How many employers are planning layoffs?
Canada’s economy experienced its largest quarterly contraction in nearly a decade outside of the pandemic earlier this year, as escalating trade tensions and U.S. tariffs weighed heavily on output, hiring, and investment, according to a report.
Canada’s real gross domestic product (GDP) shrank by 0.4% in the second quarter, following a 0.5% increase in the first quarter. That marks the sharpest decline in nine years outside of the time of the health crisis, reported Statistics Canada (StatCan).
“Much of the decrease in economy-wide output in the second quarter reflected lower activity among manufacturers and wholesalers as U.S. tariffs on Canadian steel and aluminium and autos were in effect,” said Guy Gellatly and Carter McCormack, with the Strategic Analysis, Publications and Training Division, Analytical Studies and Modelling Branch at StatCan.
They added: “Increases in business inventories and household spending partly mitigated the declines in trade and investment.”
While export volumes increased 1.4% in the first quarter of 2025, they plunged 7.5% in the second quarter “as tariffs and uncertainty hampered trade activity,” they said.
Merchandise exports dropped 9.2%, while service exports declined 1.4%, with the overall contraction in export volumes the largest since the 2008-2009 recession, excluding the pandemic period.
Import volumes also fell, down 1.3% in the second quarter after a 0.9% increase in the first. The decrease was driven by lower shipments of motor vehicles and parts, consumer goods, crude oil and crude bitumen, and building and packaging materials, as well as travel services.
Business investment amid trade tensions
Business investment was hit hard by trade tensions, with outlays on machinery and equipment (M&E) down 9.4%—the lowest level since late 2016, excluding the pandemic. StatCan notes, “Trade tensions weighed on business investment in the second quarter. Outlays on machinery and equipment (M&E) were down 9.4% on widespread declines across asset groups.”
However, business inventories increased, as manufacturers and wholesalers stockpiled goods in response to escalating trade tensions. This inventory build-up, along with higher household and government spending, partly mitigated the headline decrease in GDP.
“Trade tensions weighed on business investment in the second quarter,” according to the StatCan report.
Business closure is becoming a possibility for some Canadian employers amid the tariffs issue, according to a recent report from the Canadian Federation of Independent Business (CFIB). In fact, 19% of Canadian small businesses facing tariff-related costs say they will not survive more than six months if current conditions persist, according to the report.
Labour market, unemployment rate
Employment growth stalled in the first half of 2025. StatCan reports, “Nationally, there was no net employment growth from January to August 2025 and no net increase in payroll employment from January to June 2025.”
The unemployment rate increased to 7.1% in August, up 0.5 percentage points since the start of the year, marking the highest rate since 2016 outside the pandemic. The unemployment rate among core-age workers was 6.1% in August, while the rate among youth reached 14.5%. For students, the unemployment rate averaged 17.9% from May to August, the highest since 2009 excluding the pandemic.
Long-term unemployment also rose, with those unemployed for 27 weeks or more accounting for 23% of all unemployed in August, up from 20.1% a year earlier.
Meanwhile, the number of job vacancies fell from 527,400 in January to 469,900 in July, with broad-based declines across industries. Over 70% of the reduction in vacancies was for positions requiring a high school diploma or less. The unemployment-to-job vacancy ratio increased to 3.3 in July, while the job vacancy rate was 2.6%, below the pre-pandemic average of 3.2%.
Amid all this, income growth slowed toward mid-year. Household disposable income rose 0.3% in the second quarter, down from 0.9% in the first. Wages and salaries edged up just 0.2%, the lowest quarterly pace since 2016, excluding the pandemic. The household saving rate fell to 5.0% as consumption outpaced income gains.
The ratio of household credit-market debt to disposable income edged higher, rising from 173.7% in the first quarter to 174.9% in the second, as wage growth slowed.
How do employers plan to respond to the tariffs issue?
In response to the impact of tariffs, three-quarters of businesses that export to the U.S. intend to take mitigating actions, with one in four planning to seek alternative customers outside of the U.S. and one in six planning to delay major investments or expenditures, according to the StatCan report. The vast majority of manufacturers that export to the U.S. expect to take actions, with one in three seeking alternative customers elsewhere.
Similarly, over four in five businesses that import from the U.S. plan to take actions over the next 12 months, with one in three expecting to increase domestic sourcing and almost three in ten expecting to raise their prices.
Over 90% of manufacturers that import from the U.S. intend to take actions, with one-half seeking alternative non-U.S. suppliers and nearly one-half planning to increase domestic sourcing.
More than 9 in 10 Canadian business leaders want the federal government to provide broader supports and expanded financing options for companies affected by tariffs, with 80% saying their companies are struggling due to U.S. tariffs, which have resulted in higher costs and reduced competitiveness.
