October 13, 2025
A Recovery That Still Feels Fragile
After a tough second quarter, Canada’s economy is finally showing signs of steadying. As RBC economists Nathan Janzen and Claire Fan put it, “early Canadian gross domestic product and net trade data have broadly showed signs the economy is stabilizing after contracting in Q2.”
Still, that headline hides some uncomfortable truths. Beneath the surface, “heavily trade-exposed sectors remain under significant pressure,” they warn, and that’s likely to show up in “softer industry data on Wednesday.”
The main drag? U.S. tariffs. The revival of protectionist measures is once again clouding cross-border trade, pushing up costs and dampening demand for Canadian manufacturers — especially those in metals and heavy industry.
Manufacturing Hits a Pothole
StatsCan’s early numbers show “manufacturing sales contracted 1.5% in August, partially reversing the stronger 2.5% gain in July.” According to Janzen and Fan, “part of this swing reportedly reflected a pullback in the transportation sector following a jump in motor vehicle sales in July.”
That kind of volatility isn’t unusual for the summer months, when “typical factory retooling shutdowns” tend to distort production and sales. But this time, the weakness seems broader.
“Food sales were also reportedly weaker,” they note, and since “manufacturing production prices” rose 0.5% in August, it means inflation-adjusted volumes “likely more than reversed the 1.6% increase in July.” The result? “Volume down about 4.5% in August from a year ago,” with “more substantial declines in sectors targeted by U.S. tariffs such as primary metal manufacturing.”
It’s a familiar story for Canada’s industrial heartland: struggling to keep momentum while navigating policy headwinds it can’t control.
Consumers Keep Spending — For Now
If there’s a bright spot, it’s the Canadian consumer. “The positive news is broader consumer demand in Canada has been resilient,” the economists write, “supporting activities in sectors more domestically focused.” Retail sales rose 1% in August after a 0.8% dip the month before — a welcome rebound that suggests households haven’t shut their wallets yet.
Despite high borrowing costs and persistent price pressures, many Canadians are still spending — a sign that strong job markets and easing inflation are helping keep the economy afloat.
The same goes for housing, where “activity has also continued to recover at a modest pace.” Early data from local real estate boards point to a “mixed national picture” for September home resales — better in Ontario and B.C., softer out West. Still, stabilization here matters. Housing has been one of the key confidence drivers for Canadian households.
RBC’s View: Slow Growth, Not Collapse
Janzen and Fan remain cautiously optimistic: “Overall, we maintain our expectation that softening in trade-exposed sectors will persist, but won’t spread widely to other parts of the Canadian economy.” They’re calling for “weak GDP growth over the second half of this year, starting with a 0.5% annualized increase in Q3.”
That’s modest, but in this environment — with high interest rates, patchy global demand, and tariff-related uncertainty — even modest looks pretty good. The takeaway? Canada’s domestic strength seems capable of offsetting much of the damage from abroad, at least for now.
South of the Border: Tariffs, Shutdowns, and Inflation
Meanwhile in the U.S., things are murkier. “The government shutdown means key data releases, including September’s retail sales, are unlikely to be released in the coming week,” Janzen and Fan note.
That’s a problem for forecasters, though consumer spending in the U.S. has “broadly surprised to the upside this year.” The National Retail Federation’s data show a small dip in core retail spending (excluding autos and gas) for September — but it’s “still well above a year ago.”
As for inflation, some numbers may still trickle out despite the shutdown. That’s because the data “feeds into the calculation of cost-of-living adjustments for Social Security beneficiaries,” which, as the economists point out, “is considered mandatory under law.”
RBC expects headline inflation “to have edged higher to 3.1% in September from 2.9%,” while core inflation “likely held at 3.1% after another 0.3% month-over-month increase.”
The Bottom Line
Janzen and Fan’s message is clear: the worst may be over, but the drag from tariffs and trade tensions is far from gone. Manufacturing remains the weak link, but resilient consumer spending and housing activity are keeping the broader economy steady.
In short — Canada isn’t booming, but it’s holding its ground. The real question is how long that balance can last if global trade frictions don’t ease.
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