Rhythmic Reasoning_Full Report_Final_EN - Flipbook - Page 19
RHYTHMIC REASONING | TEMPO, TIMING AND TUNING
C A N A DA
Derek Holt
Walid Khalid
Vice President, Scotiabank Economics
Director, Investment Strategy
Latest
2024
2025f
2026f
GDP Growth
-1.6%
1.6%
1.2%
1.6%
Inflation
1.9%
2.4%
1.9%
2.0%
Unemployment
7.1%
6.4%
7.0%
6.8%
Budget Bal.
-2.0%
-1.6%
-2.4%
-2.4%
Latest
2024
1-yr fwd
2-yr fwd
3-mo yield
2.5%
3.1%
2.5%
2.7%
10-yr yield
3.2%
3.2%
3.4%
3.5%
Yield curve slope
0.7%
0.1%
0.8%
0.8%
that there is little in the way of additional information – points to
essentially no growth in 3Q25.
U.S. tariffs were a headwind during the second quarter, causing
total exports to decline and shave 9.8 percentage points off of
headline GDP growth. This marks a reversal from the previous two
quarters when exports had risen as businesses rushed to frontrun tariffs. Canada’s counter tariffs on U.S. goods caused imports
– a subtraction from GDP – to decline during the quarter, adding
back 1.7 percentage points to growth and partially offsetting the
impact of weak exports. Gross fixed capital formation was a
slight detractor, with flagging business investment being offset
by a rise in government investment. The former reflects growing
pessimism among Canadian businesses as they navigate traderelated uncertainty and headwinds.
Source: Scotia Wealth Management, Bloomberg Finance LP.
"Latest" values are as at September 30, 2025 and, for data other than bond yields,
pertain to the most recent monthly, quarterly, or annual reading available on this
date. | Forecasts are based on Scotiabank Economics forecasts dated September
11, 2025 | 2024 inflation and unemployment are based on the average YoY rates
for each month of the year. | 2024 yields are as at December 29, 2024. Forward
periods are relative to September 30, 2025 and are based on forward market pricing.
Fig. 1: Canada’s economy contracted
in 2Q25 on the back of waning exports
10%
5%
KEY CONCLUSIONS
•
•
•
•
Growth has been weighed down by U.S. tariffs but domestic
economic conditions have held up well with notable strength
in household consumption.
The BoC resumed its easing cycle following two consecutive
weak jobs reports, opening up the door for additional cuts
this year. Inflation headwinds may cause the BoC to reverse
course and retrace rates higher in 2026.
Trade tensions have eased with the vast majority of goods
being exempt from tariffs under USMCA-compliance.
However, the 2026 USMCA review could renew uncertainty.
The federal budget will be presented in November, and is
likely to show a widening fiscal deficit and a revenue shortfall
from counter tariffs on the U.S.
ECONOMY COMING UNDER PRESSURE FROM TARIFFS
Canada’s economy contracted in 2Q25 with real GDP falling by
1.6% on a quarter-over-quarter annualized basis, worse than the
median consensus estimate of -0.7% and 1Q25’s downwardly
revised reading of 2%. For June, GDP fell by 0.1% month-overmonth, also below expectations that called for a 0.1% gain. July’s
advance reading of 0.1% month-over-month – with the caveat
0%
-5%
-10%
3Q24
4Q24
1Q25
2Q25
HH spending
Gov't spending
Fixed investment
Inventories
Net trade
Real GDP (QoQ SAAR)
Source: Statistics Canada, Bloomberg Finance LP, Scotia Wealth Management
While the headline figure left a lot to be desired, it is important
to recognize that it was primarily a result of U.S. tariffs. On the
positive side, the domestic economy showed signs of life. Final
consumption added 3.5 percentage points to GDP with solid gains
in household and government spending. Inventories were also a
positive contributor, adding 3.2 percentage points to growth. Final
domestic demand – a broad measure that gauges the health of the
domestic economy that aggregates consumption, investment, and
government spending while excluding trade and inventory effects
– picked up in the period and has been positive in 8 of the last 10
quarters (Fig. 2).
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