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The grim GDP numbers are the latest in a string of economic woes hitting the country, from sluggish wage growth and vanishing jobs to a string of insolvencies in the retail sector.

“Simply put, the tariff war with the U.S. was terrible for the Canadian economy,” Royce Mendes, managing director and head of macro strategy at Desjardins, wrote in a note to clients on Friday.Ìý

Earlier in August,ÌýTrump increased tariffsÌýon goods that are not compliant with theÌýCanada–United States–Mexico Agreement (CUSMA) to 35 per cent from 25 per cent. Many Canadian producers, however, comply with the terms of CUSMA and are being spared from those levies.Ìý

Still, “the impact of the trade war and elevated uncertainty on (business) sentiment, capital spending, and hiring will likely continue to build,”ÌýMichael Davenport, senior economist at Oxford Economics, wrote in a statement.Ìý

“We expect the economy will struggle to grow … and teeter on the verge of recession.”Ìý

Economy shrinksÌý

The GDP contraction in the second quarter, which followed a two per cent gainÌýin the first three months of the year, wasÌýthe biggest decline since the pandemic and the first contraction in nearly two years.

That weakness largely came from “significant” declines in goods exports and lower business investment in machines and equipment, Statistics Canada said.Ìý

Exports plummeted 27 per cent on an annualized basis, reflecting the chilling effect of U.S. tariffs on Canadian producers, while imports fell 5.1Ìýper cent in light of retaliatory measures north of the border.

Business investment, meanwhile, contracted 10.1 per cent after rising just 1.1 per cent in the first quarter, reflecting the mounting pessimism of Canadian firms as they dealt with frequent changes to U.S. levies and policy.

Labour market woesÌý

The sobering GDP data follows reports showing Canada’s labour market has cooled significantly over the past year.

There have been no widespread layoffs, but many employers have paused hiring due to uncertainty around the tariffs.Ìý

Wages grew at the slowest pace since 2016 (outside of the pandemic) as the labour marketÌýcontinued to show signs of struggleÌýgoing in to July.Ìý

As incomes weakened, households saved less in the second quarter, Statistics Canada said.Ìý

Last month, the economy lost 41,000 jobs while the unemployment rate remained at 6.9 per cent,Ìýprompting one CIBC economist to say youth unemployment is at aÌýrecessionary level.

“The bleed in the Canadian jobs market for now appears contained to the more trade-exposed sectors and has not been spreading” to other industries, RBC economists said in an emailed note.Ìý

Distressed businessesÌý

Canada’s manufacturing sectorÌýhas been hit hardestÌýby the trade war, but other businesses also appear to be in distress.Ìý

This year saw a wave of Canadian retailers undergoing insolvency proceedings, with manyÌýciting Trump’s tariffs as a factor behind their struggles.Ìý

Montreal-based e-commerce fashionÌýbrand Ssense said it was filing for creditor protection this week as Trump killed a widely-used customs exemption for international shipments.Ìý

Earlier this year, the iconic Hudson’s Bay department store also blamed trade war tensions with the U.S.Ìýas a challenge that eventually led toÌýits demise. In a March statement announcing its restructuring, the retail chain said the “threat and realization of a trade war has created significant market uncertainty” that hampered its ability to secure financing.Ìý

In Vancouver, apparel brandÌýOak + Fort filed forÌýcreditor protection in June, sayingÌýtariffsÌýadded to price pressures that led to a decline in consumer confidence and spending.

To cut or not to cut?Ìý

The GDP drop in the second quarter was slightly worse than the Bank of Canada’s July estimate of minus 1.5 per cent.

In the bank’s ”,” tariffs and trade uncertainty will continue to hurt economic activity.

After declining in the second quarter of 2025, the bank expects GDP to resume growth in the second half of the year as export levels stabilize.Ìý

Desjardins’ Mendes said Friday’s numbers support his prediction that the central bank will resume cutting interest rates in September in a bid to stimulate the economy. The bank has kept its key rate at 2.75 per cent for the last three meetings.

But other economists aren’t so sure.

With consumer spending holding steady, TD Bank economist Rishi Sondhi says the central bank could choose to stand pat on interest rates on Sept. 17.Ìý

“Policymakers still have one more jobs and inflation report to digest before that time,” wrote Sondhi in a note to clients.Ìý

Still, there are reasons for consumers and businesses to be hopeful, said Desjardins economist Mendes.Ìý

“The good news is that trade tensions between Canada and the U.S. have been easing,” Mendes added, citing theÌýdrop in retaliatory tariffs announced by Prime Minister Mark CarneyÌýon Aug. 22. Consumer spending also appears to be rebounding, he noted.Ìý

With files from Bloomberg