While goods exports had been expected to drag down GDP in the second quarter due to tariff tensions, the overall performance was on the weaker side of market expectations with an annualized GDP contraction of 1.6 percent (1.575 percent unrounded), following a 2.0 percent growth in the first quarter.

On a quarterly basis, the GDP fell 0.4 percent in the second quarter after rising 0.5 percent the previous quarter, with exports of goods and services plunging 7.5 percent after rising 1.4 percent

On a per-capita basis, real GDP was down 0.4 percent in the second quarter, reversing the previous quarter's increase.

Exports of goods and services collapsed at an annualized rate of 26.8 percent, trimming GDP by 9.790 percentage points. The decline was led by goods exports. With counter-tariffs also implemented by Canada, imports were down at an annual rate of 5.1 percent.

Both import and export prices decreased as businesses likely absorbed part of the additional tariff costs by lowering prices, the report showed.

Business investment in machinery and equipment also dragged down Canada's GDP, trimming the annual rate by 1.217 percentage points. Overall business investment in non-residential structures, machinery and equipment fell at an annual rate of 10.1 percent (down 2.6 percent on the quarter).

Overall business investment was down 0.6 percent on the quarter, for an annualized retreat of 2.4 percent that trimmed GDP by 0.446 percentage points.

By contrast, household consumption growth accelerated to an annual pace of 4.5 percent after rising 0.5 percent in the first quarter, contributing 2.366 percentage points to GDP.

On a quarterly basis, household consumption was up 1.1 percent after edging up 0.1 percent in the first quarter. Similarly, per capita household consumption increased 1.1 percent on the quarter after being flat. However, the improvement didn't necessarily reflect stronger activity given the slower population growth.

Overall, today's report of a 1.6 percent GDP contraction is in line with the Bank of Canada's reading of the economy. Under its current scenario based on tariffs already in place, the central bank had expected GDP to contract 1.5 percent in the second quarter due to lower exports. Importantly, as the central bank watches the extent to which tariffs and the related uncertainty impact household consumption, the resilience of consumers should be a relief, limiting the odds of a rate cut.

That being said, wage growth slowed to 0.2 percent in the second quarter, the smallest increase since the second quarter of 2026, excluding the pandemic-induced decline in 2020.

Business inventories accumulated at a faster pace in the second quarter, led by manufacturing and wholesale trade industries, as well as acquisitions of gold and other precious metals by investors. Investment in inventories contributed 3.205 points to the annual GDP.

Also contributing positively was a 6.3 percent growth in annualized residential investment (1.5 percent quarterly), driven by new construction, adding 0.457 points to GDP.

Government spending increased at an annual rate of 5.1 percent in the second quarter after decline 0.4 percent.

Overtall final consumption expenditure was up 4.6 percent (1.1 percent on a quarterly basis).

Tariff angst whacked Canada’s economy in Q2 with net exports and Capex suffering while consumer spending fared relatively well. The consensus sees a decline of 0.4 percent at an annual rate. The Bank of Canada was looking for minus 1.5 percent.

Gross domestic product (GDP) is the broadest measure of aggregate economic activity and encompasses every sector of the economy. There is no quarterly flash estimate and the first report is typically not issued until around the end of the second month after the reference period. This has the advantage of limiting the size of any future revision and also accommodates the inclusion of the GDP expenditure components.

GDP is the all-inclusive measure of economic activity. Investors need to closely track the economy because it usually dictates how investments will perform. Stock market Investors like to see healthy economic growth because robust business activity translates to higher corporate profits. The GDP report contains a treasure-trove of information which not only paints an image of the overall economy, but tells investors about important trends within the big picture. Unlike the U.S., Canada produces only one estimate per quarter once full data are available for all components. Most production reports that lead to Canadian GDP are released before the official GDP number. Therefore, actual GDP figures usually confirm expectations. However, an unexpected release can move markets due to the significance of the figure.

GDP components such as consumer spending, business and residential investment, and price (inflation) indexes illuminate the economy's undercurrents, which can translate to investment opportunities and guidance in managing a portfolio.

Each financial market reacts differently to GDP data because of their focus. For example, equity market participants cheer healthy economic growth because it improves the corporate profit outlook while weak growth generally means anemic earnings. Equities generally drop on disappointing growth and climb on good growth prospects.

Bond or fixed income markets are contrarians. They prefer weak growth so that there is less of a chance of higher central bank interest rates and inflation. When GDP growth is poor or negative it indicates anemic or negative economic activity. Bond prices will rise and interest rates will fall. When growth is positive and good, interest rates will be higher and bond prices lower.

Robust GDP growth signals a heightened level of economic activity and often a higher demand for the domestic currency. At the same time, economic expansion raises concerns about inflationary pressures which may prompt monetary authorities to increase interest rates. Thus positive GDP readings are generally bullish for the Canadian dollar, while negative readings are generally bearish.