Canadian economy expected to contract in second quarter amid tariff strain

The Canadian economy is expected to see muted growth in Q1 2025 and a significant contraction in the second quarter of the year, according to the latest Main Street Quarterly report by the Canadian Federation of Independent Business (CFIB) and AppEco, an economic consulting firm.

The report estimates that Canadian gross domestic product (GDP) grew by 0.8% in the first quarter, but will contract significantly by -5.6% in the second quarter due to the ongoing trade war with the United States.

Consumer price index (CPI) inflation rose to 2.4% in Q1 2025 and is projected to further increase to 2.7% in Q2.

“Small businesses are feeling the pinch. The raging trade war will likely drive up the costs of doing business and lead to inflation,” said Simon Gaudreault, chief economist and VP of research at the CFIB. “While the Bank of Canada maintained its key interest rate, it will take bold policy changes for small businesses to feel meaningful relief. That would include reducing taxes and adopting full mutual recognition of each other's rules, permits, and regulatory regimes.”

After a solid recovery at the end of 2024, private investment is expected to drop by -13.9% in Q1 2025 and -19.1% in Q2.

While employment increased slightly (0.7%) in Q1, it is projected to fall by -3.8% in Q2, in line with overall economic contraction.

The report says that SMEs are under growing pressure from weak demand and rising input costs. Manufacturing and wholesale have been hit hardest by low demand because of their trade exposure.

Meanwhile, firms in agriculture, hospitality, recreation, and information are less able to pass on costs and more likely to absorb them.

One-third of wholesale firms have already increased prices, while two-thirds of firms in hospitality and construction plan to increase prices once supplier costs stabilize.

“Given how the long-term business confidence is at historically low levels, it's not surprising that small businesses are pausing their capital expenditures,” Gaudreault added. “It's nearly impossible for owners to plan expansions or investments when they're not sure if their business will even be open in six months.”