Canada’s economy, buffeted in recent quarters by trade shocks and export weakness, is inching toward a softer but hopeful trajectory for the remainder of 2025. After a rough second quarter marked by steep drops in key trade-sectors, newer data suggest the worst may be behind the country—though growth will likely stay well below what many expect in more buoyant times. Central to the story: while trade-exposed industries are still reeling, Canada’s labour market appears to be stabilizing, setting the stage for less risk of massive layoffs and more balanced recovery ahead.
Fallout from Trade Strains
The economy’s troubles this year have been driven in large part by tariffs on Canadian exports—particularly those targeting steel, aluminum, and related goods. In Q2 manufacturing contracted at an annualized rate of about 8 percent, and exports in tariff-exposed categories plunged sharply. These pressures were intensified by a drop in U.S. demand for key inputs, coupled with weak global commodity prices for certain sectors, especially petroleum.
However, not all is bleak: thanks to exemptions under the Canada-U.S.-Mexico Agreement (CUSMA), many Canadian exports have remained duty-free. Aside from those sectors explicitly targeted by new duties, export volumes elsewhere have held steady or edged upward.
Labour Market: Cracks Soften
One of the more encouraging signs in Canada’s recent economic tableau is what’s not happening: mass layoffs, especially broad-based permanent job losses, are slowing significantly. Though unemployment rose to 7.1 percent in August—its highest level outside pandemic disruptions in nearly a decade—that rise has come largely from people taking longer to find work, including many recent entrants to the labour force and younger jobseekers.
Permanent layoffs are rising at a much more modest rate than in previous years: about 4.7 percent year-over-year in August, compared with much steeper increases in 2023 and early 2024. This suggests that while some sectors remain under pressure, employers are largely avoiding aggressive cuts, and that job destruction is not the dominant story.
Employment in sectors outside manufacturing and transportation has been stronger: while the hardest hit industries have shed roughly 32,000 jobs since end-2024, other sectors have added around 70,000. This divergence underscores how much of the economic drag comes from trade-affected industries, rather than systemic collapse across the board.
What Lies Ahead: Modest Growth, Measured Gains
Looking forward, prospects for the rest of the year (and into 2026) are mixed but tilt toward cautious optimism. Early indicators for Q3 are showing better footing than Q2. Manufacturing sales are rising again, export volumes have turned positive for a third straight month, and consumer spending—tracked via card transactions—continues to surprise on the upside. Even housing markets, which earlier showed signs of cooling, are showing tentative recovery in some regions.
Fiscal stimulus—both federal and provincial—is also expected to help buffer some of the trade shocks, especially where they are most acute. The government’s support packages are increasingly viewed as helping to anchor growth in weaker industries and dampen risk of broader spillovers.
On policy rates, the Bank of Canada does not appear ready to cut interest rates aggressively under the current baseline scenario. That said, the possibility of easing definitely remains on the table.
Risks and Regional Headwinds
Canada’s outlook isn’t free from danger. U.S. policy remains a wildcard: broader tariff escalation would threaten more sectors, particularly those tied closely to U.S. supply chains. Maintaining CUSMA exemptions is central not just for exporters, but for preserving industrial links across the border.
Domestically, provinces are feeling the impacts unevenly. Ontario and Quebec have seen downward revisions in their growth forecasts: Ontario’s 2025 growth outlook has been reduced from about 1.3 percent to around 0.9 percent; Quebec from roughly 1.3 percent to 1.2 percent. British Columbia is also under pressure, especially from newly imposed U.S. lumber duties. Some municipalities in Ontario already face “localized recessions,” particularly those with high concentrations of manufacturing jobs.
Bottom Line
Canada’s economy in late 2025 looks likely to move forward, but not at high speed. Growth will remain modest, constrained by trade frictions, soft industrial output, and regional disparities. Still, the labour market offers reason for some hope: layoffs are not accelerating, and unemployment increases are more about delayed hiring and shifting demand than wholesale job destruction.
If exporters can retain crucial trade exemptions, and if consumer spending and fiscal support hold up, the country may dodge the more severe outcomes forecast earlier this year. But risks persist: policy missteps, renewed trade wars, or external shocks could pull the outlook lower. For now, the signal is clear: steady, not spectacular.