Statistics Canada has reported a troubling contraction in the Canadian economy, with real gross domestic product (GDP) declining by 1.6 percent on an annualized basis in the second quarter of 2023. What’s behind this unexpected downturn? This is primarily a result of a huge decline in exports and business investment. Unsurprisingly, the state of affairs became even bleaker after the U.S. raised tariffs.
The figures paint a dire picture of a nearly half collapse in global exports, especially in the automotive industry. Passenger car and light truck exports experienced a shocking drop of 24.7 percent over the quarter alone. This rapid retreat was a central player in the general economic retreat – sharing a difficult fate with Canadian manufacturers.
The entirety of the manufacturing sector has continued to experience a hard-luck story, output posting its third drop in four months. This trend has severely restricted business activity in June, playing a larger role in a more general economic slowdown. In June by itself, real GDP dropped by 0.1 percent, the same amount of contractions that occurred in April and May combined. It is the first time since the fourth quarter of 2022 that GDP has fallen for three straight months. It’s a remarkable turnabout on economic results.
Goods-producing sectors saw a widespread downturn of 0.5 percent in June. In contrast, services-producing industries experienced a modest increase, rising by 0.1 percent over the same span. Even with this small bump in services, it wasn’t enough to make up the ground lost in all the other sectors experiencing a decline.
Investment trends also forge a perfect storm for the Canadian economy. Investment in industrial machinery and equipment fell by 9.4 percent in the second quarter. That’s the slowest investment pace since 2016, excluding the impacts of the COVID-19 pandemic. This dismal investment climate has cast a shadow over Canada’s long term growth outlook and points to deeper economic vulnerabilities in our economy.
High tariffs on imported steel and aluminum products imposed by President Donald Trump have added an even heavier economic burden. These tariffs particularly hit exports of steel, aluminum, and automobiles. These tariffs have created unprecedented economic stress on Canadian industries. As a consequence, they’re getting squeezed more and more in their ability to compete both at home and globally.
Though these developments have made deficits more difficult, early estimates released by Statistics Canada suggest a positive reversal. Nowcast for real GDP growth in July is 0.1 percent. This early indication of a rebound, however small, should offer some measure of optimism in an otherwise grim economic outlook.
