⁠⁠Canada’s Trade War Hits a Weak Spot as New GDP Data Shows Factory Output Falling Before August Tariffs

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Canada entered the latest escalation in its trade dispute with the United States with less economic momentum than the spring rebound suggested. New July GDP data show the economy essentially stalled after three consecutive months of growth, while manufacturing output dropped 0.9% and several trade-sensitive industries lost ground.

The timing matters. July came before the additional U.S. tariffs that took effect in August, making the report an important baseline for judging what happened next. It also does not represent an economy untouched by trade tensions: earlier tariffs and uncertainty were already affecting Canadian businesses. Construction and utilities prevented an outright contraction, while preliminary August figures point to some recovery. Still, the factory numbers expose an important vulnerability just as another round of trade barriers began hitting cross-border commerce.

July Brought a Sudden Stop After Three Months of Growth

The headline number looks uneventful: real GDP was essentially unchanged in July. The context makes it more significant. Canada had recorded three consecutive months of expansion before July, including 0.3% growth in June. Statistics Canada had also reported that GDP by industry increased 0.9% during the second quarter, with 17 of 20 major industrial sectors expanding. Manufacturing itself grew 2.1% over the quarter, helped substantially by a rebound in transportation equipment production. July therefore represented a noticeable loss of momentum rather than another step in the spring recovery.

That distinction matters when assessing the economy’s ability to absorb new shocks. A flat month does not by itself establish that Canada is entering a downturn, particularly when individual sectors can swing because of maintenance, weather or large projects. But it means the latest tariff escalation arrived at a less comfortable moment. Instead of piling onto an economy accelerating broadly, the August measures arrived after growth had already stalled and several goods-producing industries had begun moving backward.

Manufacturing Output Fell 0.9% Just Before the New Tariffs

Manufacturing provided one of the clearest weak points in the July report. Factory output fell 0.9%, its first monthly decline in four months. That reversed part of the improvement recorded in June, when manufacturing expanded 0.6% for a third consecutive monthly gain. The June increase had included stronger machinery production, transportation equipment and primary metals, giving the sector considerably more momentum heading into the summer than the July number ultimately showed.

Petroleum refining played a major role in the reversal. Activity at petroleum refineries dropped 6.2% in July, according to the GDP data reported by Reuters. Refining had already experienced volatility around maintenance and production disruptions earlier in the year, making it important not to interpret the entire manufacturing decline as a direct trade effect. Even so, the result demonstrates how little room there was for additional weakness. A sector that had been supporting Canada’s second-quarter expansion was already contracting before August’s new U.S. duties could appear in monthly GDP.

Factory Sales Show the Weakness Was Broader Than One GDP Number

A separate Statistics Canada manufacturing report reinforces the picture of lost factory momentum. Manufacturing sales declined 0.4% in July to $78.7 billion after rising for five consecutive months. Eight of 21 manufacturing subsectors reported lower sales. Chemical manufacturing recorded the largest decline, dropping 6.6%, while food manufacturing sales decreased 1.4%. Measured in constant dollars, which strips out price effects, overall manufacturing sales fell a larger 1.4%. That distinction is important because rising prices can sometimes make nominal sales appear healthier than actual production volumes.

There were also signs of future demand that complicate an entirely negative interpretation. Manufacturing inventories increased 0.3% to a record $127.5 billion, while unfilled orders climbed 1.9% to another record of $134.6 billion. The inventory-to-sales ratio moved from 1.61 to 1.62. In other words, factories were not facing a uniform collapse in orders, but sales and current production weakened at the same time that goods were accumulating and outstanding orders remained elevated. That mixture points to an industrial sector under pressure rather than one simply running out of business.

Canadian Exports to the U.S. Were Already Falling Sharply

The trade numbers provide another warning sign. Canada’s merchandise exports fell 2.3% in July to $76.1 billion, ending five consecutive monthly increases. Exports to the United States dropped a much steeper 6.6%, the largest percentage decline since April 2025. Statistics Canada attributed much of that decline to lower crude oil and gold shipments rather than treating it as a straightforward tariff effect. Imports from the United States, meanwhile, increased 1.8%, helped by passenger cars and light trucks.

The result dramatically narrowed Canada’s merchandise surplus with its largest trading partner. The surplus with the United States fell from $10.3 billion in June to $5.9 billion in July, its lowest level since February. Yet there was an important counterweight: exports to countries other than the United States jumped 7.4% to a record $25.6 billion. Those markets accounted for 33.7% of Canadian exports during the month. That diversification does not replace the scale of the U.S. relationship, but it shows Canadian exporters were already finding substantial growth elsewhere as U.S.-bound shipments weakened.

The Biggest August Tariff Escalation Had Not Hit Yet

The chronology is crucial. The United States initially scheduled additional duties on certain Canadian products for August 19 before temporarily pushing their effective date to August 22. Canadian government documents subsequently described the U.S. action as a 50% tariff covering approximately C$27.6 billion of Canadian goods. Canada responded by announcing additional counter-tariffs covering C$27.6 billion of U.S. imports, with rates of 15%, 25% and 50% depending on the product. Those Canadian measures took effect September 8.

