Canada’s economy lags as increased trade strains and softening labor market test the economy, prompting more conversation around interest rates cut by the Bank of Canada. Canada’s gross domestic product (GDP) shrank by 0.1% in May, with expectations that it will bounce back in the following months despite continued strain from tariff stress. The biggest hit came from the retail trade sector, part of the larger service-producing industries that contribute up to 75% of total GDP, which contracted 1.2%, per Reuters. 

Goods-producing industries, which account for a quarter of the nation’s GDP, the mining, quarrying and oil and gas extraction sectors lagged significantly as they shrank 1% in May. Comparatively, manufacturing expanded 0.7% after a steep 1.8% decline in April.

The Canadian economy lost over 40,000 jobs last month, disappointing many after 83,000 jobs were added in June. The unemployment rate is steady but high at 6.9%. “This is an unambiguously weak report although it comes hard on the heels of an unambiguously strong report,” said Douglas Porter, BMO chief economist, on the employment numbers, per CBC. “Taken together, the overall picture is a soft economy, running with some excess capacity, not surprising in light of the trade uncertainty.”

With the economic stress, the Bank of Canada’s governing council is split on the need for an interest rate cut. With the heightened trade uncertainty and softening job market, many policymakers believe a rate cut would relieve stress, while others feel there is enough support already without a lower rate. During the July 30 meeting, the governing council voted that more data was needed before a decision could be made, leaving the interest rate at 2.75%.

The council will need to consider inflation, which has been at or above 3% in recent months, a rate cut would hopefully lower this rate to 2%. “Members judged the risks to inflation to be elevated given evident pressures on underlying inflation and the uncertainty around the impacts that tariffs and trade disruptions could have on Canada’s economy over time,” the minutes said, per Wall Street Journal. Inflation data will be reviewed by the council before they reconcile to make a decision on a rate cut.

The federal government, led by newly-elected Prime Minister Mark Carney, a former Bank of Canada governor, plans to announce a budget plan in the fall, which should address economic strains created by increased tension with the United States.

Of the credit managers with business in Canada, 81% of sales are with existing customers and 19% are new customers, according to FCIB’s Credit and Collections Survey. Customers are mostly on 1-30-day terms (68%) or 31-60-day terms (30%) and are on average 14 days beyond terms. Survey respondents find that payment delays are largely staying the same, however, 21% find that they are on the rise.

These delays are mostly attributed to billing disputes (46%), customer payment policy (39%), cash flow issues (22%) or supply chain issues (15%). Survey respondents largely secure payment through wire transfer (86%), check (51%) or electronic funds transfer (EFT) (51%). “Get some form of electronic payments set up for your customers,” one respondent advised. “I would also set up electronic invoice delivery too. The Canadian Post is often on strike and unreliable.”