Canada’s economy entered the latest phase of its trade fight with the United States with noticeably less momentum than it had just a month earlier. Real gross domestic product was essentially unchanged in July, ending three consecutive months of expansion, while manufacturing output dropped 0.9%. The timing makes the reading particularly important: July came before a new round of U.S. tariffs took effect on August 22, meaning the numbers largely capture the economy before those additional pressures arrived.
The stall does not amount to a broad economic contraction. Construction and utilities provided substantial offsets, while Statistics Canada’s preliminary estimate points to renewed growth in August. Still, weaker factory output, retail activity, resource production and trade-sensitive industries leave Canada facing the next stage of the tariff dispute from a more fragile starting point.
The Economy Lost Momentum After a Strong Second Quarter
July represented an abrupt change from the momentum Canada had built through the spring. Real GDP had expanded for three consecutive months before becoming essentially unchanged in July. Statistics Canada also revised June growth higher to 0.4% from its earlier estimate of 0.3%, underscoring just how quickly the monthly picture shifted from expansion to stagnation.
That slowdown followed an unusually strong second quarter. Expenditure-based real GDP increased 0.8% from the first quarter, equivalent to roughly 3.3% at an annualized rate. Exports climbed 3.6%, their strongest quarterly increase in more than three years, while exports of passenger cars and light trucks surged 27%. Household spending and business investment also contributed. In other words, July did not extend the second-quarter acceleration. It marked a pause immediately before another major change in the Canada–U.S. trading environment, making the next several monthly readings much more consequential.
Manufacturing Became One of July’s Biggest Drags
Manufacturing output fell 0.9% in July, its first monthly decline in four months. That alone mattered because goods-producing industries account for roughly one-quarter of Canadian economic output, and manufacturing sits near the centre of many cross-border supply chains. A decline at factories can therefore ripple through transportation companies, parts suppliers, wholesalers and communities dependent on industrial employment.
Separate Statistics Canada manufacturing data reinforce the picture. Factory sales decreased 0.4% to $78.7 billion after five consecutive monthly increases. More importantly, sales measured in constant dollars—which better reflect actual volumes rather than price changes—fell 1.4%. Eight of 21 manufacturing subsectors reported lower sales. Chemical manufacturing fell 6.6% and food manufacturing declined 1.4%. The weakness was not enough to erase earlier gains: nominal manufacturing sales remained 10.9% higher than a year earlier. But the July pullback suggests the industrial recovery was already uneven before the newest U.S. tariffs entered the equation.
Refinery Disruptions Explain Part of the Factory Drop
Petroleum refining was a major reason manufacturing GDP weakened. Activity at petroleum refineries dropped 6.2% in July, helping pull overall manufacturing output down. That decline illustrates why headline sales figures can sometimes give a different impression from measures of real economic activity: rising prices can lift the dollar value of what factories sell even when actual production volumes are falling.
Statistics Canada’s manufacturing report demonstrates that contrast clearly. Petroleum and coal product sales increased 1.9% in current dollars to $10.4 billion in July, yet constant-dollar sales dropped 4.1%. Higher petroleum and energy prices boosted revenues while physical sales volumes moved in the opposite direction. Refined petroleum exports nevertheless rose 6.7%. For workers and suppliers around large industrial facilities, such differences matter. A company can report stronger revenue because prices increased without necessarily running plants harder or ordering more inputs. July’s GDP figures capture that weaker underlying production activity rather than simply the higher prices appearing on invoices.
Consumers and Wholesalers Also Showed Signs of Weakness
The slowdown extended beyond factories. Retail trade GDP contracted 1.0% in July, while wholesale trade output fell 0.4%, according to the monthly GDP figures. Statistics Canada’s separate retail report showed sales falling 0.7% to $73.7 billion, with decreases in eight of nine retail subsectors. In volume terms, retail sales dropped an even steeper 1.1%. General merchandise stores recorded one of the most notable declines.
Wholesale figures tell a similar price-versus-volume story. Wholesale sales excluding petroleum, other hydrocarbons, oilseeds and grain actually increased 0.3% to $93.1 billion in current dollars. However, wholesale volumes fell 0.6%. Building-material wholesalers were among the strongest categories in dollar terms, helped partly by higher steel prices. Taken together, the figures indicate that households and businesses were moving fewer goods through parts of the economy even when nominal sales totals appeared relatively resilient. That is consistent with the essentially flat GDP result.
Construction and Utilities Prevented a Worse Result
Without construction and utilities, July would have looked considerably weaker. Construction output grew 1.3%, marking a fourth consecutive monthly increase. Statistics Canada separately reported that investment in building construction rose 1.2% to $23.6 billion during the month. Non-residential investment climbed 3.2%, while residential construction investment edged up 0.3%.
