The Economy Grew at Its Fastest Pace in Three Years. Small Businesses Didn't Feel It.

Second-quarter output surged. A month later, small-business confidence suffered one of its sharpest drops of the year, and more owners now plan to cut staff than to hire.

On paper, the spring was the best stretch the Canadian economy has had in a while.

Real GDP grew at an annualized rate of 3.3 percent in the second quarter, Statistics Canada reported at the end of August. That beat the Bank of Canada's own July forecast of 2.5 percent. The agency also revised the first quarter upward, from a small contraction to a gain of 0.3 percent, which meant the country had avoided a technical recession after all.

The details were encouraging, too. Exports posted their largest quarterly gain in more than three years, led by a rebound in passenger cars and light trucks after a period of plant shutdowns. Final domestic demand, the spending of households, businesses and governments, rose 3.9 percent. Desjardins calculated that output per person had recovered most of the ground lost since 2022, though that estimate leaned on population figures Statistics Canada has since revised upward.

Then came the caveats, and they arrived quickly.

The summer boost was partly borrowed

Statistics Canada's early estimate suggests output was essentially flat in July. Part of the explanation is a one-time event: the lift from World Cup matches played in Canada faded once the tournament moved on. RBC Economics warned that the second quarter's pace was unlikely to be repeated in the quarters ahead.

Desjardins went further. Its economists estimated that the tariffs and counter-tariffs now in place or proposed could cut annualized growth to roughly 1 percent in the third and fourth quarters, from about 2 percent otherwise. All of the strong spring data, they noted, predated the August escalation with Washington.

A sudden loss of nerve

The sharpest signal came from the Canadian Federation of Independent Business, whose monthly survey of members offers a rough read on the mood of the country's smaller employers.

In September, the CFIB's long-term confidence index, which measures expectations for the next 12 months, fell about 10 points to 47.9. A reading below 50 means more owners expect their business to get worse than better. In July, the same index had climbed to 58.3, its highest level since the Middle East conflict began.

The staffing plans underneath were worse. In September, 16 percent of small businesses said they planned to lay off full-time staff, against 13 percent planning to hire. It was the second straight month in which layoff plans outnumbered hiring plans, after six of the first seven months of the year had shown the opposite. The CFIB tied the slide to renewed tariff uncertainty and rising oil and gas prices.

Small-business owners also said they intended to raise prices by an average of 3.3 percent, a notable jump, which suggests that cost pressure, not just weak demand, is shaping their decisions.

Two economies, two kinds of client

The gap between strong aggregate data and gloomy small-business sentiment is not as contradictory as it looks. Exports and business investment led the spring's growth, and much of that activity sits with larger companies. Small firms, which tend to have thinner margins and less ability to absorb a sudden cost shock, are more exposed to fuel prices and to the knock-on effects of a trade fight.