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And manufacturing activity declined, as it has done in three of the past four months.

The manufacturing sector has taken the brunt of the U.S. tariffs damage.

鈥淭he Canadian economy experienced a significant export shock in the second quarter,鈥� said Andrew DiCapua, principal economist at the Canadian Chamber of Commerce. 鈥淭his hit to growth also showed up in weak investment numbers that confirm that businesses continued to wait for more clarity,鈥� he added, referring to the long-awaited resolution to the Canada-U.S. trade dispute.

But those dismal numbers, offset by surprising strength elsewhere in the economy, might not be sufficient to compel the Bank of Canada (BoC) to lower its policy rate by much from its current 2.75 per cent.

The BoC鈥檚 next rate decision, on Sept. 17, might see some relief for borrowers but not the half-point or bigger cut expected by many mortgage holders and Canadians with credit card balances.

The Canadian economy is proving to be resilient in the face of the tariff threat and by some measures is almost booming.

For instance, consumer spending jumped by 4.5 per cent at an annualized rate in the second quarter, and housing investment surged by 6.3 per cent.

Those are huge increases in the domestic economy, which accounts for the greatest share of total GDP.

The drop in second-quarter exports was anticipated after companies aggressively built up inventories in the first quarter to get ahead of the tariffs.

But the wider economy has continued to perform well.

Home sales have increased for three straight months. And housing starts have risen in each of the past four months, a strong signal of economic vitality as well as progress in easing the housing shortage.

RBC Economics says the loss of 41,000 jobs in July means 鈥渢he bulk of tariff-related damage could already be done.鈥� .

in the second quarter 鈥渢han the headline GDP reading would suggest,鈥� Scotiabank economist Derek Holt said in an Aug. 29 report. 鈥淕DP is being wildly distorted by tariff front-running and unwinding effects in trade and inventory numbers.鈥澛�

And the full positive impact of interest rate cuts, which began less than 14 months ago, has yet to be felt. There is a 12- to 24-month lag for changes in monetary policy to affect consumer and business decision making.

Holt believes 鈥渢he biggest risk to Canadian exports is whether U.S. growth proves to be resilient鈥� rather than tariffs.

There is reason for concern on that front. U.S. consumer spending, the largest component of the economy, has been tepid so far this year.

It grew by just 0.5 per cent in the first quarter and 1.6 per cent in the second quarter. It is projected to increase by only 1.3 per cent in the third quarter.

Inflation continues to run higher in the U.S. than in Canada, putting pressure on the U.S. Federal Reserve Board to maintain a higher policy rate than the Bank of Canada, at a range of 4.25 per cent to 4.5 per cent.

The U.S. inflation rate was 2.7 per cent in July, compared with the Canadian rate of 1.7 per cent that month.

Much depends on U.S. President Donald Trump, of course.

He could succeed in聽his efforts to force the Fed to lower its policy rate. That would cause America鈥檚 central bank to lose its credibility. But it might spur higher consumer spending and business investment.

Trump鈥檚 tariff regime has already raised prices in the U.S., accounting in part for the stubbornly high U.S. inflation rate.

That has lowered U.S. growth forecasts for this year and next.

鈥淭ariff-induced (U.S.) cost pressures, persistent policy uncertainty, severely curtailed immigration and elevated interest rates are collectively dampening employment, business investment and household consumption,鈥� said Gregory Daco, chief economist at Ernst & Young, in a recent report.

His report forecasts weak U.S. real GDP growth of 1.5 per cent in 2025 and 1.4 per cent in 2026.

The Carney government has lifted most of Canada鈥檚 counter-tariffs on U.S. imports, removing a source of inflationary pressure in Canada.

That, in turn, enables the bank to lower its policy rate by a greater amount when it feels inflation is quiescent than would otherwise be the case.

But for now, deep bank cuts will have to wait a bit longer than borrowers would like.

The hoped-for reward is a resumption of strong economic growth coming out of the current slump, this time without the high inflation and supply chain disruptions caused by the economic boom of 2022-23.