Canada’s gross domestic product plunged in the second quarter, dropping at a rate that would result in a decline of 1.6 per cent if spread over a year. Exports fell off a cliff, the result of higher tariffs, but also a reflection of a first-quarter surge in cross-border trade as companies stockpiled goods ahead of U.S. President Donald Trump’s duties.

Siege mentality: The decline in economic activity looked bigger because it followed a first-quarter growth rate of two per cent, which exaggerated the economy’s strength. Companies on both sides of the border readied for a trade war by stockpiling goods at pre-tariff prices. With their storerooms full, they could reduce their orders. The true effect of duties on trade—and the economy—won’t become clear until data from the second half of the year starts to roll in. 

Calm on the home front: Some indicators of domestic demand were surprisingly strong. Per capita household spending on goods and services increased 1.1 per cent, the most since the second quarter of 2022. Residential investment rose 1.5 per cent, led by new construction, Statistics Canada said. Factories and wholesalers continued to build inventories, suggesting companies have some buffer to absorb the fallout from the early stages of Trump’s tariff regime. 

Fog of war: The second-quarter drop is in line with what the Bank of Canada was expecting, so the latest GDP numbers provide little guidance on the trajectory of interest rates. There’s evidence of wear: household spending is coming at the expense of a lower savings rate and a big decline in business investment more than offset a first-quarter increase. There’s no sign of recession yet, but tariffs are taking a toll.