Bank of Canada governor Tiff Macklem said he expects growth in the Canadian economy will likely be soft during the second half of 2025, after activity contracted in the second quarter of this year.

“We do expect growth to resume in the second half of the year, but with weakness in business investment and exports, and uncertainty about jobs, GDP is likely to be soft,” Macklem said during an event at the Peterson Institute for International Economics in Washington, D.C. on Thursday.

United States President Donald Trump’s trade war has had a significant impact on Canada’s economy. While nearly 90 per cent of Canadian exports are tariff-free under the

Canada-United-States-Mexico Agreement (CUSMA), tariffs remain in place on Canadian steel, aluminum, lumber and autos. Macklem noted nearly 25 per cent of the economy is based on exports to the U.S. and the trade war has put Canada on a permanent path of lower growth as a result.

The Canadian economy contracted by 1.6 per cent in the second quarter, as Canadian exports declined. The unemployment rate held at 7.1 per cent in September, despite the economy adding 60,000 jobs.

“Increased trade friction with the United States means our economy will work less efficiently, and there will be added costs, and there will be less income,” he said.

The Bank of Canada cut its policy rate by 25 basis points to 2.5 per cent in September, the first trim since March, as the economy and the labour market began to show signs of weakness brought on by U.S. tariffs.

The central bank has opted not to deliver a baseline projection for GDP and inflation this year, instead presenting scenarios based on potential trade actions taken by the Trump administration and the Canadian government.

According to the bank’s summary of deliberations, policymakers are confident the bank will be able to present a forecast during its next rate decision on Oct. 29. According to its last monetary policy report, the bank’s status quo scenario had growth at one per cent for the second half of the year.

Earlier this year, economists were expecting two back-to-back quarters of negative GDP. But economists are now forecasting that the Canadian economy will avoid another contraction in the third quarter of this year, with Toronto-Dominion Bank projecting 0.8 per cent growth during the quarter, while Desjardins Group expects growth at just 0.4 per cent, with further strengthening in the final quarter at one per cent and 1.5 per cent respectively.

In a note published by the C.D. Howe Institute earlier this week, former Bank of Canada governor David Dodge and economist Don Drummond warned these positive forecasts “are far from assured.”

“Canadians should be more worried about their economic prospects,” they said. “Instead of a brief period of tepid growth, there could be a prolonged period of weak, even zero, growth, coupled with a much higher rate of unemployment.”

Drummond and Dodge said Canada’s weak business investment is part of the reason, with investment in machine and equipment falling by an inflation-adjusted 12 per cent in the last four quarters.

Both economists noted there is an urgency to fix Canada’s ailing productivity and hopes the upcoming federal budget on Nov. 4 will include investments focused on growing Canada’s economy and significant program review.

“In the short run, efforts to increase the investment share in the economy should reduce the share of both public and private consumption,” they said.

“The best possible trading relationships with the United States must be secured, trade must diversity beyond the United States, the domestic economy must be strengthened, and all these opportunities must be backed by a more productive, competitive Canadian economy driven by stronger investment.”

Macklem said he shares this urgency and noted there is a need for reforms to strengthen Canada’s economy, including the removal of internal trade barriers and streamlining regulations.

“To increase incomes and standards of living, we need to improve our productivity and competitiveness. We could have done this without U.S. tariffs, but the loss of incomes and growth now make this imperative,” he said.

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