Canadian businesses adapt to tariffs and uncertainty, shifting strategies amid slowing exports and hiring
Canadian businesses are navigating a period of heightened uncertainty as trade tensions with the United States reshape the economic landscape, leading to sharp contractions in exports, investment, and employment growth, according to Statistics Canada’s latest “Research to Insights” presentation.
Exports to the United States plunged 7.5 percent in the second quarter of 2025, marking the largest quarterly decline since 2009 outside the pandemic period, following the implementation of US tariffs on Canadian steel, aluminum, automobiles, and other goods not compliant with the Canada-United States-Mexico Agreement.
Real gross domestic product contracted 0.4 percent after six consecutive quarters of growth, as reported by Statistics Canada.
Business labour productivity also fell by 1.0 percent during this period.
The trade conflict has had a pronounced impact on sectors highly dependent on US demand, such as manufacturing, mining, and oil and gas extraction.
From January 2024 to June 2025, the number of active businesses in these sectors declined by 1.9 percent, compared to a 0.6 percent decline in other sectors, as per Statistics Canada.
Over half of manufacturers and one-third of wholesalers expect rising input costs for labour, raw materials, or energy to be an obstacle in the coming months.
Investment in machinery and equipment fell 9.4 percent in the second quarter, and private investment overall is projected to contract further, with a 3.7 percent decline in the third quarter and a 4.5 percent contraction in the fourth quarter, according to the Canadian Federation of Independent Business (CFIB) Main Street Quarterly report.
The CFIB notes that this slowdown reflects deteriorating business confidence, particularly in goods-producing sectors affected by global trade instability and input price volatility.
Labour market conditions have softened considerably.
Statistics Canada reports that there has been no net employment growth from February to August 2025, with the unemployment rate rising to 7.1 percent in August, the highest since May 2016 outside the pandemic.
The pace of employment growth in the private sector has remained below 2 percent for the past 17 months.
Young workers and students have faced a particularly challenging labour market, with the unemployment rate for returning students averaging 17.9 percent from May to August.
Wage growth has also slowed, with aggregate wage growth at just 0.2 percent in the second quarter—the slowest pace since 2016, excluding the pandemic.
The Bank of Canada’s Business Outlook Survey found that many businesses anticipate continued weak demand and slower inflation, while cost pressures linked to the trade conflict persist.
The effects of tariffs have extended to consumer prices and business strategies.
Prices for various consumer goods, including new cars, clothing, appliances, and groceries, have been directly or indirectly affected by tariffs and countermeasures.
In the third quarter, one-quarter of businesses reported passing cost increases attributable to tariffs onto their customers, and nearly two-fifths indicated they were likely to do so in the next 12 months, according to Statistics Canada.
In response to the disruptive effects of tariffs, businesses are pursuing mitigation strategies.
One-third of businesses that sell to the United States reported their products had tariffs applied, with slightly over half indicating a negative impact.
Nine in ten manufacturers that export to the US plan to take action over the next year, with one in three seeking alternative customers outside the US, and about half of manufacturers that import from the US plan to seek alternative suppliers or increase domestic sourcing.
Investment flows have also shifted.
Foreign investors reduced their exposure to Canadian securities by $22.4bn during the first half of 2025, while Canadian investors increased their holdings of foreign securities by $63.3bn, driven by acquisitions of US equities and bonds.
These transactions resulted in a net outflow of $85.7bn from the Canadian economy in the first half of the year, as reported by Statistics Canada.
Despite these headwinds, household spending—particularly on new vehicles—has partly mitigated declines in trade and business investment.
Retail volumes have expanded for five consecutive quarters, and domestic travel within Canada rose 2.2 percent year over year in the first quarter of 2025, with spending on domestic tourism up 4.4 percent.
