Our country faces a decisive moment, a moment that requires strength and courage to overcome economic challenges while preserving national unity.
Canada’s most recent GDP report makes for some sobering reading. Canada’s economy contracted by 0.4% in the second quarter of 2025, a significant shift from the 0.5% growth recorded in the first quarter of the year. Per capita GDP gains from Q1 (0.4%) were reversed, as per capita GDP fell 0.4% in Q2.
Tariff toll
The decline in Canada’s GDP was driven largely by tariffs imposed by the United States. While much of Canada’s trade with the U.S. remains tariff-free due to CUSMA, tariff-exposed sectors like autos are taking a hit. Canada’s exports of passenger cars and light trucks fell 24.7% in Q2, while other areas linked to tariff-exposed sectors like steel and aluminum also saw negative effects. Canadian exports of industrial machinery, equipment, and parts dropped 18.5%, while travel services dropped 11.1%.
Chaos & long-term planning
The chaotic trade posture of the United States and Canada’s significant exposure to that chaos make long-term planning difficult for many Canadian businesses. After all, a large portion of Trump’s tariffs have been struck down by a U.S. appeals court, but can remain in place until mid-October, by which time the case will likely be in the U.S. Supreme Court. Businesses thus have to plan for an ever-shifting set of tariffs while trying to eat some of the costs to avoid losing customers.
And there’s no sign of the chaos letting up. Following the U.S. removal of the ‘de minimis’ exception (in place since 1938) that removed tariffs for packages under $800, roughly 30 U.S. trading partners have halted postal services to the U.S.
Uncertainty is now pervasive. And under those conditions, businesses – and consumers – often pull back from spending and try to save money whenever possible. This may be in the best interest of individual businesses and consumers, but since your spending is someone else’s income and vice versa, it is damaging when too many economic actors shift towards saving rather than spending.
That’s what’s happening in Canada right now when it comes to businesses. Business investment declined 0.6% in Q2, with investment in machinery and equipment dropping 9.4%. As noted by Statistics Canada, investment in machinery and equipment has dropped to its lowest level since the end of 2016, aside from 2020’s pandemic-induced economic downturn.
A few positives
The news wasn’t all bad, with Canadian households showing some resilience. Household spending rose 1.1%, a 1-point increase from the 0.1% gain in Q1. Spending on trucks, vans, and SUVs rose 5.6%, while spending on insurance and financial services, food, and food and beverage services all increased. Household spending also rose 1.1% on a per capita basis. In another bright sign, residential construction rose 1.5%, with new residential construction up 3.7%.
You’ll note that the overall GDP decline and per capita GDP decline match, as do the overall household spending increases and per capita household spending increases. This is a clear indication that Canada’s population growth has declined to near 0%. For years, Canada’s GDP growth was driven entirely by population growth in many quarters, meaning that the standard of living of Canadians was declining even as the population grew.
If reduced population increases remain the norm (which is likely given the Carney Government’s stated support for reduced immigration levels), getting positive GDP growth will need to depend on real productivity gains.
Difficult times ahead
The few bright spots in the latest GDP report cannot mask the fact that Canada is heading into a difficult economic moment. For years, our productivity has lagged, and our dependence on both the volatile price of energy and our deep ties to the U.S. economy has left us dangerously vulnerable.
With the Trump Administration exhibiting unrestrained hostility to the concept of free trade and mutually beneficial economic partnerships, Canada faces significant headwinds. And while Trump’s tariff agenda may be largely struck down by further court rulings (or the current appeals court ruling if the U.S. Supreme Court declines to hear the case), further pretexts will be found, and uncertainty will remain. Further, the tariffs on autos, steel, and aluminum were not impacted by the court ruling and will likely remain in place. As we’ve seen, those tariffs alone can do significant damage to Canada’s economy.
In this context, some will be incentivized to use Canada’s economic challenges as a way to divide our nation. Already, some online influencers are trying to use the tariff-induced damage on the Canadian economy to extoll ‘maga economics,’ as if Trump damaging the economies of U.S. allies is somehow worthy of praise.
Given that economic declines fuel discontent, separatists and annexationists will no doubt try to exacerbate that discontent and try to push for Canada to simply submit to whatever the U.S. demands, along with giving up on our efforts to diversify away from the United States through deeper trade relationships with the European Union and other partners.
Listening to those voices would be a mistake.
Difficulty now, prosperity later
For far too long, Canada has been plagued by short-term thinking. Our research and development spending (one of the best ways to secure long-term prosperity) lags many of our peers as a percentage of our GDP. We’ve coasted on the assumption that our proximity to the U.S. guaranteed prosperity and security. We let our military erode, and – despite many first-class educational institutions and hardworking, ambitious Canadians – failed to develop a good environment for businesses and entrepreneurs to thrive, driving many away. And we failed to take even the easy wins, like free trade within our borders and generating growth through building up our Armed Forces.
This is starting to change.
There is widespread agreement on the need for the elimination of interprovincial trade barriers. The government is taking Canada’s challenges seriously, as indicated by appointing a former oil pipeline CEO to head the Major Projects Office and the decision to headquarter that office in Calgary. Military spending is on the rise. Contentious policies like the consumer carbon tax and capital gains tax hikes have been removed. The oil & gas sector is now being treated like the asset it is, rather than as a controversial burden. There is even a focus on positioning Canada to make the most out of artificial intelligence.
The challenge is that there is a gap between the moment when problems are addressed and when the benefits from addressing those problems start to become apparent. We’re in that gap right now.
Thus, in the short term, we are going to feel all the pain of U.S. tariffs, without feeling the benefits of establishing new trade relationships, investing in major projects, building up the military, freeing up interprovincial trade, and more. And that will lead many to feel that nothing is being done, and that Canada is therefore destined for decline.
That sentiment will provide fertile ground for bad-faith actors who want to undermine our confidence and our belief in ourselves as Canadians. Those bad-faith actors will want us to give up on the important steps we are taking right now, steps that, if continued, would help build and strengthen Canadian sovereignty and prosperity in the medium to long term.
This is not to say the government should be exempt from criticism. In fact, a tough opposition is needed to keep the government accountable. The combination of an aggressive Opposition Leader and a pragmatic Prime Minister could lead to a more rapid addressing of national challenges. The key, however, is for criticism to be made in good faith, in the service of building Canada up, rather than trying to tear it down.
Canada is worth fighting for
At moments like this, we must reaffirm that Canada is worth fighting for. We will not allow our nation to be torn apart by internal division or external narratives that seek to divide us. We will not allow tariff-induced economic pain to dissuade us from taking the necessary steps to strengthen our sovereignty and build ties with like-minded trading partners. And we will not allow difficult moments to turn us against our values of openness and support for mutually beneficial exchange.
This is a tough moment, filled with uncertainty and doubt. But those who built our country, and those who built lives here after fleeing poverty and oppression, faced far worse, and had the strength and courage to overcome their circumstances and forge Canada into a free, prosperous, and welcoming nation.
We can do the same.
Spencer Fernando
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