Scotiabank Previews This Week's GDP Data in Canada

12:31 PM EDT, 08/25/2025 (MT Newswires) -- Friday will bring out a fresh impression of the health of the Canadian economy when the gross domestic product for Q2 and the individual months of June and July arrive, said Scotiabank.

Combined, they will also give an early impression of momentum into Q3, noted the bank.

The punchline is that the Canadian economy probably stalled in Q2, but the details about how and why,, combined with how the quarter ended could matter more, stated Scotiabank.

The bank estimates that Q2 expenditure-based GDP contracted a touch by around 0.25% quarter-over-quarter seasonally adjusted annual rate (SAAR). The Bank of Canada's July Monetary Policy Report was harsher at a 1.5% decline in its 'current tariff scenario' at the time.

Some of this estimate is informed by tracking monthly income-based GDP. If June GDP grows by 0.2% month-over-month seasonally adjusted (SA) as per Scotiabank's estimate, then this measure of GDP in Q2 may be flat over Q1. A simple regression equation against higher frequency readings leans toward something stronger than 0.2%, but the bank tamped that down because Statistics Canada -- that operates with more internal data than the bank has to go by -- guided on July 31 that the economy probably increased by about 0.1% month over month in June.

The uncertainty surrounding reliance on monthly GDP figures -- based on product/income concept estimate expenditure -- based GDP is that the full effects of net trade and inventory swings on how output changed may not be fully captured, pointed out the bank.

On that note, net trade was a disaster last quarter. Export volumes fell by over 30% and import volumes also fell but by much less. Since imports are a leakage from GDP accounts, a decline in imports perhaps perversely serves as a lift to GDP. As an aside, Scotiabank's tracking of monthly net trade figures including revisions along the way suggests that Q1 exports in the GDP accounts and as such Q1 GDP could be revised lower.

An offset to this net trade effect could be inventory investment. The bank is missing a lot of data on inventories, but the manufacturing and wholesale figures suggest that inventories added to GDP growth by expanding in Q2. This was likely a tariff front-running and stockpiling effect. A caution is that retail inventories are only available quarterly and so Scotiabank doesn't have them yet, and it has insufficient data on other business inventories.

Most economists, however, would argue that a better gauge of the health of the domestic economy that cuts through all the wild swings in inventories and net trade is final domestic demand (FDD), added the bank. In a GDP accounting sense, this adds consumption plus investment plus government spending to arrive at a measure that may be more closely aligned with what monetary and fiscal policy can impact.

It's entirely feasible that Q2 saw a solid rebound in this measure from flatness in Q1. While Q1 saw GDP growth of 2.2% quarter-over-quarter SAAR, final domestic demand was weak (-0.1%). Q2 could see a reversal of this outcome with weak headline GDP, but stronger FDD.

Housing starts were up by 160% quarter-over-quarter SAAR in Q2 as they soared from 223,000/month on average in Q1 to 283,000 in Q2; this should lift residential investment in the GDP accounts.

Because most spending by Canadian businesses on machinery and equipment is imported, another mild gain in such import volumes in Q2 would support investment. Retail indicators of consumer spending and various service spending proxies, like restaurant spending and air travel, point toward resilient consumer spending. Strong showings by housing starts, existing home sales, and auto sales suggest that the most rate sensitive areas of the economy are beginning to see the fruits of 225bps of monetary easing from July of last year to March of this year and in keeping with lagging effects over a 12-24 month period.

In all, the devil will very much lie in the details to this GDP report.

All of this complicates things for the Bank of Canada. Technically, soft GDP could raise the amount of slack in the economy that the output gap measure in the BoC's July MPR estimated at -0.4%. But monetary policy has the greatest effect on the domestic economy and can't chase inventory swings.

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