The state of Canada’s economy halfway through 2025

That was an intense six months for Canadian businesses, consumers, and policymakers alike.

Not quite the shock and urgency of the pandemic, or the existential peril of the Global Financial Crisis. But it was right up there.

The first half of the year exposed Canada’s economic vulnerabilities. It gave Prime Minister Mark Carney not only an election victory but a wide berth to pursue his promised economic transformation. And we may have even seen the Canada-U.S. relationship fundamentally altered.

Yet the crisis Carney warned of—the greatest of our lifetimes—has not materialized, at least not economically. And it may never will. Canada’s short-term growth remains weak, but sentiment is shifting. With trade tensions potentially easing, the outlook is brightening—just in time for Canada Day.

Here’s a look at where the Canadian economy stands halfway through 2025.

Sentiment improving

Some green shoots are appearing in the sentiment data. The Canadian Federation of Independent Business’ latest survey shows confidence among small and medium-sized businesses is at its highest since before Donald Trump began imposing tariffs. It’s approaching “neutral” territory, though still well below historical norms.

To be sure, sentiment remains weaker among businesses more exposed to trade. And overall, firms are still worried about softening demand for goods and services. But confidence has clearly rebounded from its lows.

Consumer sentiment is also improving. The Bloomberg Nanos Confidence Index is back in “positive” territory and is hovering at its highest level of the year. The share of Canadians who believe the economy will worsen over the next six months has dropped to about 42 percent, from 65 percent two months ago.

Concerns about policy uncertainty are also easing, somewhat. One measure of policy uncertainty based on Canadian news coverage jumped nearly threefold between December and March, but has fallen 22 percent since then.

The pattern in every case is that sentiment has improved from earlier lows, but remains fragile.

Economic activity

The economy is showing clear signs of strain from the tariffs and the broader uncertainty.

Retail sales, exports, manufacturing shipments, construction—across the board, the numbers are soft. And it’s not just the trade friction. The sharp slowdown in population growth is now a significant economic headwind.

Still, as downturns go, this one remains mild.

Statistics Canada has reported the economy contracted slightly in both April and May, shrinking by about 0.1 percent in each month. Economists expect similarly weak results for June.

But stabilization is expected over the summer, with a modest rebound likely by year-end.

As Deloitte noted in its latest economic outlook: “With interest rates lower, a new federal agenda in motion, and early signs of resilience in energy-producing provinces, recovery may not be far behind.”

Some regions and sectors are faring better than others. Trade-exposed industries are struggling. Manufacturing-heavy Ontario and Quebec are expected to lag. Meanwhile, Saskatchewan, Alberta, and Newfoundland—last year’s outperformers—are once again leading.

Manufacturing recession

Manufacturing may be the sector closest to recession, though it’s hard to disentangle cyclical weakness from longer-term decline.

Factories have shed 55,000 jobs since January—the most of any major sector. Manufacturing’s share of total employment has dropped to a record low of 8.7 percent.

But this is also a long-running story. The industry has been in secular decline for decades. After a strong rebound in 2021 and 2022, manufacturing employment has been flatlined since the beginning of 2023. Output has been declining in volume terms since early 2024. All this predates Trump 2.0.

In fact, factory sales in volume terms in the first four months of 2025 was 3.3 percent below the same period in 2019.

The tariffs appear to be just one more challenge for a shrinking sector.

Labour market

Canada’s labour market is weak, but not in crisis.

The unemployment rate—currently at 7 percent—has been rising for more than two years. For much of 2023 and 2024, employment growth was actually strong, but couldn’t keep pace with the surging labour force. It was a rare instance of a growing jobs market alongside rising unemployment.

Since the start of 2025, however, a more troubling trend has emerged: employers aren’t hiring. But they aren’t firing either.

There’s still no sign of mass layoffs, despite a few high-profile cases. That’s little comfort for those looking for work—new immigrants, recent graduates, or the recently unemployed—who are finding it difficult to find a new job. Long-term unemployment is rising, and that’s always a bad sign.

Economists don’t expect much more deterioration from here, anticipating the jobless rate to peak at about 7.3 percent, as labour force growth slows and the economy picks up.

Housing

Canada’s housing market saw a bit of a recovery in late spring, as lower prices began to attract buyers. The market, however, remains very weak, with activity still well below historical averages. Home sale transactions in the first five months of this year are nearly 5 percent below last year’s levels, and more than 8 percent below the average over the past two decades.

We’re also seeing a pickup in new listings—suggesting we’ll continue to see downward pressure on prices. The average price of a home sold in Canada in May was $690,900 (seasonally adjusted), down from its peak of $837,000 in 2021.

The good news is lower prices—and lower interest rates—are making housing more affordable. According to RBC Economics, the share of income a household needs to cover home ownership costs fell to 55.1 percent in the first quarter, from 60.7 percent a year earlier. That’s still well above pre-pandemic levels of about 42 percent.

Interest rates

We’re closing in on the end of the Canadian cutting cycle.

The Bank of Canada has cut its overnight policy rate by a total of 2.25 percentage points, bringing it to 2.75 percent—levels the central bank considers near “neutral,” meaning neither stimulative nor contractionary. (Prime rates at commercial banks sit just over two percentage points above the policy rate.)

There may be a bit more coming. Markets and economists expect another 25 to 50 basis points of cuts, particularly if the tariffs and trade uncertainty persist.

What’s holding the Bank of Canada back are worries about the trade war’s impact on inflation, constraining its ability to provide support through lower rates. Recent inflation readings suggest underlying price pressures in Canada are elevated, hovering at about 3 percent.