Canada’s economy shrank at an annualised pace of 1.6% in the second quarter as exports took a hit from tariffs imposed by US President Donald Trump, Statistics Canada said on Friday. This marked the country’s first GDP contraction in seven quarters.The agency also revised down its first-quarter growth estimate from 2.2% to 2.0%, underscoring the impact of Washington’s trade actions on the world’s ninth-largest economy, AFP reported.Canadian exports fell sharply by 7.5% in the April-June period after a 1.4% rise in the previous quarter. International shipments of passenger cars and light trucks plunged 24.7%, while exports of industrial machinery and equipment dropped 18.5%. Travel services were also down 11.1%, the data showed.The sharper-than-expected decline has raised expectations that the Bank of Canada may move to cut interest rates when it meets in September. The central bank has left its benchmark rate unchanged at 2.75% in its past three policy meetings.However, robust domestic activity partially offset the external shock. Household consumption jumped 4.5% annualized, residential investment rose 6.3%, and government spending increased 5.1%, leading to overall domestic demand growth of 3.5%, according to Reuters.On a monthly basis, June GDP contracted 0.1%, primarily due to a slowdown in goods-producing industries, which make up around a quarter of the economy. “That weaker-than-expected trend in the monthly figures makes today’s release supportive for our forecast of a September interest rate cut,” said Andrew Grantham, senior economist at CIBC Capital Markets.The contraction raised market expectations for a Bank of Canada (BoC) rate cut next month. Money markets now price in a 48% probability of a September 17 rate reduction, up from 40% prior to the GDP release.An advance estimate for July by Reuters suggested a 0.1% month-on-month expansion, indicating that Q3 could show minimal growth. Royce Mendes, managing director at Desjardins, noted, “While the July flash showed the economy largely recovered lost ground from June, early tracking points to a flat-to-slightly-negative estimate for Q3 GDP.”The Canadian dollar traded lower at 1.3771 per US dollar (72.62 US cents), while yields on two-year government bonds declined 2.8 basis points to 2.664%.Economists noted that jobs and inflation data for August would be critical for the BoC’s rate decision. Despite weak exports, domestic spending strength demonstrates underlying resilience, leaving policymakers with a mixed picture as they weigh potential action.