The Weekly Bottom Line
Our summary of recent economic events and what to expect in the weeks ahead.
Date Published: August 1, 2025
- Category:
- Canada
Canadian Highlights
- The Bank of Canada held their policy rate at 2.75% for the third consecutive announcement, citing uncertainty, inflation pressures and economic resilience (outside of trade exposed sectors).
- Monthly, industry-based GDP data released this week implies a flat Q2 print for this measure of GDP. The BoC is projecting a 1.5% contraction in expenditure-based GDP. These two measures of output can diverge by a lot, but the message was that Q2 was weak for the economy.
- President Trump raised the tariff rate on goods not in compliance with the CUSMA trade agreement 10 percentage points to 35%. However, most Canadian exports comply with CUSMA and are therefore tariff free.
U.S. Highlights
- The U.S. economy bounced back in Q2 with 3.0% annualized growth, following a contraction in Q1. Smoothing through volatility, growth was 2% through the first half of the year.
- Payrolls added a modest 73k jobs in July, but sharp negative revisions to the prior two months showed that the labor market has been at a near-standstill since April.
- As expected, the Fed held rates steady. Meanwhile, President Trump signed an executive order increasing tariffs on virtually all U.S. trading partners.
This week featured plenty of fireworks for investors ahead of the long weekend. Both the U.S. and Canada had central bank decisions, and a Canadian GDP report rolled out. Friday was also the U.S. administration-imposed deadline for a Canada/U.S. trade deal, although no agreement has been struck yet. President Trump followed through with this threat to raise the tariff rate on U.S.-bound Canadian exports that are not compliant with the CUSMA free trade agreement to 35% from 25%. However, with most Canadian exports compliant with the agreement (and therefore entering the U.S. tariff free) perhaps Canada can afford to be a bit more patient to strike the right deal.
When (and if) a U.S.-Canada trade deal does materialize, the hope is it removes some of the uncertainty hanging over the heads of businesses and households. The Canadian economy is clearly suffering from this uncertainty, along with the direct impact of the tariffs on export costs (see report). However, this week’s GDP report did offer a reprieve from this narrative, with some industries closely tied to the U.S., such as manufacturing, seeing some bounce back after a rough April (Chart 1). Overall, however, GDP dipped 0.1% month-on-month (m/m), weighed on by mining, oil and gas.
The economy appears to have had a better month in June, with Statcan’s preliminary estimate flagging a 0.1% (m/m) gain. With this estimate in hand, industry-based GDP was flat in the second quarter. While weak, this would imply a better showing than the 1.5% annualized contraction that the Bank of Canada (BoC) expected in their latest Monetary Policy Report (released accompanying their interest rate decision this week). However, the output measure that the Bank forecasts is expenditure-based GDP. This is different than the monthly, industry-based data released this week. And, the expenditure-based measure of Canadian output has, at times, been much weaker than the industry-based one. Notably, both measures should drive home the message that Q2 was soft for the economy.
Despite the Bank’s expectation that Canada’s economy contracted in the second quarter, it held the policy rate unchanged at 2.75% this week. The Bank cited pressures on core inflation, and resilience in parts of the economy not directly tied to the trade war as reasons to wait and see. Instead of a baseline forecast, policymakers opted to (again) present a scenario-based analysis of what could happen under different tariff assumptions, including the current tariff regime, and scenarios where the trade war is escalated or de-escalated. From our view, a plausible outcome for the economy could fall between the current tariff and escalation scenarios, both of which see inflation contained while GDP recovers (Chart 2). Against this backdrop, we think the BoC has room for additional easing to help support a recovery, especially given excess supply in the economy, and a policy rate only at the midpoint of what the BoC considers neutral. The BoC itself noted the potential for additional easing in the statement accompanying its decision, conditional on inflation being contained.
Rishi Sondhi, Economist | 416-983-8806
Some weeks are quiet, and some weeks it’s everything, everywhere, all at once. This past week the U.S. economic calendar was already full, with a flurry of last-minute trade announcements and new tariffs added on top. Equity markets declined on Friday, following the tariffs announcement and a weak jobs report.
Things started off on a decent footing earlier in a week, with the GDP report showing that the U.S. economy grew by 3.0% (annualized) in Q2 after contracting 0.5% in the previous quarter. Still, this quarter-to-quarter volatility reflects the surge and then reversal in imports as companies rushed to ship ahead of tariffs. Smoothing though the volatility, growth was 2.0% over the first half of 2025, a step down from the 2.5% in the second half of 2024. Excluding trade, inventories, and government spending, core domestic demand—measured by sales to private domestic purchasers—rose just 1.2% in Q2, the slowest pace in 2.5 years.
Consumer spending remained modest at 1.4% annualized. That is up from Q1’s weak 0.5% pace, but compared to last year, spending has clearly slowed amid rising uncertainty. Monthly data showed a soft end to the quarter, with real spending up just 0.1% in June following a 0.2% decline in May. Services spending has stayed sluggish for three straight months.
Consumer spending is likely to stay weak through the second half of the year. Core goods prices are rising again (Chart 1), and inflation pressures are expected to build, particularly considering the latest tariff announcements. The 10% universal tariff remains in place for countries with the trade deficit with the U.S., but countries with a trade surplus now face rates of 15% or more. Tariffs on non-USMCA compliant imports from Canada have been raised from 25% to 35%. Mexico got a 90-day extension, while a deal with China remains pending ahead of an August 12th deadline.
On top of rising prices, the labor market is expected to weaken. Indeed, Friday’s payroll report was a reminder of how if things seem too good to be true, they usually are. After substantial downward revisions to the prior months’ numbers, job growth has slowed more sharply that previously reported. Payrolls were virtually flat in May and June, and only rebounded modestly in July (Chart 2). At the current pace, job growth will not be enough to prevent the unemployment rate from increasing, leaving consumer fundamentals more fragile.
While this week’s FOMC meeting was largely as expected with the FOMC leaving rates steady, changes are in the air. Two of the board members – Bowman and Waller – dissented in support of a rate cut. It increasingly looks like they will be joined by others in September. Stability in the labor market has been a major factor keeping the Fed on the sidelines through this year. But with that narrative now shattered, the prospect of a September cut is looking increasingly likely. Following this morning’s release, Fed futures have priced in an 80% probability of a September cut, up from the near coin toss priced prior to this morning’s release.
Disclaimer
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