A fragile reprieve: Canada’s trade data in early Q3 confirms “stabilization”
Trade data analysis
In early Q3, Canada caught a welcome, though fragile, breath of economic stabilization. According to RBC, the country’s trade deficit narrowed substantially in July, helped by a modest rebound in exports to the United States and a slower pace of imports. While goods exports remained nearly 5 percent below last year’s levels, they ticked up 0.9 percent from June, driven by a 5 percent surge in U.S.-bound shipments. At the same time, exports to the rest of the world fell 8.6 percent. Although far from robust, these dynamics suggest that the steep dent in Q2 GDP from trade may not be repeated in Q3.
There is a glimmer of structural resilience beneath the surface. Nearly 88 percent of Canadian exports to the U.S. entered duty-free in July, thanks to strengthened compliance with CUSMA, even as overall U.S. tariffs edged upward. This low relative tariff rate gives Canada a foothold of protection that few major trading partners enjoy. Yet, sector vulnerabilities persist. Steel and aluminum exports remain deeply hurt by targeted tariffs, down nearly 50 percent year-on-year, demonstrating how even a broader trade uptick can leave pockets in peril.
In the Trenches of Labour Markets
This tentative improvement in trade finds its echo in the labour market. The unemployment rate eased from 7.0 percent in May to 6.9 percent in June, buoyed by a substantial 83,000-job increase, the biggest monthly gain since December. Manufacturing employment, long a casualty of spring’s trade disruptions, climbed back by 11,000, then again by 4,000 in July, though overall manufacturing employment remains weaker than a year earlier. Services delivered the lion’s share of new jobs, particularly in retail and wholesale.
Still, the gains remain uneven. Ontario, with its heavy trade exposure, has struggled to regain momentum, and wage growth continues to slow amid persistent slack. Average hourly earnings dipped to 3.2 percent from 3.4 percent. Hiring activity, while improved, reflects the patchwork pattern already visible in other economic indicators: consumer-facing sectors showing resilience, trade-sensitive ones lagging. The Canadian Staffing Journal’s Hiring Index, which has hovered in the mid-fives out of ten, reflects that same reality: a labour market trying to stabilize but still weighed down by uncertainty.
How to read what’s next
On the bright side, Canada’s sustained CUSMA compliance ensures low effective tariffs for the majority of exports, a bulwark during continued policy uncertainty. The narrowing trade deficit and improving labour figures hint that the Q2 GDP contraction, Canada’s sharpest outside the pandemic, might be avoided this quarter.
But vulnerabilities persist. Aluminum and auto exports remain under heavy pressure, with ripple effects for manufacturing hubs and the workers who staff them. Meanwhile, service-sector sentiment has dimmed, with S&P Global’s August PMI showing business activity and new export orders slipping, though employment just managed to stay above contraction. These frictions mirror the challenges highlighted in earlier reports on tariffs and inflation: recovery is possible, but fragile.
There are opportunities if trade policy steadies. Stronger U.S. demand could underpin job creation across supply chains, from industrial machinery to logistics and professional services. Consumer resilience, reflected in rising automotive and machinery imports, offers another channel for domestic hiring and investment. Yet the threats are clear: renewed tariff battles or a downturn in U.S. demand could quickly undo the fragile progress and return Canada to the contractionary path seen earlier this year.
Canada’s early Q3 trade and labour data tell a story of cautious recovery amid enduring fragility. Thanks to CUSMA resilience and a rebound in exports to the United States, the worst of the Q2 shock may be easing. But for workers and businesses, relief is uneven. Hiring momentum is returning in fits and starts, consistent with a hiring index that reflects neither boom nor bust, but a labour market stuck in the middle—hesitant, hopeful, and vulnerable to the winds of global trade.