolving trade policy. The removal of retaliatory tariffs should ease the BoC’s inflationary concerns, and the soft August employment report sets the stage for a 25-basis-point cut to the overnight rate target at its next meeting on September 17. We then expect another 25-basis-point cut at either the October or December meeting.