That means July’s 0.9% manufacturing decline cannot reasonably be attributed to tariffs that had not yet taken effect. Instead, the data establish the economic position immediately before that escalation. This distinction makes the factory decline arguably more informative: new barriers were being added to a manufacturing sector that had already lost momentum. The August measures also landed on industries and supply chains already accustomed to adjusting production, sourcing and pricing around repeated changes in cross-border trade policy. The economic effect of the newest tariffs therefore has to be separated from pressures already visible before their implementation.

July Was Not a Pre-Trade-War Baseline

Calling July a “before tariffs” month requires another qualification. It was before the latest August escalation, but Canada had already been dealing with U.S. tariffs and trade uncertainty for well over a year. In its July Monetary Policy Report, the Bank of Canada estimated that the average U.S. tariff rate on Canadian goods stood at about 5.0%, compared with just 0.1% before 2025. Canada’s average tariff rate on U.S. goods was estimated at 1.5%. Most North American trade remained tariff-free, particularly where CUSMA exemptions applied, but several sectors faced much heavier measures.

The Bank has repeatedly emphasized that those sector-specific measures matter disproportionately to affected industries. Its September policy deliberations noted that the newest U.S. tariffs covered roughly 5% of Canadian goods exports to the United States. Governing Council expected their direct economy-wide effect to be relatively modest while warning that affected businesses and workers could experience a much larger impact. It also identified a broader risk: renewed uncertainty could weigh on business investment, hiring and household confidence even beyond the products directly facing tariffs.

Construction and Utilities Prevented a Worse July Result

Canada’s July economy was not weak everywhere. Utilities output increased 1.7%, while construction advanced 1.3% and recorded a fourth consecutive monthly increase. Those gains offset much of the weakness elsewhere in the goods-producing economy. Without them, the monthly GDP figure would have looked noticeably softer. Mining, quarrying and oil and gas extraction fell 0.5% for a second consecutive month, adding to the drag from manufacturing.

Services were similarly mixed. Professional, scientific and technical services grew 0.3%, their strongest monthly advance in roughly 20 months, while real estate, rental and leasing increased 0.2%. Real estate activity expanded for a sixth consecutive month. Wholesale trade, however, declined 0.4%, reversing some of the strength it had provided in June. These crosscurrents explain why Canada’s economy could register essentially zero headline growth without looking like every sector was contracting at once. They also show why manufacturing deserves particular attention: strength elsewhere was enough to offset the factory decline in July, but that cushion cannot be assumed to persist indefinitely.

Consumers Were Losing Momentum at the Same Time

Factories were not the only soft part of the July economy. GDP generated by retail trade declined 1.0%, while separate Statistics Canada sales data showed retail sales falling 0.7% to $73.7 billion. Sales decreased in eight of nine retail subsectors, and inflation-adjusted retail volumes fell 1.1%. General merchandise retailers led the weakness with a 1.9% monthly sales decline after posting a 2.5% increase in June. Core retail sales, which exclude gasoline stations and motor vehicle and parts dealers, were also down 0.7%.

That matters because a trade shock becomes more difficult to absorb when domestic demand is not providing a strong counterweight. Still, July should not be treated as proof of a prolonged consumer retreat. Statistics Canada’s advance indicator suggested retail sales could rebound 1.3% in August. The July report therefore looks more like a warning about uneven momentum than evidence that household spending had collapsed. For manufacturers, however, softer retail activity adds another source of uncertainty alongside export demand, tariffs, input costs and changing supply chains.

Early August Numbers Point to a Mixed Response

The first indicators covering August are not uniformly negative. Statistics Canada’s advance GDP estimate suggests the economy expanded 0.2% during the month, with higher mining and retail activity among the contributors. An advance manufacturing estimate separately indicated that factory sales increased 1.1% in August, led by primary metals and chemicals. Those numbers offer an early indication that July’s manufacturing decline may not have simply continued at the same pace once the new tariffs arrived.

Labour data also delivered a surprising counterpoint. Overall Canadian employment fell by 42,000 in August and the unemployment rate remained at 6.4%, but manufacturing employment increased by 22,000, or 1.2%, with much of the gain occurring in Ontario. At the same time, an advance estimate showed wholesale sales excluding certain petroleum and grain categories falling 1.5%. None of these early indicators settles the tariff question. Advance estimates are explicitly subject to revision, while employment, sales and GDP measure different parts of economic activity. Together, however, they argue against assuming that August produced an immediate across-the-board industrial contraction.

The Real Test Will Come With the Next Round of Data

There are already signs that trade pressures are reaching individual industrial communities. Cleveland-Cliffs said its Stelco operation would halt cold-rolled and coated steel production at its Hamilton facility beginning October 9, with as many as 500 workers potentially affected. The company attributed the decision partly to the disruption caused by U.S. tariffs and difficult market conditions, while saying steel production would be concentrated at its Nanticoke operation. That company-specific decision does not establish the size of the tariff impact on Canada’s entire manufacturing sector, but it illustrates how macroeconomic disputes can eventually reach factory floors and household paycheques.

More definitive evidence will arrive throughout October. Statistics Canada is scheduled to release August merchandise trade figures on October 6, official August manufacturing data on October 15, August retail sales on October 23 and August GDP by industry on October 30. Those releases will provide the first substantially complete picture of economic activity after the August U.S. tariff escalation. Until then, July’s message is narrower but still significant: Canadian manufacturing was already losing momentum before the newest trade barriers arrived, leaving policymakers and businesses watching closely to see whether the weakness proves temporary or becomes more persistent.

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