09:13 AM EDT, 08/20/2025 (MT Newswires) -- The United States tariff shock is being felt by Canada's economy, but looking through the quarterly volatility, 2025 is shaping up a bit better than expected a few months ago, said TD.

To be clear, underlying momentum is still performing well below its capacity and accumulating economic slack, wrote the bank in a note to clients. Annual growth is anticipated to register 1.3% this year, but this figure is flattered by strong growth at the end of last year.

On a Q4/Q4 basis, TD looks for the economy to expand by a more modest 0.6% this year.

The bank expects the economy to contract in Q2 due to a tariff-related plunge in exports, but modest growth is likely to return in Q3 as the housing market improves and the initial trade shock fades. The outlook for consumer spending this year is also looking a little better than TD's priors, amidst ongoing headwinds from confidence and slower population growth.

The shock from U.S. tariffs is worth a closer look, stated the bank. Canada's trade-sensitive sectors are underperforming the rest of the economy across a variety of metrics. Over the last six months, exports across most tariff-exposed categories have underperformed overall goods exports to the U.S.

Notably, steel exports to the U.S. have contracted sharply as domestic producers face a punitive 50% tariff. Real GDP in trade-exposed sectors has tread water, while non-trade-exposed sectors have grown by about 1%.

Finally, trade-exposed sectors have also accounted for only 10% of the roughly 180,000 Canadian jobs created since President Donald Trump won the presidency in November, despite accounting for one-third of total employment.

Due to the lack of high-frequency data on business investment in Canada, that piece of the near-term outlook is "murkier," added TD. The Bank of Canada's recent Business Outlook Survey (BOS) highlighted that tariff uncertainty is causing firms to hold off on new investment plans, opting instead to focus on routine maintenance.

One exception relates to the installation of a major oil platform on the East Coast that will boost investment in a single quarter but have no staying power. Meanwhile, Canadian automakers have slashed production and delayed investments.

Overall, non-residential investment is expected to barely tread water this year with a 0.3% expansion in 2025 on a Q4/Q4 basis, but that is still an improvement relative to what the bank forecasted three months ago.

Likewise, a slightly stronger outlook for the consumer than a few months ago is still marked by an expected pace of just 1.0% (Q4/Q4) this year, according to TD. Putting the pieces together creates an economic expansion of 0.6% this year, before picking up to 1.9% (Q4/Q4) in 2026, helped by lower borrowing costs and increased investments from governments and businesses.