The latest data from Statistics Canada shows that the country’s gross domestic product (GDP) fell by 1.6% in the second quarter of 2025, significantly exceeding market expectations.
Manufacturing and other goods-producing industries were the primary drag on the economy, confirming that the tariffs implemented by the United States in April have had a substantial impact on Canada’s export-oriented sectors. Although household consumption and government spending partially offset the weakness in foreign trade, the overall economy still showed clear signs of decline.
The core reason for this economic contraction is a sharp drop in external demand. U.S. tariffs on Canadian goods (such as steel, aluminum, and automobiles) were the main shock, leading to a 7.5% decline in total exports. Simultaneously, corporate investment willingness noticeably weakened, with spending on machinery and equipment falling significantly, reflecting increased pessimism among businesses in the face of trade policy uncertainty.
Analysts point out that although a turnaround in tariff policy is unlikely in the short term, the Canadian stock market has performed strongly since 2025, highlighting the value of defensive sectors. These assets act like a “ballast” for a portfolio; while they may not deliver explosive growth, they can effectively enhance its resilience. Investors are advised to focus on high-quality companies with stable cash flows, low debt ratios, and cross-border diversification.
Against the backdrop of an overall economic contraction, Canada’s banking sector has demonstrated remarkable resilience. Major banks generally saw improved profits in the second quarter, with stock prices largely following suit. Despite a cooling housing market and rising unemployment in tariff-affected industries, household debt-servicing ability remained stable: the Q2 mortgage delinquency rate edged up to 0.19%, and the credit card delinquency rate rose to 1.7%, both remaining within their historical low ranges.
Taking Toronto-Dominion Bank (TSX:TD) as an example, the bank’s conservative lending policies (with a CET1 capital ratio of 14.9%), prudent loan loss provisioning, and advantages from its cross-border operations have contributed to its performance. After its stock price bottomed out at $74 in 2024 amid a money laundering scandal, it has rebounded by approximately 50% since. Although the bank’s U.S. operations face regulatory constraints, they effectively hedge against the risk of economic downturn in its domestic market.
In the utilities sector, which has also performed well against the trend, Fortis (TSX:FTS) is a typical example. The company’s operations span Canada, the U.S., and the Caribbean. Ninety-eight percent of its operations are regulated utilities, forming a natural barrier against competition, and it has increased its dividend for 51 consecutive years. The company is currently advancing a $26 billion capital expenditure plan, which is expected to continuously increase future earnings by expanding its rate base.
