Some economists think there is a case to be made for the Bank of Canada to cut interest rates after the economy contracted 1.6 per cent in the second quarter, crushing the average estimate of -0.7 per cent.

Statistics Canada released its latest gross domestic product (GDP) numbers on Friday. The report showed the economy reversed course in the second quarter after expanding by two per cent on an annualized basis in the previous one. Exports to the United States dropped 7.5 per cent from April to June compared with the previous quarter.

The Bank of Canada projected in its most recent Monetary Policy Report (MPR) that GDP would contract 1.5 per cent quarter over quarter under its current tariff scenario — one of three.

Here’s what economists think the GDP numbers mean for the economy and any future Bank of Canada interest rate cuts.

‘Not all bad news’: BMO

While the second quarter GDP report certainly put up some bad numbers, “it wasn’t all bad news,” Benjamin Reitzes, managing director of Canadian rates and macro strategist at BMO Capital Markets, said in note, pointing to firmness in the domestic economy, including a 4.5 per cent annualized rebound in household spending and a gain of 6.3 per cent in residential investment.

“Final domestic demand rose 3.5 per cent annualized, reflecting the resilience and perhaps Canadians’ bias to buy/travel domestically,” Reitzes said.

However, income growth slowed and he cautioned that a lower savings rate among Canadians could lead to less spending.

For the Bank of Canada, “there’s nothing here screaming for a September cut,” Reitzes said, noting that the difference between the central bank’s estimate for the quarter and the actual result was “minor.”

Signs that the third quarter is tracking lower than their estimate of one per cent poses one possible “negative” for the Bank of Canada.

Reitzes said BMO is currently tracking third quarter growth at 0.5 per cent.

“Arguably, the economy is evolving largely in line with the BoC’s July MPR forecast. Policymakers opted to stay on hold then, so this report likely doesn’t push them any closer to cutting in September, with the LFS (Labour Force Survey) and CPI (consumer price index) still to come,” Reitzes said.

‘Better Q3 on tap’: TD

Weaker U.S. demand and the ricochet effects of tariff frontrunning in the first quarter “walloped” Canada’s GDP in the second quarter, Rishi Sodhi, an economist with TD Economics, said in a note.

Still, the resilience of Canadians consumers, evident in the data, likely “surprised” Bank of Canada policymakers, who could fold that into arguments to hold interest rates at their Sept. 17 meeting.

However, the second-quarter contraction shows that slack is continuing to build, and “even with a better performance in Q3 likely on tap, the economy probably remains in excess supply,” Sondhi said.

Ongoing slack, where the economy is producing more than is being consumed, could continue to push down inflation. paving the way for further interest rate cuts.

Markets are currently pricing in a 55 per cent chance of a rate cut in September, Sondhi said.

‘Easing’ trade tensions: Desjardins

“Simply put, the tariff war with the U.S. was terrible for the Canadian economy,” Royce Mendes, managing director and head of macro strategy at Desjardins Securities, said in a note.

But he thinks there is plenty of reason to believe that trade tensions are “easing” between Canada and the U.S., especially given that most exports appear to be compliant with the

Canada–United-States–Mexico Agreement (CUSMA) , significantly reducing “tail risks” to the economy. That said, Mendes is looking for the third quarter to come in either flat or slightly negative, given that the July flash estimate from Statistics Canada showed GDP growing by a slim 0.1 per cent.

If growth were to contract in the third quarter, that would create the conditions for a technical recession — two consecutive quarters of negative growth.

However, Mendes doesn’t think the recession label would apply “since that involves very specific ingredients.”

  • Canada’s economy shrinks more than expected as exports to U.S. plummet
  • Tariffs push Canada’s current account deficit to record

“What I would say is that it doesn’t look like the economy is set to bounce back from its Q2 contraction. Rather, it appears that the economy entered the third quarter dazed and confused from the tariff woes of the second quarter,” he said in an email.

Given the significant miss on estimates for the second quarter and an apparent lack of momentum so far in the third, Desjardins is sticking with its call that the Bank of Canada will start cutting rates again in September.