Institutional construction was particularly strong, increasing 7.4%. Ontario accounted for most of that gain, helped by new hospital construction. Utilities provided another significant offset: the sector expanded 1.7% in July as hot weather pushed electricity demand higher. Statistics Canada described electricity generation, transmission and distribution as recording its strongest monthly growth of 2026. These pockets of strength help explain why the economy stalled rather than contracted. They also show that Canada’s current economic picture is not simply one of across-the-board weakness; large infrastructure projects and weather-driven electricity demand can temporarily compensate for softness elsewhere.
Trade Was Already Shifting Before the New Tariffs Arrived
Canada’s July trade figures provide another warning sign. Merchandise exports to the United States fell 6.6%, the sharpest percentage decline since April 2025. Canada’s merchandise trade surplus with the United States consequently narrowed from $10.3 billion in June to $5.9 billion in July. Lower shipments of crude oil and gold played major roles in the decline.
At the same time, diversification outside the American market continued. Exports to countries other than the United States increased 7.4% to a record $25.6 billion, representing 33.7% of Canadian merchandise exports in July. China, Germany and the Netherlands were among the destinations contributing to the increase. The shift is significant because the United States remains Canada’s dominant export market: 71.7% of Canadian merchandise exports went south of the border in 2025. July therefore demonstrated both sides of Canada’s trade challenge—non-U.S. markets are growing, but changes in American demand can still have an outsized impact on national production.
The Latest U.S. Tariffs Came After July’s Numbers
The sequencing is central to understanding the GDP report. The United States imposed an additional 50% tariff on a range of Canadian goods beginning August 22 after Canada–U.S. negotiations failed to produce an agreement. Ottawa estimated that approximately C$27.6 billion worth of Canadian goods were covered and responded with Canadian counter-tariffs of 15%, 25% and 50% on C$27.6 billion of U.S. imports beginning September 8.
That means July’s flat GDP cannot reasonably be treated as evidence of the full economic effect of those measures—they had not yet taken effect. The Bank of Canada estimated in September that the newly targeted Canadian products represented roughly 5% of Canadian goods exports to the United States. The trade dispute has continued to escalate since then: U.S. import bans covering certain Canadian alcoholic beverages, dairy products and motorcycles took effect September 29. Consequently, September and fourth-quarter data will provide a clearer picture of how firms, workers and customers are adjusting.
August’s Preliminary Rebound Comes With an Important Caveat
Statistics Canada’s early estimate suggests real GDP rebounded by approximately 0.2% in August, with increases in mining, quarrying and retail activity among the contributors. If confirmed, that would mean July’s stagnation was not the beginning of an immediate economy-wide contraction. It would also leave third-quarter growth positive despite the weak opening month.
There are two reasons for caution, however. First, advance GDP estimates are preliminary and can be revised when more complete information becomes available. June provides a recent example: its initial 0.3% increase was subsequently revised to 0.4%. Second, the newest U.S. tariffs did not begin until August 22, meaning they were in force for only the final portion of the month. Some importers may also have accelerated orders before tariffs took effect. The official August GDP release, scheduled for October 30, should therefore provide more information, but September and later readings will capture a substantially longer period under the new trade regime.
Jobs and Inflation Are Sending Mixed Signals
The labour market has not moved in perfect step with industrial output. Canadian employment declined by 42,000 in August after cumulative gains of 181,000 between April and July, while the unemployment rate remained at 6.4%. Manufacturing employment actually increased by 22,000 in August despite the 0.9% decline in manufacturing GDP recorded one month earlier. That divergence is not unusual—companies do not necessarily change staffing immediately when production fluctuates—but it highlights the difficulty of reading too much into one monthly GDP number.
The Bank of Canada faces another complication: weak growth is occurring alongside elevated headline inflation. CPI inflation was 3.0% year over year in August, although inflation excluding gasoline was lower at 2.4%. The Bank kept its policy rate at 2.25% on September 2 and said higher energy prices and tariffs had increased inflation risks while renewed trade uncertainty made the growth outlook less certain. Its next scheduled policy decision is October 28.
The Bigger Test Comes as Tariff Effects Move Through the Economy
July’s stagnation is best viewed as a warning about Canada’s starting position rather than a measurement of the latest tariff shock itself. Manufacturing, resource extraction and consumer-facing activity were already showing weakness before the August measures arrived. At the same time, construction, infrastructure investment and growing exports outside the United States demonstrate that other parts of the economy still have meaningful momentum. The question is whether those strengths can offset further pressure on trade-exposed industries.
Independent estimates underline the uncertainty. KPMG Canada has estimated that, if the latest increase in U.S. tariffs becomes permanent, Canadian GDP could be 0.3% to 0.5% lower over roughly the next year than it otherwise would have been. That is a scenario estimate rather than an observed loss, and the outcome will depend heavily on future trade policy, business adaptation and government responses. For now, July shows an economy that stopped accelerating just as another major external test arrived.
