Canada’s economic outlook has softened but not stalled, according to RBC Economics’ latest Quarterly Canadian Outlook, which expects low but positive growth through the remainder of 2025. The report argues that tariff-exposed industries absorbed the sharpest blow in the second quarter, yet broader domestic demand and the protective role of CUSMA exemptions kept the overall economy from tipping into contraction.
RBC notes that trade-sensitive sectors were the clear weak spot in the spring. Exports fell and manufacturing output contracted at an annualized rate of 8 percent, reflecting the bite from U.S. tariffs. Imports of Canadian steel and aluminum products that are subject to a 50 percent tariff dropped nearly 50 percent year over year in July, underscoring the severity within targeted categories. Even so, the report emphasizes that most Canadian exports still crossed the border duty-free, limiting the damage to specific sectors rather than the economy as a whole.
The labour market loosened but did not break. The national unemployment rate rose to 7.1 percent in August, the highest outside the pandemic in nearly a decade. RBC attributes much of the increase to longer job searches among new entrants, rather than a surge in permanent layoffs, and points to a moderation in the growth of job losses tied to permanent separations.
Consumers Remain the Anchor
Household spending helped stabilize the picture. Consumer outlays jumped 4.5 percent in the second quarter, and RBC’s card-transaction tracking showed momentum carrying into the early part of the third quarter. This resilience in consumption, together with a modest improvement in housing activity, is central to RBC’s view that growth can remain positive even as net trade subtracts less from GDP than it did in the spring.
Early third-quarter indicators add to that case. RBC highlights three consecutive monthly gains in export volumes through July, improving manufacturing sales, and signs of firming in existing-home markets. The report frames the third quarter as more constructive than the second, with a smaller drag from trade and manufacturing.
CUSMA’s Cushion and the Tariff Split
A key plank in the outlook is the continued protection afforded by the CUSMA framework. RBC estimates that 88
percent of Canadian exports to the United States remained tariff-free in July. Within that split, tariff-targeted products were down 16 percent from a year earlier, while products that remained largely duty-free eked out a 0.5 percent gain. The bank argues that preserving the exemptions is critical to limiting spillovers from U.S. tariff policy into the integrated North American industrial base.
The policy message is symmetrical. RBC stresses that CUSMA matters to exporters north of the border and importers south of it, pointing to the risk that broader tariff escalation would shrink activity across a tightly linked supply chain. With formal CUSMA expiry not arriving until 2036, and discussions on extension slated to begin next year at the latest, the report casts the agreement’s continuity as a central stabilizer for planning and investment on both sides of the border.
On monetary policy, RBC does not build further interest-rate cuts into its base case, but it emphasizes that the Bank of Canada retains room to act if growth falters again. Given that the heaviest drag in the second quarter came from trade and manufacturing, and that consumption has continued to surprise on the upside, the bank sees the decision for near-term easing as close to even. The growing role of targeted fiscal support at the federal and provincial levels also shapes the macro mix heading into year-end.
Provinces Diverge as Trade Shocks Hit Unevenly
The national shock is not distributed evenly. RBC trims 2025 growth forecasts for provinces with heavier exposure to metals and manufacturing supply chains. Ontario’s projection falls to 0.9 percent from 1.3 percent, Quebec’s slips to 1.2 percent from 1.3 percent, and Manitoba’s is lowered to 1.0 percent from 1.2 percent, reflecting embedded metal content in transport equipment and machinery. British Columbia’s forecast is cut to 1.0 percent from 1.2 percent amid sharper lumber duties and the wind-down of major capital projects. By contrast, Prince Edward Island is revised higher to 2.0 percent from 1.7 percent on the strength of tourism and construction.
RBC says Ontario is “in the eye of the trade war storm,” with localized recessions possible in municipalities where joblessness has moved into the double digits. Even there, the bank argues, household demand, a stabilizing job market, and a rebound in existing-home sales should keep provincial growth in positive territory, albeit at a low rate.
China’s Tariffs Complicate the Export Map
While U.S. measures dominate the headlines, RBC also flags the role of Chinese tariffs. Levies on seafood had already been incorporated into projections for Atlantic Canada and have not altered above-national growth expectations there. New canola tariffs that took effect in mid-August arrived too late in the growing season to materially change 2025 GDP profiles for the Prairie provinces, but RBC indicates these could influence the 2026 path depending on how trade talks evolve in the months ahead.
Risk Balance: Still Tilted to the Downside
The bank’s risk assessment remains cautious. If U.S. tariffs broaden or intensify, the integrated nature of continental manufacturing could pull activity lower even where Canadian tariff exposure is limited on paper. Domestically, a higher unemployment rate, still-elevated household debt burdens, and sector-specific stress in manufacturing, transportation, and lumber leave parts of the economy vulnerable to a renewed slowdown. The mitigating factors are tangible but narrow: resilient consumption, targeted fiscal programs, and the legal durability of CUSMA.
What It Means for Retail
For Canadian retail, the contours of RBC’s outlook suggest a mixed operating environment. The consumer remains the core stabilizer, supported by wage growth and easing inflation, which is consistent with the bank’s evidence of elevated card spending through the summer. That helps categories tied to services, travel, essentials, and value-driven discretionary purchases. At the same time, uneven regional growth implies that national chains will see sharper contrasts at the store level, particularly in Ontario’s manufacturing belts and in British Columbia communities linked to forest products. Merchants exposed to tariff-affected inputs or to export-dependent industrial customers will feel the pinch more acutely than those focused on domestically sourced goods and experiences.
Against that backdrop, retailers may lean further into inventory flexibility, private-label value, and localized pricing and promotion. If the Bank of Canada opts to ease policy again because growth disappoints, borrowing costs could offer a modest tailwind to durable goods demand, but RBC’s base case does not assume that outcome. The bank’s central scenario is steadier rather than strong, with pressure concentrated where trade headwinds are most direct.
